The changing world of estate agents and how they charge fees
The clear if limited, opportunity in the Buy to Let property market is the growing market in Holiday Home properties.
If you are looking to invest in the Buy to Let market and have decided not to due to the punitive tax changes in recent years, then clearly you are in good company as the Buy to Let market did slow down for a while.
This slow down may be coming to a halt now as investors adjust to the new financial climate however when an obstacle occurs you can be sure that people will find the new opportunities the changes create and start to make the most of them.
This year it is estimated that the weakness in Sterling will attract nearly 40 Million visits to the UK, with the cost of holidaying in the UK and the cost of spending when here reduced significantly compared to previous years. As well as bringing in more visitors from abroad the weakness in Sterling would usually lead to more UK residents deciding to take a Staycation in the UK due to the cost of holidays abroad, although I must admit our summer weather does not help this trend.
To this add the explosion in channels through which Holiday rentals can be marketed via sites such as AirBnB and you have a heady mix which is seeing a real boom in demand for and supply of Holiday property for rent.
So the market for Holiday Homes must be booming and in truth if you listen to the major players in UK holiday accommodation it seems this is happening. So it must be a major opportunity for any Buy to Let investor. Usually if reasonable occupancy rates can be achieved the rental return from a Holiday Let can be significantly higher than from traditional lets.
A growing market with good returns must represent a major opportunity. This opportunity of course is not limited to the traditional tourist areas of Cornwall, Devon or the Welsh coast. If you look closely the positive Holiday and Tourist glow is cast over large areas of the country form regions such as Northumbria, Cotswolds, Norfolk and the Highlands to individual towns and cities such as Edinburgh, Chester, Cambridge, York and of course London. So the choice of property investments is broad and very varied.
Into the mix if you look at the Sunday papers and supplements we are seeing an explosion in developments (usually around a lake, so check the midge count first) seeking to take advantage of the Holiday rental boom. These are usually upmarket and offer a fully managed rental service along with full property management. These developments tend to trade on a stunning location, fashionable property, opportunity for owners breaks and of course the return on investment for rentals. One growth area that can be seen alongside the more upmarket developments is the growth in Lodges. As well as usually being priced at a lower level if they are mobile homes they are also exempt from the punitive stamp duty increases. On the minus side mortgages can be difficult and a close examination of any service charges, ground rents or re sale clauses is needed. There is no doubt thought that some of these developments will offer good returns on the investment.
Its probably no surprise that their marketing material also tends to Highlight the considerable financial advantages that short term holiday rental properties hold over the more traditional Buy to Let property. See http://www.buy2letconveyancing.co.uk/holiday-let
There are some obstacle though
The stamp duty issue does not go away, you really have to have done good research on the tourist market in the area you are looking at and it can be difficult to obtain a mortgage on a Holiday Home.
If these are some of the obstacles however they are all issues of course that can be either taken into account during your financial review of the investment opportunity or mitigated in some other way.
As for most property investors the eventual capital appreciation is also a factor I guess that the potential future price rises of property around lakes in the middle of the country may also be called into question. So as with all Buy to Let property investments the key step is research, research and more research.
The conclusion is that any property investor or anyone seeking good returns from a Buy to Let investment would be foolish not to give considerable thought to whether that investment should be in a Holiday rental property.
The Government’s Tax and Relief changes over the last 3 years have started to result in significant shifts in the structure of the Buy to Let property market. The market is worth over £1 trillion and so understanding these changes and their future impact is important both for Landlords, Prospective Landlords and the growing Rental community.
If we are honest most of the changes were predicted from the day the then Chancellor started to introduce the new rules and three of the most significant and predicted trends are clearly visible in the Buy to Let property market.
The first trend which was predicted was a shift away from individual Landlords who own one or two properties to Landlords who own ten properties or more. The new challenges for Buy to Let property Landlords were aimed squarely at individual smaller portfolio Landlords with higher stamp duty, reducing mortgage relief, reducing expenses claimable against Tax, all impacting on the returns they achieved. Many of these Landlords were individuals who either from their savings, or by accessing their Pension Pots had felt Bricks and Mortar represented a safe investment from which they could obtain a reasonable return on their money. Alongside the possibility of Capital gains from a strong property market, and the ever-increasing demand for rented property it seemed a far better option than the level of risks and returns they could obtain elsewhere.
