What Will Happen To UK Property Investment?

by Mark Alexander

14:34 PM, 2nd April 2016
About 5 years ago

What Will Happen To UK Property Investment?

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What Will Happen To UK Property Investment?

What will happen to UK Property Investment

Many UK landlords feel their world has been turned upside down. Not surprising given the shock announcements of having to pay an extra 3% Stamp Duty on purchases as of NOW, that mortgage interest paid out will become increasingly taxed as if it was income (for private landlords only) and that buy-to-let mortgage lending may well become a lot harder to arrange.

But does it mean that buy-to-let is dead?

Well I don’t think so!

There’s a lot of talk of landlords selling up and to an extent I will be doing some of that myself for personal reasons, but not completely. Far from it in fact. I’ve been in this business for 27 years now and whilst it’s time to live a little, I still see property investment as a solid nest egg. My plan is to sell what I need to sell to pay off my most expensive mortgages, increase my liquidity reserves which were all but wiped out due to a historic divorce settlement and for my wife and I to retain around £50,000 each taxable per annum of rental profits. That amount should keep us at just about the 20% tax threshold by 2020, thus absolving us from the effects of clause 24. As you may have heard, we’ve relocated ourselves and all our consultancy practices to Malta and will only pay 15% income tax on worldwide income (the HNW scheme income tax rate here in Malta for ex-pats) and very little CGT on the UK investment properties we will be selling (only on gains post April 2015). We will only be selling properties as and when they become vacant through tenants choosing to move on. We will not be evicting any tenants. That’s another story though!

Sorry, I digressed, back to the point ….

Demand for UK rental accommodation is set to continue to rise but if investment into the sector slows down the inevitable consequence is that rents will rise. Given that people invest into property for rental profits, increasing yields will become more attractive and kickstart investment again. If there are any signs of values falling over the coming years and month, due to lots of landlords deciding to sell up, I suspect property values will soon spring back when rental yields yet become more attractive than any other form of investment again. As values recover the press will no doubt be reporting the rise in property values, this will attract more speculators and the merry-go-round will yet again be turning.

There was an article in The Guardian this weekend suggesting that it will be better to hold off investing further into buy-to-let until 2019. The logic of the author was that changes to tax legislation will get even worse, more landlords will sell up and values will plummet as a result of the number of properties hitting the market. His prediction was that the market is likely to bottom out by 2019.

What are your views?



Comments

Mark Alexander

11:54 AM, 4th April 2016
About 5 years ago

Reply to the comment left by "michael fickling" at "04/04/2016 - 11:37":

Excellent, well considered comment. Thanks for sharing your thoughts ?
.

Mandy Thomson

12:39 PM, 4th April 2016
About 5 years ago

In the mid to long term, I see our housing tenure landscape looking more like Germany, where more people rent but they rent from large conglomerates, not small private landlords.

It is obvious that national and central governments have started moving towards that aim, with many new housing developments and "affordable" housing schemes, built by large private companies, local authorities and housing associations.

However, George Osborne has, to put it mildly, taken us all by surprise by trying to force these changes upon us in the here and now, in a very unpleasant and punitive way.

Will all these brand spanking new housing developments go up quickly enough to cover the shortage of housing caused by Clause 24? I doubt it. Even where the new developments are complete, these will be more expensive than older housing, and many tenants will be unable to afford the rents. Even if they can afford the rent, why pay more rent than they need to?

Don't forget, the vast majority of landlords WON'T be affected by clause 24, so only a relatively small proportion of BTL properties will be taken off the rental market.

Mike W

15:51 PM, 4th April 2016
About 5 years ago

Just a thought. Why has the UK housing market not been affected by 'the crash' like Spain and Ireland? Will the BoE and tax changes make any difference?

Mandy Thomson

16:42 PM, 4th April 2016
About 5 years ago

Reply to the comment left by "Mike W" at "04/04/2016 - 15:51":

I believe most vendors learned their lesson from the last time the property market crashed in the 1990s - values dropped and many people either lost money or ended up in negative equity.

This time around, during the credit crunch, people held on to their properties rather than sell at a loss, knowing there was likely to be a recovery. As we know, many who needed to move let their properties rather than selling them.

