Buy-to-let news to Friday, November 17th, 2017

Housing estate from the air

Buy-to-let landlords could be forced to join redress scheme

The Government is set to unveil details of a new scheme aimed at helping to resolve tenancy disputes.

Details of the redress scheme, which landlords will be required to register for, are likely to be outlined in the Autumn Budget on 22nd November.

The concept was announced at the Conservative Party Conference, with Communities Secretary Sajid Javid stating that the Government would “insist that all landlords are part of a redress scheme.”

Whilst details remain unclear at the moment as to how this will work, there are currently no ombudsman schemes in practice that deal with the private landlord sector, although there are a number of voluntary schemes in operation, including those run by the National Landlords Association, The Property Ombudsman and the Housing Ombudsman Service.

A typical model for this type of scheme will normally encompass a dispute resolution system, which is legally binding, with all members having to follow a code of conduct.

Javid explained the reasoning behind the proposed scheme:

“For too long, tenants have felt unable to resolve the issues they’ve faced, be it insecure tenure, unfair letting agents’ fees or poor treatment by their landlord with little means of redress. We’re going to change that.”

Buy-to-let landlords selling up

BTL landlords selling upFresh warnings suggesting more landlords are set to leave the private rental sector, have been counteracted with a reminder of the potential returns of buy-to-let investment.

Savills the estate agent has predicted that the next five years could see as much as a 27% reduction in the number of buy-to-let landlords, equating to a fall from 75,000 to 55,000.

According to Savills’ data, which did not include remortgage products, Q2 of 2017 saw a total of 78,000 new buy-to-let mortgages, while the overall number of mortgage rental homes increased by just 28,000.

The difference of 50,000 constitutes the largest in the past decade and started to manifest in Q3 of 2016.

Lucian Cook, director of Savills residential research, said:

“Mortgaged buy-to-let investor numbers are forecast to fall most dramatically - we have seen the earliest signs that some mortgaged buy-to-let investors may be selling stock.

“Those entering the market will be looking very carefully at yields, putting the spotlight on urban markets outside the capital.”

The figures come after a turbulent time for landlords, which has seen a number of punitive Government measures hitting them hard, such as the introduction of a 3% stamp duty levy on second homes, followed by the news that mortgage interest tax relief was being reduced gradually down to 20%, beginning in April 2017. More recently the Prudential Regulatory Authority rules have introduced tighter lending conditions whilst scrutinising landlords’ entire portfolios when assessing affordability, when they own four or more properties.

However, despite the changes which have impacted on landlord finances, buy-to-let continues to offer attractive returns for many landlords, with rental growth reported across many areas of the UK.

Andrew Turner, chief executive at Commercial Trust Limited, commented:

“Historically, it was perhaps easier to derive income from buy-to-let. Whilst the margins may have narrowed, the fundamentals remain.

“Demand for rental property is high and as such rental income is strong, which means a shrewd investment can offer a profitable regular monthly income, after costs. That income may (or may not) be proportionally smaller than in times gone by, but that doesn’t have to mean it is negligible, in fact quite the opposite may be the case.

“What is true is that financing buy to let has become significantly more complex, so it is not advisable to take a DIY approach to finding finance without adequate time, understanding and experience.

“At Commercial Trust we work with in excess of forty lenders, each offering a wide range of products which are bound by a myriad of criteria. It would not be reasonable to expect landlords to identify suitable and profitable financial solutions from amongst this range of choice, when very often they have a primary career that requires their focus.

“The increasingly complex marketplace and industry changes means that now is a good time for landlords to review their property, whether they have one or two, or a large portfolio.

"Consulting a tax professional may be beneficial for those unclear on their position and it is our aim to identify a buy-to-let solution to future-proof investment strategy."

Landlords willing to look at longer term tenancies says trade body

Landlords willing to consider long tenanciesAn industry body has stated that landlords are willing to offer tenants longer term tenancies, but that the Government will need to provide incentives and clear up one or two issues.

Last month Communities Secretary, Sajid Javid, told the Conservative Party Conference that the government was keen for landlords to offer tenants longer tenancies and hinted that an incentive might be introduced to encourage this.

Javid said: “All landlords should be offering tenancies of at least 12 months for those who want them…. That’s why, at the Autumn Budget, we will bring forward new incentives for landlords who are doing the right thing.”

In response, the Residential Landlords Association (RLA) has suggested that the Budget, on November 22, should build upon the goodwill of its members.

The RLA said that a recent survey of nearly 3,000 landlords, resulted in 63% stating they would offer a 12 month tenancy to tenants if requested, confirming “the will is there”.

However, the RLA has also indicated that more work needs to be done between the Government and mortgage lenders, in order to make longer tenancies a reality. According to the association, almost a quarter of its member landlords have had tenancy length restrictions imposed by their lenders.

