Rental returns in prime central London were negative in
January 2019, but property continues to outperform other asset classes,
according to Knight Frank’s latest Prime London Lettings Index.
The real estate consultant found that average rental returns
in prime central London during January stood at -1.4%, due to declining sales
values and rising rent prices.
However, this means that investments in prime central London
residential property outperformed a range of other asset classes last month,
including gold, stock markets, commodities and Bitcoin.
The Prime London Lettings Index analyses the performance of
rental properties in the second-hand prime central and prime outer London
markets costing between £250-£5,000 per week.
Prime central London
The average rent price in prime central London rose by 1.3%
in the year to January, compared to a decline of 0.6% on a quarterly basis.
Prime outer London
No change was recorded in the average rent price on an
annual basis in January, while rents dropped by an average of 0.5% on the
previous quarter.
However, Knight Frank reports that declining levels of
supply continue to put upwards pressure on rent prices in prime London markets.
The number of new listings in both prime central and prime outer London was 13%
lower in 2018 than in 2017, according to Rightmove data.
Meanwhile, the total number of listings fell by a fifth over
the 12 months to January.
The firm believes that a decrease in supply is due to more
landlords leaving the buy-to-let sector, following tax changes. This reflects a
separate study by ARLA Propertymark (the Association of Residential Letting
Agents).
As a result, the average rent price increased by 1.3% in
prime central London in the year to January, but prices were flat on an annual
basis in prime outer London, suggesting that positive growth will return in the
short-term.
Marylebone outperformed the rest of prime central London in January, with average rent price growth of 7.0% over the year. Rents in the area have been supported by declining second-hand stock, while Marylebone’s revitalisation and arrival of new build developments have attracted tenants, in particular, students from nearby universities.
Although landlords appear to be leaving the prime London
markets, it is positive to see that rental returns continue to outperform other
investment options on offer.
The proportion of income spent on rent by private tenants
has fallen over the past decade, according to new official figures.
The latest English Housing Survey, for 2017/18, shows that
the proportion of income spent on private rents was an average of 32.9% in the
period, which is down from 34.3% in the previous year and 36.4% in 2014/15.
With the Government considering how to increase the length
of private tenancies, the Survey also found that the average time that a
private tenant has spent in their current home was up from 3.9 years in 2016/17
to 4.1 years in 2017/18.
The Government’s new Private Landlord Survey for 2018, which
was published at the same time, reports that 70% of landlords kept their rent
prices the same when renewing their most recent tenancies, indicating that
landlords prioritise keeping good tenants for the long-term.
Owner-occupation
The latest English Housing Survey found that, of the
estimated 23.2m households in England, 14.8m (64%) were owner-occupiers in
2017/18. The proportion of homeowner households increased steadily from the
1980s to 2003, when it hit a peak of 71%.
Since then, owner-occupation has gradually declined to its
current level. However, the rate of homeownership has not changed since
2013/14.
After more than a decade of decline, the proportion of
35-44-year-olds in owner-occupation has increased. In 2017/18, 57% of those in
this age group were homeowners, which has risen from 52% in 2016/17.
While owner-occupation remains the most prevalent tenure for
this category, there has been a considerable rise in the proportion of
35-44-year-olds living in the private rental sector (from 13% in 2007/08 to 28%
in 2017/18).
Private renting
After a period of substantial growth, the proportion of
households in the private rental sector has not changed for five years.
Meanwhile, the share of households in the social rental sector has not changed
for over a decade.
In 2017/18, the private rental sector accounted for 4.5m (19%) households. Throughout the 1980s and 1990s, the proportion of private rental households was steady, at around 10%. While the sector has doubled in size since 2002, the rate has hovered around 19-20% since 2013/14.
Social renting
The proportion of social tenants who expected to buy their
own homes has declined, but no such drop was observed among private tenants.
In 2017/18, 25% of social tenants expected to buy a property
at some point in the future, which is down from 30% in 2016/17. A greater
proportion of private renters expected to buy – 58%, which is unchanged on
2016/17.
The social rental sector had the highest rate of
overcrowding and the lowest rate of under-occupation.
In 2017/18, 8% of households in the social rental sector
were living in overcrowded accommodation (compared to 6% in the private rental
sector and 1% of owner-occupied homes).
Meanwhile, 10% of homes in the social rental sector were
under-occupied (defined as two or more spare bedrooms). While under-occupation
remains less prevalent in the social rental sector (54% of owner-occupied homes
and 15% of private rental homes), it rose between 2016/17 and 2017/18, from 8%
to 10%.