Alison King

17:10 PM, 4th April 2016
About 5 years ago

Reply to the comment left by "Mike W" at "04/04/2016 - 15:51":

Unemployment is a huge problem in Spain, and so is historic over-development. We have the opposite situation here, along with a rapidly increasing population. That's why property has not been hit. But why our economy is so different from Spain's is a question I cannot answer.

Alphabet Pictures

18:16 PM, 4th April 2016
About 5 years ago

Reply to the comment left by "Ranjan Bhattacharya" at "02/04/2016 - 18:48":

My take is that this is only the first step aimed at tax revenue and shaking the BTL tree to see what's left in a couple of years.
Next I suspect will be an introduction of rental caps to ensure rental properties remain affordable despite a shortage, then the big pension funds and investors will move in as in Hull and a German model of corporate ownership with fixed rents will become the norm with a very much reduced private sector. At least I may well be pushing up daisies by then so I'll not be affected!

Trendo

0:00 AM, 5th April 2016
About 5 years ago

The PRS will survive and flourish, but Asylum, low income, HB tenants, vulnerable, people wth mental issues, disabled and care in the community, ex offenders, drug rehabilitaton, supported living tenants are all about to get sqeezed out of the market......the only way the PRS will be able to step back in to assit is with financial incentives - i think there are more punitive steps to come which to be honest i am not putting on here (GO gets ideas from all sorts of ridiculous sources - i am not about to be one of them) - then i think some of these will be relaxed if a LL takes one of the above as a tenant. They have to live somewhere and the PRS is the only option open to them. with HB down and rents up something will have o give or downing street will look like Calais within a few short months.

Claudio Valentini

13:22 PM, 5th April 2016
About 5 years ago

Long post - sorry I didn't have time to make it shorter...
On Clause 24, SDLT raise etc - I’ve lobbied my MP about the unfairness of it all as well as presenting the unintended consequences of repossessions and tenant evictions but frankly, it’s my view that politicians don’t care too much about this issue and with the exception of the Landlord community the majority of people don’t give a sh*t about all this.
I predict more pain; You boil a frog by putting it in cold water and slowly turning the heat up, and as the heat turns up landlords will get no sympathy from any quarter because everyone hates a landlord, don’t they?
I believe the Government have started ‘beating the bushes’ to see who takes flight. It’s my view if you take flight now you’re likely to get shot. I will take a long breath before I make any revolutionary changes. We are moving into a new normal.

Property is still a tangible and appreciating asset and much of the debate on these forums has been about how much less money landlords will make post C24 – however, even if you are leveraged up to the hilt and your business model is not currently viable, you can restructure and still end up making money…You never make a loss on a profit!

The facts are; there is a chronic under supply of housing and supply and demand means that property has effectively become a commodity, so for particular types of property in select locations you will see demand push up the intrinsic value of the property and it’s rentable value. This will continue until the supply and the demand balances out, which isn’t going to be anytime soon. Unfortunately, property shouldn’t be a commodity, it should be someone’s home but it is what it is.

There is no coincidence that institutions want to move into rental property; an appreciating asset base and reasonable yields, in comparison to Gilts and Govt. bonds, and with a readymade and pent up demand. No brainer!

Residential property is still a great investment; I don’t plan to walk away from it. I’ll find another way; there will be demand for many years to come, and as an assets class it will continue to appreciate. No wonder the Institutions and Corporates want a piece of the action, and importantly for the Treasury, no wonder they want to encourage them. Corporations can be regulated and managed to pay their tax and from the Governments’ perspective they can also tap them up for political contributions.
First, they just need to get rid of that ‘pesky cottage industry’

So what did Warren Buffet say? “Be fearful when others are greedy and greedy when others are fearful” - or something like that.