Andrew Turner at Commercial Trust gave his view,

“Owning and renting property is done to attract a reliable income and to achieve capital growth. If rent is coming in, the property is well maintained by the tenant and capital growth is being achieved, this is the holy trinity of buy to let.

“The challenge in offering longer tenancies is that, if a landlord needs to increase the rent mid-tenancy to maintain profitability, this is very difficult to achieve.

“In principle, a long-term relationship with a tenant is the ideal, as it means a regular income is maintained and the cost of remarketing the property is eliminated. Some landlords even discount market rents to retain tenants, where the relationship is positive.

“However, with various new financial pressures being placed upon landlords, for example the reduction of mortgage interest tax relief, a landlord would have to calculate whether the rent set up at the start of a tenancy would remain profitable throughout the term. This becomes more complex to calculate over longer periods and may lead to front weighting the rent to future-proof profitability.”

Landlords undeterred by Brexit

Landlords undeterred by BrexitThe UK’s landlords have greater concerns over tax, stamp duty and stricter lending rules than the effects of Brexit, with 32% of landlords with five or more properties still looking to increase their portfolios, new research has revealed.

A resounding 85% of buy-to-let landlords said that the UK’s departure from the European Union did not concern them, with just 8% indicating that Brexit would deter them from increase their property portfolios.

The Landlord Voice Survey, conducted by Simple Landlords Insurance, outlined that far more salient matters influencing landlord decisions include stamp duty, capital gains tax and stricter mortgage lending rules.

56% of the landlords surveyed own at least five properties (which constitutes 41% of the overall number of those surveyed) and have had cause to review and update their investment strategy in the last 12 months.

The second phase of new underwriting rules, which had to be in place by the end of September when this survey was undertaken, affects at least this segment, and potentially more of those surveyed in particular. The rules (imposed by the Prudential Regulation Authority) require lenders they regulate to undertake a stricter underwriting process for portfolio landlord borrowing, which for the PRA means those who own four or more mortgaged buy to let properties (as opposed to the five properties referred to in the survey).

The Government changes to buy-to-let have had an effect on attitudes, with landlords owning larger portfolios citing the reduction in tax relief on mortgage interest payments as a big worry.

Smaller landlords were most concerned about periods when their properties were empty.

The report highlighted damning perceptions of the Government, with only 1% of landlords with large portfolios considering it to be supportive of the buy-to-let industry.

In spite of the changes that have taken place, it appears buy-to-let landlords are still seeing the benefits of their investments though, with just 3% looking to sell up over the coming year, while 32% of those owning five or more properties looking to invest in the next 24 months.

“Brexit turns out to be the least of landlords’ worries, it’s Government policy that’s causing the most sleepless nights and causing landlords to mistrust policy makers,” affirmed Alex Huntley, director of operations at Simple Landlords.

"Yet despite the uncertainty and instability in the market, landlords remain remarkably upbeat about their future prospects. The bigger the landlord, the more positive the outlook,” she added.

Research highlights gaps in landlord and tenant knowledge

Lack of property law knowledgeNew research has highlighted that many landlords and tenants are simply not up to speed with rules and regulations when it comes to the private rental industry.

A study by LetBritain, of over 2,000 UK adults, indicated that 16% of landlords do not know a tenant must receive at least two months’ notice under section 21 of the Housing Act 1988 if they wish to evict them. Tenants had even less understanding of this rule, with 37% unaware of the two-month minimum requirement.

The report also showed that 12% of landlords did not know they must provide 24 hours’ notice before they can enter a property, while 28% of tenants said they didn’t know this.

14% of landlords were unaware of their responsibilities regarding maintenance to the property exterior.

But the lack of knowledge extends further, with a surprising 12% of landlords unaware that tenant deposits should be placed in a tenancy deposit scheme and 27% claiming they did not know tenants have the right to challenge rent amounts if these are higher than the typical rent charged for similar properties close by. Half of the tenants surveyed didn’t know their rights to challenge rent.

34% of tenants did not know that their landlord should provide an Energy Performance Certificate; and 43% were unaware they could challenge excessive charge by reporting these to an ombudsman.

Fareed Nabir, CEO of LetBritain, said:

“It is clear that a huge proportion of UK renters – a population growing in size – do not truly understand the legislation and regulation in place to protect them. Likewise, a concerning number of landlords are also in the dark about exactly what rights and responsibilities they have.

“Such a lack of awareness increases the risk of renters and landlords being exploited – it must be addressed and letting agents certainly have a duty to better inform all their customers about the vital legislative framework governing the rental sector.”

Andrew Turner, chief executive at Commercial Trust Limited, commented:

“The results of this survey highlight how important being informed and communicating effectively can be for all parties in the property rental dynamic.