It still is a fairly solid investment of course, its just that the rate of return has fallen due to the Chancellors changes. As a result of the changes these Landlords have put the brakes on expanding their property portfolios and the flow of new individual entrants to the Buy to Let property market has slowed down, which in turn has contributed to a slow down in house price increases or in some areas to falls in house prices. In fact these Landlords accounted for 62% of the rental property market so any impact was always going to be significant. In turn uncertainty over House price rises or falls then puts off a few more prospective entrants to the market, so its probably no surprise that the rental market only grew by 2% last year.
I guess this trend will continue until the market has fully settled down, House price inflation resumes and or rents start to rise significantly due to a shortage of rental property. Individuals looking for a return on any cash they possess or can access will now look at the returns from other investment routes depending on the level of risk and return they are comfortable with , Bitcoin anyone?
The Second trend is the increasing impact of Landlords with large existing property portfolios. For these Landlords the change to incorporate into a company brings a whole slate of positive benefits. As they are treated as a business they avoid a number of the financial challenges the Chancellor imposed on individual Landlords. Equally they can claim the financial benefits of operating a company. So for anyone with a large property portfolio, moving the properties into a company is a no brainer.
Of course much of the Buy to Let property market was already owned by companies with large portfolios, and they and newly incorporated companies are starting to dominate any growth in Buy To Let property.
Many of these companies are based in other countries and have always invested in the UK property market and they are continuing to expand their property portfolios. As well as being based abroad many of these companies are ultimately harboured offshore in tax havens. Some recent examples have shown that these companies have snapped up the majority of properties becoming available in new developments. As a result of this, proposals have been put forward to limit the level of new properties in any development which can be purchased by what are described as Foreign companies. I think to describe them as Foreign companies is probably misleading though as although based in Tax Havens they may well belong to offshore trusts for whom the beneficiaries are UK citizens.
So an unintended consequence of all the Government changes has been to put financial challenges in the way of the individual Buy to Let property investor with a small savings pot, but to put few challenges in the way of companies, both UK and Foreign along with more wealthy individuals who can afford to use offshore trusts. I am not at all sure this was intended and so I suspect this story will grow and we will see future tax changes. As the Government wishes to encourage the inflow of money into the country from abroad it will be interesting to see how they tackle this issue.
The third trend, which was also predicted over a year ago, has resulted from the coming together of several factors. These are the reaction of individual Landlords to the Chancellor’s changes, the rise of the AirBnB website and the weakness of Sterling. Once the changes had been made by the Chancellor many people including ourselves predicted a movement away from Long Term rentals into Short Term Holiday rentals.
This is because if the property achieves the qualifying criteria, it is treated not as a buy to let but as a trading business. This is the only way individual’s investors can obtain the same financial benefits as the larger company based Landlords. Coupled with the rise of AirBnB, and the exchange rate encouraging both foreign and stay at home holiday makers it is resulting in a boom in the Holiday rental market. This is where I would expect to see growth for individual Buy to Let property investors concentrated over the next few years. Of course a key criteria is that the property must be in an area which attracts visitors and this may lead to a change in the relative increase in localised property prices as the potential rental property in these areas is snapped up.
The qualifying criteria are not simple to achieve either, the property has to be available to rent out for a minimum of 210 days per annum, be actually let for at least 105 days and limits are imposed on the number of rentals lasting over 31 days. These criteria need to be achieved in at least one year in every three, and if the property is let out for over 140 days per year then it should be subject to Business rates. The rewards though are significantly higher for the Landlord when compared to a normal Buy to Let property and so the trend to Holiday rentals will continue.
Again the Government in future may wish to address this area, thus penalising the small property investor again, however the level of rental property available, along with the weakness of Sterling is helping to grow the UK Holiday industry so any action taken would have to be carefully considered.
