The challenges created by a changing property market
Up until recently, the buy-to-let market in the UK represented a shining beacon of light for investors in an uncertain economy.
But, the combination of rising stamp duty on purchases, the elimination of tax breaks, relatively weak house price growth forecasts, falling rental yields and increased regulation have made buy-to-let investments less appealing. In April 2015 it was already estimated that the following 12 months would see buy to let returns plunge by an estimated 62% and that was before the Brexit vote in June 2016.
We believe, based on our interactions with hundreds of property investors, that over the next few years there will be a significant fall in new buy to let investment and many landlords will look to reduce/exit their existing portfolios to seek returns from other forms of real estate.
Rising tax burden set to hurt buy-to-let profits
While the UK government has historically offered mortgage interest tax relief on buy-to-let purchases, this is set to be reduced from next year. Buy-to-let mortgage interest tax relief will be gradually reduced to 20% of interest paid between 2017 and 2020.
So a higher rate and additional rate tax payer will now lose a significant portion of their rental income to tax and some, whose interest payments are high relative to rental income may start making losses.
Increased stamp duty adds to buying costs
From April this year we saw the introduction of a new stamp duty levy for buy to let landlords. Those buying additional residential properties, including buy-to-lets and second homes, now have to pay an additional 3% in stamp duty. This increases the overall cost of buy-to-let property for investors and lowers their return on investment.
Weak forecast house price growth
After 5 years of house price rises, recent tax changes and the UK’s vote to leave the European Union, many commentators are now forecasting relatively weak house price growth across the UK over the next five years.
Rental yields continue to plummet
The rise in acquisition costs, along with disproportionate house price growth relative to more moderate rental increases has dampened net rental yields across the UK.
While some landlords may seek to increase their rents to offset their higher cost base, this is not always possible in a competitive market place and in some cases, increased rent will actually lead to the much dreaded void periods.
Increased complexity and compliance costs
The time and effort to stay compliant with the ever changing laws, such as the HMO licensing reform hasn’t made a landlord's life any easier.
In fact, it wasn't very easy to begin with. Between finding the right property in the right area at the right price and managing the many stakeholders (estate agents, lawyers, mortgage brokers, lenders, managing agents, tenants, tradesmen etc) buy-to-let investments weren’t appealing to many investors in the first place.
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Disclaimer: Future performance is not guaranteed and is based on projections only. Your capital is at risk if you invest in property. For more information see our full risk warning.