Energy efficiency
The energy efficiency of English homes has increased
considerably in the past 20 years, but has not improved since 2015.
In 2017, the average Standard Assessment Procedure (SAP)
rating of English dwellings was 62 points, which was up from 45 in 1996. This
increase was evident across all tenures.
However, the increase appears to be slowing, and there was
no change in the average SAP rating of homes between 2016-17 (in any tenure).
Decent homes
There remains a lower proportion of non-decent homes in the
social sector than in the private rental and owner-occupied sectors.
In 2017, 13% of homes in the social rental sector failed to
meet the Decent Homes Standard. This is lower than the proportion of private
rental (25%) and owner-occupied (19%) homes.
Over the past ten years, the proportion of non-decent homes
has dropped from 35% of all stock in 2007 to 19% in 2017. This decline was
observed across all tenures, but has stalled in recent years.
Positively, the number of homes in the private rental sector
with a Category 1 hazard has plummeted from 31% in 2008/09, to 14% in 2017/18.
Comments
John Stewart, the Policy
Manager of the Residential Landlords Association (RLA), responds to the Survey:
“What emerges from the wealth of data out today is a picture of
continuing improvement in affordability, security and standards for private
tenants.
“The figures also debunk the myth that landlords are
always increasing rents unreasonably and looking for every opportunity to evict
a tenant.
“We recognise that, whilst this data confirms that the
vast majority of landlords enjoy good relationships with their tenants and want
them to stay on long-term, there are still too many unscrupulous landlords who
bring the sector into disrepute and they should be driven out of the market.”
Dan Wilson Craw,
the Director of tenant lobby group Generation Rent, had a different opinion: “With house prices slowing and
landlords now paying more tax, it has become slightly easier for renters to buy
their first home. However, for the remaining 4.5m private renters,
unpredictable rents and tenancies that the landlord can end without needing a
reason mean they have no stability. We need much better protections from
eviction and regulation of rents if renters are to enjoy long-term homes.
“These numbers suggest that most tenants
already have a landlord who wants to provide a long-term home. But, because
tenants have so little power in the market, there’s no way to actively avoid
ones who don’t. Tenants should expect that paying rent means they get to stay,
and that they shouldn’t face unaffordable rent rises. With most landlords already
on board with this, the Government should crack on and raise standards for the
whole sector.”
Despite Government restrictions, buy-to-let landlords in the
UK claimed £17.7 billion in tax relief last year, which is up from £17.4
billion in 2017, according to a study by ludlowthompson.
The estate agent suggests that, even once all of the Government’s
planned restrictions to buy-to-let tax relief are fully implemented
(by 2020), landlords will still be able to offset a total of £16.7 billion of
their finance costs against their rental income.
However, landlords were able to claim £7 billion in tax
relief on their mortgage interest and other finance costs last year. A further
£4.1 billion was claimed for property repairs and maintenance.
Landlords are still able to claim tax relief when purchasing
furniture for a rental property, under the Wear and Tear Allowance.
Stephen Ludlow, the Chairman of ludlowthompson, says: “The tax grab on buy-to-let investment is
unwelcome, but it has not undermined the attractions of buy-to-let, especially
when compared to the volatile stock market.
“You’re still able to offset the vast majority
of your costs – ensuring landlords will still benefit from tax relief on a high
proportion of their rental income.”
He believes: “Tax reliefs are one way that can
incentivise landlords to continue investing in their rental properties, thereby
improving the quality of rental stock across the UK. If landlords are not
allowed to offset their costs, they may be disincentivised from investing in
buy-to-let – and that would impact the supply and quality of rental property as
a whole.
“Policymakers need to ensure they still
encourage landlords to invest in buy-to-let. They are essential for ensuring a
strong supply of high-quality rental property. This helps improve labour
mobility, particularly in large economic hubs, such as London. The Government
should look to keep further intervention in the sector to a minimum.”
Buy-to-let yields for landlords have dropped to a three-year
low, due to the effects of recent tax changes, according to the latest
quarterly landlords panel by BM Solutions, covering the fourth quarter (Q4) of
2018.
The lender found that average buy-to-let yields have fallen
to 5.6% on the previous quarter.
Those with large portfolios have been worst affected, with
three quarters of landlords managing between 11-19 properties reporting a
decline in profitability over the past three years.
