Housing your money: Buy to let lndlords should look beyond the obvious opportunities
Landlords were hit by changes left, right, and centre in 2017, with new legislation affecting almost every corner of the market.
Some of the changes introduced in the past couple of years include a reduction in the amount of tax relief landlords can claim on mortgage interest costs, the scrapping of the so-called “wear and tear allowance”, and the hike in stamp duty tax.
And yet, despite the barrage of blows, buy-to-let continued to deliver competitive returns.
So what does 2018 have in store?
From an investment point of view, the property market remains an exciting proposition built on the strong foundations of an exciting and robust asset class.
The UK may have seen its fair share of political upheaval over the past year, but none of that has changed the fact that Britain will always need homes.
In fact, the growing cohort of people who can’t buy, or don’t want to, will more than ever rely on the rental sector to house them.
In the absence of a crystal ball, landlords should instead use variations in rental growth and yields over the past year to pick out some of the most promising regions for buy-to-let.
The capital has experienced falling rents for over a year now, with prime locations seeing the greatest decline and rents, shrinking in 26 of the 33 London boroughs in 2017.
Rents in London fell by 0.83 per cent last year, compared to growth of 1.27 per cent elsewhere in the UK.
However, despite the closing gap, London rents remain, on average, 2.5 times greater than those across the rest of the UK.
There remains good opportunities for a range of property sizes in London.
As house prices become increasingly out of reach for aspiring homeowners, Generation Rent is growing both in volume and household size, with people more likely to be in rental accommodation as they begin and grow their families.
As a result, three-bed properties saw the greatest rental growth across UK in 2017.
For landlords, it’s clear that there’s a lot to be gained by offering a three-bed property in a London market that is crowded with smaller properties.
For example, average rents for three bed properties in London are 39 per cent higher than rents for two bedroom properties. This is a 39 per cent uplift in rent you can receive for a house that is likely to have no more than 30 per cent extra living space.
This slowdown in rental growth has not been consistent across the country.
The East Midlands saw 2.1 per cent growth in 2017, while the South West and East England both saw growth around the 1.6 per cent mark. This is in stark contrast to the UK average of just 0.53 per cent.
These figures would suggest that many young professionals are moving further afield to reduce their rent burden, possibly while they save for a house of their own.
The strong demand for low-rent accommodation by long-distance commuters is thought to be pushing up rents in East England more specifically. And in turn, this shows signs of increased yields for buy-to-let property. For example, Peterborough and Thurrock are among the greatest risers, with growth sitting at around two per cent.
It may not be a market for everyone, but those looking for better yields may even want to consider looking further afield to university cities.
Although the costs of maintaining houses in multiple occupation (HMOs) are typically higher than maintaining those housing a single family, the number of homes lived in wholly by students continues to soar, and the presence of a top university nearby is one way of ensuring a consistent stream of income.
Leading university towns include Manchester, Bristol, Birmingham, Leeds, and Nottingham, which all saw rents increase more than four times the amount of the UK average in 2017. There are some great investment opportunities out there for people prepared to target the student market.
The waiting game
On one level, 2018 is going to be a year of waiting and watching, as the impact of new regulation and tax reforms come to bear on the market.
Landlords may look back at 2017 as the year that things got tough, but in the UK’s property microcosm, there are always new locations and new opportunities.
This is the year for buy-to-let investors to branch out beyond the obvious.