“It is important for tenants and for landlords to be clear on both their own obligations and rights and those of the other party. A lot of discussion is had on the failures of some landlords, but there can be failures on both sides.

“For many of the critical issues the onus is rightly upon the landlord, because by accommodating a tenant they have responsibility for that person’s health and safety, but, there are other considerations where responsibility falls to the tenant.

“Gaps in knowledge often only become apparent when things go wrong, which can exacerbate the problem faced and may in some instances come as a nasty shock if the consequences faced are significant – which they may well be.

“I encourage all involved to dedicate time, care and attention to understand in full the responsibilities of their role, ultimately it will be to the benefit everyone and has the potential to achieve a harmonious and positive experience for landlord and tenant.”

Buy-to-let holds its own in September

Buy-to-let steady in SeptemberThe buy-to-let market may have fallen in September, but remains stronger than a year ago, new figures from UK Finance have revealed.

The data highlighted that total mortgage-lending fell in September, but was still higher than 12 months previously.

The buy-to-let sector saw a monthly fall of 9%, but at £2.9 billion, was still 4% stronger than the same period in 2016.
Andrew Turner, chief executive at Commercial Trust Limited, said:

“These figures come at a time of ongoing change for buy-to-let landlords, who have experienced tax changes and stricter underwriting rules in recent times.

“It is encouraging that many appreciate the positive aspects of prevailing low rates, rental rises across the country and healthy returns and that many landlords remain upbeat.

“Demand for rental homes continues to be high and, whilst many landlords are adjusting to the various changes in the industry, there remain significant opportunities for reward from buy-to-let.

“Buy-to-let lenders are offering a wide variety of product choice and specialist brokers like Commercial Trust Limited are well-placed to identify mortgage solutions for even the most complex of scenarios.”

Buy-to-let mortgage costs still steady

Buy-to-let steady in SeptemberThe buy-to-let market continues to confound many speculators, with the cost of mortgages remaining steady in September, despite recent changes including the second phase of PRA changes and mortgage rates rise rumours.

New data from mortgage technology provider, Mortgage Brain indicates that many mainstream buy-to-let mortgage products have in fact reduced in cost since August.

Among the highlights is the market for longer-term buy-to-let products, which show a 2% fall in the cost of a 3- or 5-year fixed mortgage, at 70% loan to value.

Mark Lofthouse, chief executive of Mortgage Brain, said:

“With interest rates rising for the first time in just over 10 years, and further increases predicted, this could be one of the last times that our analysis reports reductions in the cost of mainstream BTL mortgages.

“While our three, six and 12 month analysis all show potential cost savings for BTL investors, we’re already starting to see ripples across the market following this month’s rate rise.

“Our most recent monthly data, for example, shows signs of a number of cost increases when compared to last month and it will be interesting to see how this develops in the coming months.”

Scotland sees 4.4% annual rental growth

Scotland sees 4.4% rental growthThe average monthly rent for a two-bedroom home in Scotland, has seen its biggest annual rise since 2010, the Scottish Government has reported.

The past year has seen average rents go up from £616 in 2016 to £643 in 2017, as 15 of the 18 regions experienced growth, although there were glaring exceptions.

Greater Glasgow saw the biggest leap with rent 7.0% higher now than a year ago, closely followed by Lothian at 6.9%. At the other end of the scale, the Ayrshires experienced 0.7% growth in rents.

Lothian and Greater Glasgow blazed a trail with average rental increases that outstripped the 15.9% rate of inflation between 2010 and 2017 by a cumulative increase of 33.7% and 32.1% respectively over the seven years, while all of the other regions saw rents rise below the rate of inflation.

For the 12 months to the end of September 2017, Lothian emerged with the highest average monthly rent for a two-bedroom property in Scotland, at £888.

However, Aberdeen and Shire saw a sharp fall of 9.6% in typical rent, which represented the third successive annual decrease in the region, perhaps an indicator of falling rental demand following the downturn in the oil industry, as Andrew Turner, chief executive at Commercial Trust Limited, commented:

“Scotland’s private rental sector continues to strengthen based on these figures. We have seen in recent weeks how buy-to-let yields in Scotland have been outperforming their English and Welsh counterparts.

“At the same time, demand continues to rise for rental properties, with Scottish Housing Minister Kevin Stewart recently indicating that approximately 760,000 people now live in privately rented homes, roughly double the number that did a decade ago.

“In Aberdeen and Shire, there are very specific reasons why that demand has fallen and consequently average rents have fallen for three years running in this region.

“With the Scottish Government also looking to raise standards within the private rental sector, including a new code of practice for letting agents in January 2018, there is the prospect of further growth within the buy-to-let market in Scotland.”

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.