So three trends predicted over a year ago, and three trends becoming visible in the market. Its interesting that the attempt to cool the Buy to Let property market and therefore make more property available for first time buyers the Government has seen some predictable and intended consequences occur, and as always we are seeing some unintended consequences as well. As a free market, to some extent, in trying to control it the Government may find itself drawn into ever more legislation, or may in fact step back. A realisation is dawning that the aim of releasing more property for first time buyers (and no doubt increasing tax receipts) is a worthwhile target but penalising the Buy to Let property market is probably not the best way to achieve it.
The changes to Stamp duty introduced initially by George Osborne and followed through by the current Chancellor seem to have achieved the aim of raising taxes but at the same time ated as a large negative for Buy to Let investors and First time buyers who have to buy in the South East and London.
The punitive rates for First Time buyers have become a negative that balances out any of the support to First Time buyers offered by Help to Buy schemes. It all means that if you are faced with London or South East first time buyer property prices then the Government has probably increased your costs considerably. This regional discrimination will no doubt affect the perception of the Government among the more youthful elements of the population.
It has become such a glaring issue that a daily newspaper ” The Daily Telegraph ” has started a campaign to influence the Chancellor in order to see reductions in Stamp Duty for First Time buyers and I guess we all would like to see this campaign succeed.
The newspaper has also highlighted how complicated the Stamp Duty regime has become, no doubt like others before him the Chancellor will say he aims to simplify the Tax system, then if this is true ( I suspect it is not ) then Stamp Duty would be a good place to start.
In fact the Telegraph has published an up to date calculator which is I have to say very useful, but also shows how complex this element of the Tax system has become.
OK, the number of mortgage being authorised is at the lowest level for nine months, the financial results from estate agents look pretty scary, particularly those with a concentration on the London property market and of course there is a long queue of commentators lining up to tell us that property prices will fall , or will crash completely, over the next 10 years, etc. etc.
If you listened to these drumbeats you would start looking for any form of investment that does not involve property. As for Buy to Let, well after the impact of the tax changes and if prices are going to fall then it’s a sure fire way to lose money. Surely this is the logical conclusion.
In my view no, it is the wrong conclusion. The same media outlets will tell a different story if you turn over the page, this story comments that house prices have surprisingly continued to rise. Even in the London area. So how do we find ourselves reading about such contradictory and confusing stories, all based on solid facts.
It started with a Chancellor who decided to increase his tax take on the premise his actions were about making property more affordable and available for everyone. The premise I applaud, as making housing more available and affordable has to be good for house buyers and in the long term the housing market. The actions he took tended to hit specific sections of the Buy to Let market, the smaller investor with one or two properties and the higher priced London market.
The results were as expected, a slowdown in the London market overall with the impact going from top to bottom of the price range. A flood of Buy to Let purchases to beat the dates on Tax changes followed by a slump in activity. House prices in London stagnating and falling slightly with the major impact being at the top end. A switch of activity to the out of London property markets.
This was intended to lead to a surge in available housing for first time buyers and therefore a surge in first time purchases which would strengthen as house prices fell.
Well we have seen an increase in first time purchases which is good news. We have not seen though the scale of increase that might have been hoped for. The reason, simply put, is that there are too few houses on the market. Estate agents are suffering not only due to a slowdown in activity, they are also suffering due to a shortage of stock. A lack of supply has meant that house prices even in the face of reduced demand have and will continue to rise. Until wage inflation starts to close the wages to property price gap for first time buyers then demand may stay at a reduced level, which of course means that demand for rental property will continue to strengthen particularly as population growth continues at its current rate. On the supply side no actions taken by the Chancellor are going to result in the size of increase in housing supply that would be needed to stagnate prices. So estate agents may continue to struggle but house prices will continue to rise. Which will lead in London to empty property as landlords in some cases mothball property waiting for the London top end market to re ignite, which it will.
For the Buy to Let market well the focus will be outside of London for some time to come and as statistics become comparable with last years changes no doubt we will see moderate growth resume. In fact I know of one case where an prospective Buy to Let purchaser has found themselves being gazumped. So the market is still alive and it will be growing.
