What might Brexit mean for landlords and what should you be doing to prepare?
Brexit is fast turning into the never-ending story. But what will it mean for landlords?
According to the annual HomeLet survey, more than a third of landlords are worried about Brexit. According to HomeLet CEO Martin Totty, “the three main concerns that landlords have are the macro-economic impacts they face on their finances – further changes to legislation, the potential implications of Brexit and house price values.”
Here, we will cover those key concerns, collecting all of the relevant information, expert opinions and possible scenarios into one comprehensive guide.
We’ll focus on where we currently stand in the Brexit saga, how it’s affecting the property market and the buy-to-let market and how landlords should be seeing through the media hyperbole to the potential beyond Brexit.
Where we stand
Theresa May is trying to placate both sides of the divide, Donald Tusk wants a swift resolution, and the people’s vote that many remainers are calling for looks less and less likely to happen.
The most likely scenario right now appears to be a no-deal Brexit. Unless Article 50 is extended or the government can get Parliament to agree on a deal by 29th March, we will be leaving without a deal, with significant economic consequences, according to business experts such as the Confederation of British Industry (CBI) and the Institute of Directors (IoD).
We know that tenants, investments, legislation, tax, property prices and rental yields are all perpetual concerns for our landlords. So, what might a no-deal Brexit mean for landlords in these key areas?
The property market
The housing market has suffered because of Brexit. The Royal Institution of Chartered Surveyors (RICS) has said that the UK property market is at its weakest levels in more than six years. Simon Rubinsohn, RICS’ chief economist, said: “the ongoing uncertainties surrounding how the Brexit process plays out is taking its toll on the housing market. I can’t recall a previous survey when a single issue has been highlighted by quite so many contributors”.
According to Nationwide, house prices have fallen by £5,000 since last July, with the average house price in the UK now standing at £211,966 – down 2.3 per cent from a peak of £217,010 in July 2018. It would appear that prospective buyers are hesitant to lay down their deposits amidst Brexit fears and an “uncertain economic outlook”.
Howard Archer, chief economic advisor at EY Item Club, an economic forecasting group, believes that “if Brexit is delayed, ongoing uncertainty is likely to weigh down on the housing market and could well see house prices stagnate or fall slightly”.
With the outlook so seemingly bleak for buyers, landlords could, in fact, be turning the stagnation to their advantage. Market uncertainty means that more prospective buyers will choose to rent instead – offsetting the potential renters that might be lost if immigration rates fall.
Fewer buyers on the table also means that the buying power of the remaining buyers raises substantially, so brave landlords looking to expand their property portfolios should be able to snap up some serious bargains.
The buy-to-let market
According to the HomeLet Rental Index, the average monthly rent in the UK currently stands at around £943. Excluding London it falls to £780, which is up 1.8 per cent on 2017, underlining a long-term trend of narrow but steady growth.
Martin Totty, CEO at HomeLet, said: “Over the last year, the growth rate has remained below the average rate of inflation in the wider economy, and the growth in the housing market. However, the rental sector can be seen to be performing at a much steadier rate, with a lower level of volatility when compared with house prices”. For landlords, this is excellent news, as it means there will be fewer prospective homeowners and more prospective renters, particularly in unstable times. There will also be less competition when it comes to portfolio expansion.
According to John Goodall, CEO of Landbay, meanwhile, the house price correction likely to take place in the event of a no-deal Brexit could result in an improvement in rental yields. “If we look back through recent history, while house prices have been quite volatile through the cycle, rents have proved extremely stable. In fact, rents have risen in most recent years by around 2 per cent and even during the crisis they only fell by around 1 per cent ”.
John also admits, however, that our current Brexit climate (combined with a range of changes to the tax treatment of the buy-to-let market) has wiped thousands of pounds off rental growth in London, specifically. This has saved renters a small fortune, but has led to poor yields and many landlords leaving the market.
He adds: “While tenants are better off, without necessarily realising it, uncertainty in the market has caused a conundrum for landlords. Many landlords will have been looking to offset the Government’s punitive tax regime by raising rents, however, the uncertainty surrounding Brexit has forced the vast majority to forfeit this to maintain a steady income.”
The takeaway here is that while rental demand might have fallen in the capital, it has risen elsewhere and looks set to continue rising during and after Brexit. Indeed, while rental yields are currently at their lowest point for three years, at an average of 5.6 per cent, according to BM Solutions, one in four landlords has reported an increase in tenant demand.
Whilst Brexit might have catalysed uncertainty in the housing market, one area that might offer relief for landlords is in legislation.
While EU law has given us consumer protection, working hour caps and greater employee rights, it has also given us regulations that make it more difficult (and more expensive) for some landlords to acquire mortgages. Sovereignty from the EU means that certain laws, like the Mortgage Credit Directive – which came into law in 2016 and was designed to ensure that mortgage lenders applied borrowing rules uniformly across all EU member states – could be repealed. It also means the UK will be exempt from any future EU legislation.