Almost a quarter of buy-to-let landlords, especially those
with larger portfolios, now plan to sell up and leave the private rental
sector, with the research citing tax and regulation changes as the main
reasons.
Despite that, some landlords are still planning to add to
their portfolios, with one in seven investors preparing to purchase more
properties.
The research also found that confidence among landlords in
the UK financial market in the short-term has dropped by 8% year-on-year to
just 9% – the lowest level in five years.
However, despite the decrease in their confidence levels,
the majority of buy-to-let yields are still healthy, with 86% of landlords
saying that they still make a profit from their property portfolios.
BM Solutions found that 31% of landlords make a full-time
living from their lettings businesses, while 55% use their rental income to
supplement their wages.
Phil Rickards, the Head of BM Solutions, says: “The buy-to-let industry has been
through many regulatory changes over the past few years, and the effects of
this are clearly being felt.
“However,
the landscape is not entirely bleak. The proportion of landlords making a
profit from their lettings activity remains at 88%, equalling the record high
seen in Q3 2018.”
He adds: “It
is clear that the market is sensitive to the current legislative and
macro-economic environment, and this has been reflected in the latest
findings.”
Landlords,
have your buy-to-let yields dropped over the past year?
UK rents are expected to rise by an average of 11.4% over
the next five years, according to a prediction by CBRE.
Alongside fairly moderate growth of 1.8% in the average UK
house price this year, the property group expects rents to rise by 1.3% during 2019.
The report, which looks at how economic, political,
financial and technological trends could affect the property market, foresees
further growth in rents leading up to 2024, supported by a drop in housing
supply in the private rental sector, amid “dampened investor demand for
buy-to-let”, and growing demand for rental homes, particularly from
lower-earning young people.
CBRE estimates that UK rents will rise by 1.3% in 2019,
followed by growth of 1.9% in 2020, 2.5% in 2021, 2.7% in 2022, and a further
2.6% in 2023. This equates to total growth of 11.4% during the whole period.
House prices, on the other hand, are expected to increase by
1.8% this year, followed by growth of 2.3%, 3.4%, 3.7%, and 1.3%, equating to
13.1%.
Miles Gibson, the Head of UK Research at CBRE, says: “We expect rather
weak house price and rental growth over the next year, but we think that the
lack of supply and low interest rates for mortgages will hold prices up.”
He adds
that weak supply and strong demand is “creating a lot of interest among
investors” in the student accommodation and build to rent sectors, especially
in terms of institutional capital.
Some £2.1
billion of institutional funds have been invested in the year to the third
quarter (Q3) of 2018, which is 51% higher than in the same period of 2017.
Investment
is on a firm upwards trajectory, with volumes in 2019 likely to exceed 2018’s
total, according to CBRE.
Do you
believe that UK rents will rise by 11.4% by the year 2024?
The Scottish equivalent of Stamp Duty, Land Buildings Transaction Tax (LLBT), could be raised to 4% for those buying additional properties north of the border.
On Wednesday (12th December), the Scottish Finance Secretary, Derek Mackay, proposed a 1% hike on the tax payable when purchasing buy-to-let properties or second homes.
Mackay set out his plans for tax and spending for the year ahead at Holyrood, as part of the Scottish Budget, which included the proposal to increase the surcharge on LLBT for additional properties from 3% to 4%.
If the Scottish Government approves the proposal, the rate hike will be introduced from 25th January 2019.
However, the 4% surcharge will not apply if the contract for a property transaction was entered into before 12th December 2018.
The proposed hike would mean that a buy-to-let landlord purchasing a property in Scotland for £250,000 would see their LLBT bill increase from £9,600 to £12,100.
Several property experts have expressed their concerns over the adverse effect that LLBT is having, following its introduction in April 2015, especially on the middle to upper end of the Scottish property market.
There is also plenty of evidence to suggest that LLBT is placing upward pressure on rent prices, as Brian Moran, the Lettings Director at Your Move Scotland, explained back in June: “Rents are rising rapidly as a result of the LLBT surcharge for buy-to-let properties.
“This tax hike has dissuaded landlords from investing in the sector, leading to a shortage of homes to rent, compared to the demand for housing.”
He continued: “With the limited supply of rental properties, potential tenants have been forced to compete to secure homes, pushing up rents.
“The introduction of this anti-landlord legislation from Holyrood has ensured the cost of the policy has hit tenants hardest.”
Landlords must note that the Scottish LLBT is separate to the 3% Stamp Duty surcharge introduced by the Government back in April 2016.