Falling house prices and rising mortgage rates, coupled with a cost of living crisis, which inevitably results in higher incidences of rental arrears, are scaring off potential new investors in buy-to-let.
But new investments in the right locations could be an astute move for new investors at this time. The a dilemma that landlords are in right now is, is now the right time or is it better to wait and see if prices fall further?
The start of a house price fall
Data produced by the Land Registry show that house prices started to stall last autumn, with mortgage approvals falling by around 4 per cent since September, an annual rate of fall of around 7 per cent.
What’s different for landlords, as opposed to home buyers, is the level of rental demand and the growth in rent prices. The fact is that government policy over the last ten years or so has been so discouraging to buy-to-let landlords that many landlords are selling up, creating a major undersupply of rentals.
Frustrated landlords and buying opportunities
Adversity creates opportunities for those who are savvy and nimble investors, those who are able to pick up the right bargains in the right locations, perhaps from overstretched (over borrowed) and frustrated landlords who have had enough?
Many existing landlords are in a bind: their financial affairs are not structured optimally to avoid the high taxes the government has imposed, their properties are in need of expensive upgrades to meet the upcoming new environmental standards, which could mean many thousands needing to be spent, and they may be over borrowed to boot, just as interest rates are rising, plus they are fearful of impending new tenant friendly legislation.
The right financial structure
New investors can structure their financial affairs to avoid the worst of the tax traps, working through a limited company for example; they can budget for upgrades if they purchase a property at the right price, or even buy new, and with the right approach any changes in legislation can be dealt with – after all the Government needs good landlords more that ever at this time.
The proviso to all of this is buying the right property in the right location, one which guarantees that all important factor in property investing, tenant demand. In some locations right now, tenants are queuing to rent, in these locations properties could be let 20 times over just days after coming onto the market.
So, deep research, followed by careful selection of the location will almost guarantee you owning a property that will bring long-term sustainable profits. Interest rates will come down and house prices will stabilise, given time, and prices will start to rise again, all this in the short to medium term, perhaps 2 to 5 years.
Those with funds will benefit
If you are one of the lucky ones with funds of your own to invest, then you can take advantage of the situation right now, you’re in a strong position as a counter market-cycle investor. The higher the level of enquiry you can provide in your bricks and mortar investment, the less pressure you are under to pay high mortgage interest each month, and the easier it is to weather the storm, and see the long-term higher returns and profits.
There’s only so many potential property investors with the necessary funds funds available to invest right now. That puts anyone with a cash sale proposition (cash with loan facilities arranged) who can move fast, able to negotiate and snap up a bargain.
Capital gains tax relief
It’s perhaps late in the day in early February to catch those landlords wanting to exit the fray in time to catch the capital gains tax benefit before the change in April – when the tax fee allowance drops from £12,300 down to £6,000 per person – but it’s still theoretically possible with the will of the solicitors involved to get the deal over the line in time. That’s a great big incentive for some landlords to sell.
The end of buy-to-let?
Many are forecasting the end of buy-to-let and have been for some years, headlines like “Good Riddance to Buy to Let” in the New Statesman recently don’t help. But seriously, what’s the alternative? Can government suddenly magic up 20,000 new homes, because that’s probably the figure that’s needed now to bring supply and demand into equilibrium in the UK.
Twenty major cities
Recent research carried out by Colliers International on behalf of The Daily Telegraph analysed the rental markets in 20 cities across the UK, cities including Cambridge, Oxford, London, Glasgow and Edinburgh. The study looked at factors including house prices and rental yields, economic performance, quality of life, educational levels and the environment.
The study found that a city like Cambridge, though prices were higher than the average, offered above average earnings potential in a location where demand is high and tenants are likely to be in a position to continue to afford rising rent prices into the future. Here you can be confident about your cash-flow projections into the future.
Rental demand in Cambridge along with some of the other major cities continues to outstrip supply, especially where leading universities and high tech jobs are available. Theses locations offer landlords a steady market for new tenants and a log-term income flow where workers are taking up well-paid jobs around academic institutions, with nearby tech industries.
Alex Bloxham, of Bidwells estate agents in Cambridge, told The daily Telegraph:
“They’re not typically great yields but the capital growth is what you’re looking for, as well as the consistency of rent you’re getting. The void periods are very minimal and the demographic of tenants is very good.”
The growing populations around these popular cities means there’s a shortage of the right rentals and house building is failing to keep up. Over a ten year period landlords have seen their rental property values increase by around 70pc in today’s values says Bloxham.
Following Cambridge, Edinburgh, Glasgow, Oxford and London were seen as locations with the highest potential for landlord investors.
