Invest or divest? The BIG question for landlords in 2019
2018 was an annus horribilis for landlords.
You don’t have to be a Latin scholar to know that, over the last 12 months, changes to government policy began to bite property investors hard – with tightened underwriting regulations, new rules around tenants and stamp duty hikes putting the pressure on the UK’s private rented sector.
Cutting mortgage tax relief was, for many landlords, the rotten cherry on a particularly sour cake. And investors voted with their feet with buy-to-let mortgage applications dropping to a four-year low and growth in London property prices falling to its lowest in five years.
Many landlords will be wondering what else could happen to their businesses in the New Year, and whether property investment remains the right game to play.
So let’s tackle the big question: should you divest or invest in your buy-to-let portfolio in 2019?
The case for divesting
If 2018 was full of change, 2019 looks set to be stormier still. And landlords’ day-to-day workload is likely to get heavier as new property legislation comes up the track. This will be enough to persuade many investors to downsize their portfolio.
Let’s get the B-word out of the way, first. Brexit will continue to dominate headlines for the next six months (if not, years). As investors, the only certainty we can hold on to is that more uncertainty is coming our way. As a result, many landlords will choose to hold off making new investments while the details of our EU exit-deal remain unknown. Sellers are likely to do the same – limiting investors’ choice of properties.
Once a deal is hammered out, landlords who let to foreign nationals could be negatively affected by new immigration policies. And if a Labour government replaces Theresa May’s cabinet in a snap election, landlords will have to contend with a policy programme that’s likely to be hostile to their interests. Labour has already pledged to overturn Section 21, allow councils to introduce rent controls and abolish tenant fees (costs of which are likely to be shifted to landlords).
Meanwhile, alarm bells are ringing for the international economy. In December, the IMF Global Financial Stability Report warned of storm clouds gathering for another 2007-type slowdown.
If this happens, UK property prices will take a hit. Access to finance is likely to become harder to find. Landlords’ capital assets will suffer. This pressure will be partly offset by an increased number of renters entering the market, but most investors will see their margins squeezed.
The next 12 months will, therefore, be difficult for risk-averse landlords. And policy changes will make things worse still, by squeezing profits and adding to their workloads.
Landlords completing their tax return in the next month will be able to claim just 25 per cent relief on mortgage interest payments, as part of the phased introduction of Section 24. Next year, they won’t be able to claim any at all.
Compounding this pressure on profits is the fact that landlords can no longer claim a 10 per cent ‘wear-and-tear’ allowance for their properties. Increased stamp duty on second homes shows no signs of being reversed. Last year’s HMO room size regulations and Minimum Energy Efficiency Standards are also beginning to take effect, making it necessary for more landlords to pay for an HMO license and invest in energy-saving improvements to their properties.
Many of the landlords we’ve spoken to are considering divesting their portfolios in response to these changes. And further similar policy developments are in the pipeline.
A tenant fee bill is currently being reviewed in government which, if implemented, will prevent agents from charging tenant fees. These costs are likely to be shifted to landlords instead. While many landlords will be unaffected by these changes, many professional landlords who charge tenants for references and similar will have to review their business model if the proposed changes pass into law.
We’ll also find out the results of the 2018 consultation on tenancy length, which could make three-year tenancies the norm. This will cut flexibility for investors by locking them into longer contractual relationships with their tenants.
Elsewhere, the government is considering establishing a housing ombudsman to serve property owners and tenants better. This may require landlords to sign up to a redress scheme and is likely to create more administrative work for investors. A consultation is also in progress regarding five-year electrical checks for all buy-to-let properties – not just HMOs.
These policy changes are important for the safety and wellbeing of tenants and will drive up professionalism within the private rented sector, which can only be a good thing. They may also be the thing that encourages concerned investors to divest their portfolios in 2019.
The case for investing
Every cloud has a silver lining. Economic uncertainty creates new opportunities for entrepreneurial landlords who are willing to think differently. And looking beyond the short-term chaos, the market fundamentals for UK buy-to-let remain the same: a high demand for housing; a low supply of homes.
Let’s tackle supply first. The government has so far failed to hit their target of building 300,000 new homes annually by 2020. In 2017 developers built just 217,000; in 2018 the government was prompted to lower the lending cap for developers to stimulate activity. We may see similar incentives this year as ministers act to meet their own targets.
Meanwhile, homeownership remains unaffordable for many – even while price growth slows in London and the surrounding areas.
This disparity in supply and demand – which benefits landlords – is likely to grow in the event of continued inflation and economic uncertainty, whether caused by Brexit or otherwise. Fewer people will be able to buy homes and will enter or remain in the private rented sector.
Meanwhile, those landlords who choose to divest their portfolio under these conditions will free up stock and tenants for the landlords who are willing to buy in the down-cycle. The buy-to-let mortgage marketplace will become more competitive, with lenders willing to offer better deals to a smaller pool of property investors. Investors looking to remortgage properties will also benefit under these conditions.
This opportunity may only be available for a short period. Many analysts predict that the economic uncertainty caused by Brexit will be short-lived, with Savills expecting London to revert to 4.5 per cent price growth over the next five years. Savills and many other agents expect growth to be fastest outside of London – with the North West leading the charge at 21 per cent growth between now and 2023, and Leeds, Manchester and Birmingham all predicted to benefit.
Investors willing to look to new regions may still have time to pick up a buy-to-let bargain. Others will look to diversify their portfolio to tackle perceived risks – investing in HMOs, business lets or converting shops into homes, under the new 2014 change of use rules. Opportunistic, entrepreneurial thinking of this type can also help tackle the policy pressures outlined earlier.
An increasing number of landlords are choosing to incorporate to deal with their mortgage interest relief being cut. This step should only be taken following professional legal advice, as it carries with it new responsibilities and costs. Others have reworked their portfolio to offer short-term lets – income from which is not affected by the tax relief cuts.
In uncertain moments, buy-to-let remains a relatively stable asset serving a clear market need. For landlords able to invest time and thought in reforming and repositioning their portfolio, 2019 may, therefore, be the perfect time to buy.
Buy to let property is a long-term game – requiring patience, hard work and a strategic approach. 2019 is set to test the mettle of even the best-prepared property investors – both in terms of economic pressure and policy change. Tell us what you plan to do with your portfolio on Twitter, @HamiltonFraser.
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