However, note that Greenland is the only other member state that has ever left the EU and it is still subject to EU treaties, which means that it is unlikely that EU regulations that are already a part of UK law would become null and void, at least not immediately.
The Centre of Economic Performance, part of the London School of Economics, states: “Prior to leaving the EU, the government would need to pass legislation setting UK law in areas currently subject to EU regulations. Whether this legislation would simply transpose EU regulations into UK law or implement new regulatory policy is uncertain”.
One other major blow that could result in a lot of empty properties is the fact that a no-deal Brexit might put EU nationals at risk of losing their homes in the UK. Under the 2014 Immigration Act, all EU nationals have the automatic right to rent property in the UK. With the UK out of the EU and no longer under any legal obligation to enforce this act, it’s unclear what rights the 66 per cent of EU nationals who rent in the UK would have. This poses a quandary for landlords who might not know whether to renew tenancy agreements for existing EU nationals or make new ones.
EU citizens will be able to apply for the EU Settlement Scheme from 30 March 2019 until 30 June 2021 in a deal scenario and 31 December 2020 in a no deal scenario. Until we are sure exactly what Brexit will mean for the industry and for the country, it will be up to landlords themselves to check the immigration status of their tenants. Satbir Singh, CEO of the Joint Council for the Welfare of Immigrants, feels that most landlords won’t go through the hassle of checking someone’s status, when it would be so much easier to rent to a British national instead. He explains: “Landlords cannot be expected to act as border guards, and to ask them to do so is to play with the lives and livelihoods of immigrants and ethnic minorities. It must stop”.
If the economy looks to be entering a recession, the Bank of England will introduce a buffer in the form of a rise in interest rates, making buy-to-let mortgages more expensive. This, coupled with a government clampdown on these mortgages, will make it difficult for landlords to get their feet in the door.
So what happens next and what, if anything, can landlords do to prepare? If a no-deal Brexit is indeed what we’re heading for then there will be a lot of scrambling and a lot of confusion. In this environment of chaos, it’s important to keep a clear head and a watchful eye on all political and economic developments, as well as on sector trends.
The Brexit-based uncertainty is causing a major rush on remortgages, for example, with homeowners and landlords alike keen to refinance their home loans whilst the base rate holds. Indeed, according to UK Finance, remortgaging surged to its highest level for nearly a decade in October 2018 at £9.2 billion. With the base rate set to rise after a no-deal Brexit, David Hollingworth, director at broker L&C Mortgages, believes that tracker mortgages are far less desirable than fixed rate mortgages. He explains: “We’re still at a low point on fixed rates, so the upsides of a variable deal are fairly limited. Therefore it’s all been about fixed rates”.
Of course, there was always going to be an element of economic readjustment after such a major socio-economic shift. But with rent levels likely to remain steady and a down market leading to some great investment opportunities, there’s also a lot to feel excited about for landlords willing to see the wood for the trees.
According to Paresh Raja, CEO of Market Financial Solutions, Brexit could ultimately be seen as an opportunity for landlords and he feels that the strong buy-to-let market is a good indication of this. He explains: “Following a slowdown in the growth of the UK’s housing market in the immediate aftermath of the referendum, conditions have recently picked up again”.
Indeed, according to Halifax data, the average house price in Britain reached a new high of £230,280 in July 2018 – a positive sign for those looking to invest in a new property. Raja adds: “In an effort to stabilise the UK economy and prepare for the aftermath of leaving the EU, high street banks have introduced stricter regulations making it more difficult for prospective buyers to secure mortgages” – and that can only be good news for landlords.
Seeing through the scaremongering
Brexit might be a frightening prospect, but change is always frightening if you allow it to be. It also presents landlords with a number of opportunities for portfolio expansion, remortgaging and more besides.
The UK property market has withstood countless major political changes over the past decade, beginning with the 2008 financial crisis and peaking after the 2016 referendum. So as bad as things might seem, there’s always an upside and the housing market will always bounce back.
Our message is: don’t panic and don’t make snap decisions. Keep your fundamentals in check; cement your relationships with agents and tenants and make sure you stay abreast of any changes in legislation.
If in doubt, just remember that property is generally a good investment. A 2018 survey by Market Financial Solutions revealed that 53 per cent of UK investors would rather invest in ‘traditional’ assets such as property than newer assets like cryptocurrencies, with 63 per cent regarding property as a “safe and secure asset”.
So, while the rest of the world is clambering for safety and security, rest easy in the knowledge that landlords have it better than many other sectors.
In uncertain times, landlords should be able to quickly and reliably check their tenants before signing an agreement. Our Tenant Verify advanced online checking service is fast, simple and precise.
Get a landlord insurance quote
Get a quote online in under 4 minutes