All of which for the reasons above means that in my opinion we will not see a property price crash, rather we will see continued demand for rental property, continued house price increases and eventually a strengthening of demand in the Buy to Let market.
I of course have a vested interest in this market, so this is good news, however whats your thoughts on the confusing signals from the Property market.
The latest figures from the Office for National Statistics reveal a surprisingly strong property market. It seems Average House prices have risen by just over 5% in the last year. The London property market appears to have been the most sluggish, with a rise of 2.5%, the North West showed the largest increase with a 7.3% rise. Of course, these are averages and so hidden under the surface there must be a wide spread of variations and ups and downs. No doubt within the North West some of the more fashionable locations will have registered strong House price growth and of course some locations will have registered low or negative prices changes.
These variations are to be expected, however what does seem strange are the statistics themselves. The fact that House price growth is still so strong, due to high demand and restricted supply, seems at odds with other snippets of information about the residential property market. Nearly 40% of House prices have been reduced, and in the recent quarter 28% of Residential transactions fell through ( Perhaps Exchange Insurance is a worthwhile investment http://www.buy2letconveyancing.co.uk/
These seemingly contradictory facts spread across the whole residential property market, in the rental market a lot of commentators have talked about Buy to Let Landlords releasing houses on to the market as they cut back their portfolio.
It seems that the rental market, which feels as if it has had more Government intervention in the last 2 years than the previous 20 years has started to reach a balance and adjust to the new reality. Landlords particularly those who own more than one property seem to have accepted the new level of returns on investment that the market offers. What’s happening is a simple balancing of supply and demand and the balance is reached by the increase or decrease of rents. The regional variation in house prices also probably reflects Landlords moving their investments outside of London as opposed to Landlords stopping investing.
In the residential property market, the same forces are at play, increasing demand meeting very restricted supply. The balancing factor of house prices will again show variation in ups and downs according to the demand and supply in each region and location. The overall shortage of housing seems to point to further house price rises in the future, and probably underlines the fact that house prices are not going to crash any time soon. The one unknown is the lowest end of the house purchase chain, the First Time buyer. This is because once someone has a property to sell then to some extent the fluctuations in price are self-balancing in that if you sell low, you can buy low, sell high then you will probably have to buy high.
At the start of the chain the First time buyer has no such consolation, if the price is high then they have to find the deposit and mortgage needed regardless of pricing. In a market as unbalanced as the current one this is difficult. The Government has recognised this and the Help to Buy scheme has given a push start to the First time buyer market. This only helps new property buyers (and therefore Housing Developers) leaving large swathes of potential buyers who get no such support.
We can hope for more interventions from the Government to help First time buyers as Housing seems to be becoming one of the very hot Political touchpoints of the moment. The problem with this of course is that there is only so much that Government can do. Deciding to launch a host of new towns (many of which seem to have MOD land available for sale) is fine. It will no doubt impact the demand for housing in those areas, it will not however help the majority as the impact is too local. Unless these locations offer good commuter links to areas of employment then they will not help supply meet demand. So unless the Government is willing to consider a real leap of imagination in providing support to all potential First time buyers regardless of whether they are purchasing new or old then this part of the market will remain fragile.
If the Government embarked on a large scale and funded drive to build more social housing then this may over time lead to Landlords reducing their housing stock. As it would result in a rebalance of rents to reflect the change in supply and demand of rental property. In turn this could impact of House prices as more Housing stock became available for sale.
Personally I could not see a Government being willing to embark on the scale of action and funding which would be required to alter the market dynamics, and so the see saw will continue and we will keep reading seemingly contradictory facts and articles. These contradictory statistics and articles have to be seen against against the backdrop of a Housing market in which there are simply too few properties to meet the demand for housing. Which means that in this topsy turvy world regions and locations may show reductions while overall the trend for House prices remains upward.
To say the election result was unexpected is an understatement!
But now the dust has begun to settle and the Conservative’s organise a supply and confidence arrangement with the DUP to continue in government, it’s worth considering how this might affect the rental sector.