Intuitively, here's what I’m considering my ‘new normal’ plan could look like:

1. Consolidate the existing portfolio and divest some of the worst performing properties to pay down debt and mitigate any loan to value over leveraging that Clause 24 will expose.
2. If I have cash and am minded to buy, take a view on capital growth rather than yield. I’d also make a higher down payment on any new purchase. As I’m in the South that’s easier for me than for most but In short I’ll become a property investor – because that is what the Government considers Landlords to be – and ensure the yield is good enough to get by on. Good quality property in good locations with inherent demand and Freehold properties only.
3. Increasing rents; maybe but I’m not convinced. But if so, reasonably and progressively. If you have good tenants who pay their rent on time and are no trouble it might be better to forgo a premium for a quiet life. I’m of the view that like the mobile phone industry it’s all about the contract; the handset is just the come on and although in this analogy the handset is the house and the contract is the AST, getting the right tenant on a fair long term arrangement I believe is a better strategy than squeezing short term lets for short term cash.
4. I’ll also consider re-mortgaging to take advantage of the current low mortgage rates to improve the cash flow.
5. Retaining a good cash buffer to protect against more of Gideon’s misery is good advice I’ve taken from Mark Alexander, and making the most of Personal Pension plans, as over 55 year olds can treat them as a piggy bank is advice I’ve taken from my accountant.
6. Develop an exit strategy; decide how I’d like to sell my properties, which of them and when; piecemeal or alternatively as a package - perhaps to the new corporate/institutional entrants who will enter the market once Gideon has smashed up the ‘cottage industry’ – I believe you would need to present sound business fundamentals and an operating mechanism for this sort of exit strategy to have legs. In short, I’ll need to be running a proper business.
7. Consider going Corporate for future purchases, but also consider what kind of security you’ll need to offer to support this kind of enterprise (I won’t bet the Ranch), meanwhile I’ll wait and see what Gideon does first…
8. Continue to do the right things; Offer value and good customer service. Rental business is a people business. Treat people like you would like to be treated yourself and you will feel good, look good and you’ll make a difference.
9. Finally, hold fast. Illegitimi non carborundum

Rachel Hodge

15:26 PM, 5th April 2016
About 5 years ago

Reply to the comment left by "Claudio Valentini" at "05/04/2016 - 13:22":

I agree with your positivity, and many will adapt and survive a less profitable model.

There are a few points I think you've missed though:

1. It of course looks more profitable to corporations as they are exempt from the mortgage interest cost reclassification under clause 24. That's the point! They are being given a competitive advantage due to this tax being only applicable to non-incorporated LLs doing exactly the same business. That's the main agenda I believe. Like you say, to weed out the small players, but they are doing that via state aid - putting corporations at a competitive advantage.

2. On from point 1, not all LLs will still make a profit as we will be taxed on turnover, not profit. After deduction of mortgage interest, costs and tax from rental income, it may be that some LLs are at a loss. To quote another writer here, they are being taxed on "fictitious profit." Even worse, some of those LLs taxed on turnover may then be pushed into the 40% tax bracket when they were previously in a lower tax bracket. Double whammy.

3. You can of course pay down some debt by selling properties, but you will have to pay CGT, and I assume that will be applicable since why else would you sell them if there wasn't a profit to be realised. GO did grant CGT relief - but only to corporations - funny eh!

4. I too thought of stuffing as much profit as possible into PIPS since I currently pay 40% tax (before clause 24), and it's sensible to lose it now so that when I do get my hands on it, I pay tax at a lower rate. But I really believe GO, or someone, will cancel that "loophole" of earning now and paying a reduced tax later. Also, annual pension contributions have been reduced, and I imagine will reduce further. So although I agree with you, this may seem currently a good plan, I don't think it's there for much longer and I think my head would explode if the gov took away the advantages AFTER I'd stuffed money into a pension. Another retrospective tax regime!

NW Landlord

9:29 AM, 9th April 2016
About 5 years ago

I have just incorporated my portfolio using Mark smith I would like to thank property 118 for giving the opportunity for me and my friends and business partners Who have portfolios.

I am going to start buying through my new company and feel like I can crack on as I've been in limbo, as we all have for too long. What I worry about is that fool in London applying the same rules for limited companies of a certain size I hope not but you cannot trust him.

The telegraph want to run a feature on us. Me and my business partner are one of the biggest private landords in the area with hundreds of vulnerable family's at risk due to George Osbournes sustained attack on our businesses

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