Both the main parties had manifesto pledges that impact the private rental sector, but it now looks like the Conservative’s ban on letting agent fees announced in the 2016 Autumn Budget Statement will go ahead as planned. The likely outcome of this will be for letting agents to pass all or most of the lost revenue on to landlords in the form of increased lettings fees, who in turn will attempt to pass these costs onto tenants. This could add £100 to £200 per year to rents.
Agent fees were banned in Scotland in 1984, with tenants only liable for the deposit and rent, but this has led to agents doing less in the way of pre-agreement checks, often omitting a credit check, leaving landlords more vulnerable.
With no resounding mandate from the electorate, Mrs May is unlikely to replace Philip Hammond as Chancellor. Thus we can’t know whether any replacement would have been friendlier to private landlords or not, though in these uncertain times, how long Theresa May will last in the job and when or if another election is called are questions for astrologists!
With a Labour led coalition unlikely to come about (the outright numbers don’t add up), some relief will be felt by landlords that their manifesto pledges to control rents and how landlords operate will not happen. Under Labour, councils would have got new powers to license landlords and apply tough sanctions on those who tried to bend the rules. Their manifesto also included pledges to limit rent rises to inflation and make three year tenancies the norm as well as re-instating housing benefit to 18 to 21 year olds.
The abolition of mortgage interest tax relief does look set to continue, with the phasing out period ending in 2020. This, along with the previously implemented increases in stamp duty on second homes, has acted as a disincentive to landlords either entering the market or increasing their portfolios. Indeed, many landlords and investors will be are looking to reduce their portfolio of rented property in order that they can reduce their level of borrowing. Note though that this does not impact landlords / investors that own their properties through a company. One upside to this for landlords that are not highly leveraged is that any decrease (or minimal increase) in the properties available for rent will put upward pressure on rents as demand continues to grow. (Need a conveyancing quote? Click here)
Figures for May have shown a continued downturn in the number of property transactions taking place across the country. New instructions are down and the pool of available property is shrinking. Many homeowners, concerned with moving costs that have increased significantly with the changes to stamp duty, have decided to stay put and extend / improve. This reduces the number of people / families moving up the property ladder and the availability of first time properties available for new buyers to move into.
In conclusion, the election result will continue to put financial pressure on highly leveraged landlords and those looking to increase their portfolio whilst those with lower borrowings may well benefit from shortages of rental property and the consequential upward pressure on rents. The one proviso is that with a minority government and weakened leader, we might be facing another election in the autumn or next spring leading to a complete change of government!
During a busy three year period the Government seems to have tried with varying degrees of success to cool the Housing market by making it more difficult to be a successful Buy to Let investor. The simple idea ( from not so simple people I guess ) seems to have been that if fewer people became Landlords then less property would be sold and a reduction in demand for property would lead to lower property prices.
So if you are a new Buy to Let investor, or a small existing investor who intends to raise hefty mortgages to build a property portfolio, then there is no doubt they have made it less attractive by reducing the returns you can make from a mortgaged property. In fact from making it more difficult to qualify for a buy to let mortgage, to increasing the amount of tax you pay, it has been a pretty full on attack on this part of the market and these individuals.
As always though, one persons misery becomes another persons opportunity.
The low borrowing rates and the post Brexit fall in the value of Sterling has meant for some investors a golden opportunity has arisen.
If you are a large company with a significant portfolio or a foreign investor benefiting from the exchange rate you probably believe this is a heaven sent opportunity.
As a result we have the Times newspaper highlighting the fact that an increasing proportion of British property is being bought by foreign investors, and that this movement in the property market is no longer just focused in the London area, it now is impacting in the larger cities across the country. They quote one Manchester development where 93% of the units have been purchased by overseas investors, when they say overseas investors of course they include offshore funds and companies and so the numbers may not be a true reflection of the situation. Large U.K. based investors may well own all or part of these offshore companies and so may have effectively benefited from the Governments actions. As often is the case its just the small investors that pay the price of the changes.
Due to the size of the opportunity on offer to these larger types of investors it should be no surprise therefore that the messages on House prices do not reflect a mission accomplished for the Government. After an initial cooling most forecasts now seem to point to a strong recovery in the market for mortgages and House prices. In fact the Daily Express highlighted a report from the Centre for Economics and Business that predicts a 25% increase in house prices over the next 4 years.
Not good reading for the Government, unless of course, if you take a slightly more cynical view, their intention was just to raise more taxes and cooling the market was the excuse used to do this.
It just might be though that another group of potential Buy to Let investors might be facing a significant opportunity. This time a group of small investors may be looking at a golden window for investment that I am sure was not intentionally left open.
This is because the other area of feverish Government activity over the last few years has been pension deregulation. The annuity rates on offer have been stunningly low and given the economic uncertainties of the next few years look unlikely to change. So the new freedoms have meant that many pensioners have taken control of their own pension cash. The problem is though, where can you invest it to get a decent return.
The answer may well be that they should take a look at property and a serious look at the Buy to Let opportunity. These investors have cash, something that will erode as inflation steps up and they need an inflation proof investment that gives a moderate returns in the short term and potentially a sizeable return in the long term. Cash means the mortgage difficulties and the tax changes to interest relief are no longer part of the equation and if the 25% increase in property prices mentioned above comes to fruition it is very difficult to see where an investment would give a better return. All of the normal constraints still apply of course, the need to research the market, surveying the property etc. however for once the Government actions may have benefited one small group of small investors.
You can be sure though that having spotted the window of opportunity it will not be long before the government takes action to close it. So if you have the cash and need an investment then it may pay to act soon.
The budget last week appears to have raised a storm in some areas, such as the increase in N.I. contributions for the self employed. For the property world and those interested or engaged in it however it was a non event, leaving in place the taxes introduced by his predecessor which targeted small and individual property investors.
The hope in the Buy to Let investor world was that some relief from the previous years changes would be offered by the new Chancellor.
The article in the link from Simply Business below just about sums up the thoughts of these investors, and reflects the disappointment felt at a missed opportunity to correct failing policies.
The changes to the tax treatment of Buy to Let properties over the last 2 years has started to shift growth in Buy to Let properties towards the Holiday Home sector. A trend predicted by many experts once the new tax rules began to be rolled out in 2015 .
It now seems that 2017 will create very healthy conditions for the surge in Holiday Home investment to accelerate. The profit motive for these investments has never been stronger and the economic climate post brexit is ideally suited to encourage holidays in the United Kingdom Both these factors will inevitably lead to more and more investment in Holiday Home accommodation.
The profit motive for this shift in investment exists because Holiday Homes are treated as a trading business and so are exempt from the recent tax changes on Buy to Let investments. As well as this a holiday home can give a substantial annual return in rent if the right location is chosen. The limited stock of Holiday homes in the “right ” locations should also ensure capital appreciation becomes a positive factor in the investors considerations. Its no wonder that many people now see this as a potential retirement investment which will give a good income during retirement.
As with any pot of gold though there are difficulties, financing being one of these difficulties. Obtaining a mortgage on a holiday home often requires some searching among providers. The most difficult to finance are the purpose built holiday homes on leaseholds and many holiday parks now offer their own financing options to overcome this difficulty. Mortgages do exist though and Independent brokers can often assist potential investors in finding the right type of mortgage for their property purchase. of course If the holiday home is a freehold cottage or a house in a tourist location, which could be flipped to residential use then sourcing finance through a mortgage is far easier.
As well as a profit motive incentive the economic climate is also a positive. The fall in the value of sterling against other currencies is expected to create a boom for holidays being taken in the United Kingdom, and the launch of easy to book sites such as Airbnb now makes booking accommodation in a holiday home a simple exercise. So supportive economic conditions, new channels for reaching holiday makers and the tax benefits all make this market a potential hot spot for Buy to Let investment.
This shift in the Buy to Let market was predicted some time ago , in fact almost as soon as the new tax riles were announced, as can be seen in the article on the link below, its just taken a little while to build up a head of steam, and now its moving it does not look likely to halt for some time to come.
Informative 2015 article in the Daily Telegraph http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/11979388/Why-holiday-homes-will-be-the-next-buy-to-let-boom.html