UK buy-to-let is broken ─ and change will be good for investors

UK buy-to-let is broken ─ and change will be good for investors

New stamp duty hikes on second homes, seen by many as a clamp down on buy-to-let, could pave the way for a revolution in Britain’s rental market.

November 25th 2015 was a landmark moment in the UK’s property industry.

It was the day that moved the investment goalposts. It was the day that called for change. It was the day Chancellor George Osborne declared a new 3% levy on stamp duty land tax (SDLT) rates for second homes and buy-to-let properties.

From April 2016, UK property investors will be subject to a 3% increase in SDLT rates.

At present, no stamp duty is paid on the first £125,000 of a new property purchase, then 2% on £125,000 to £250,000 and 5% above £250,000. Now, however, stamp duty will be 3% on homes between £40,000 and £125,000, and an additional 3% on each of the current stamp duty thresholds.

Such was the announcement’s significance, it reverberated around the investment world at a frantic pace. Online message boards were littered with passionate and concerned comments from landlords and letting agents. Hastily typed Google searches were made in an attempt to find the most up to date information on how the changes could affect each investor and agent in person.

Buy-to-let property has been the pre-eminent investment class in the UK for 20 years; the natural investment strategy for those with the funds available to purchase an asset that will generate a new or second income. So were these reforms a measure to curb the numbers of buy-to-let investors in the UK?

If anything, it was an acceptance. The acceptance that buy-to-let is broken. It will mark the start of a long-overdue revolution in Britain’s rental market. A welcomed changed for tenants. A welcomed change for prospective homeowners. And for investors, a change that will shift the focus to a new rental property sector – one that will secure the long-term future of their investment portfolios.

The rise and fall of buy-to-let?

It’s an asset class with a relatively young but astonishing history.

Prior to the early 1990s the notion of buying a property to let out was reserved only for high-net worth individuals; those that would pay in cash and provide professional levels of property management. Then came the introduction of the Assured Hold Tenancy that sparked banks and building societies to create specialised buy-to-let products, presenting the opportunity of property investment that would help create more homes for the country’s private rented sector.

In the years that followed, buy-to-let established itself as the investment choice of two million Britons.

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The annual rate of returns grew by 16.3% between 1996 and 2004, as investors enjoyed returns of 1,400% in just 18 years. Such has been the unrelenting demand for buy-to-let investment, today there are over 1,000 buy-to-let mortgages available from many of the UK’s leading lenders.

But things have now changed.

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An accommodation problem that buy-to-let can no longer solve

The UK is in the midst of a housing shortage. Huge numbers want to rent a property and cannot find one. Huge numbers want to buy a property and cannot afford one.

Phenomenal capital growth that’s making buying property less attainable for more people, along with changing generational attitudes towards homeownership, has turned the UK from a nation of homeowners to a nation of renters.

An additional 1.8 million households will be renting their property by 2025, while owner occupation levels will fall to just 60% over the next 10 years.

The need for sustained investment has never been more pronounced. Yet buy-to-let is no longer the answer.

The problem is twofold:

An outdated product for modern renters

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For years renting was viewed as the poorer sibling of homeownership. Older generations decried it as ‘dead money’. Many tenants saw it as a means to an end; a waiting-room before achieving the milestone of owning ones property.

But for many of the 20 million Britons that rent their property today, renting is now a preferred lifestyle choice. According to Knight Frank, 25% don’t want to or don’t know if they will want to buy a home in the future. Renting provides the flexibility that Britain’s increasingly mobile workforce is looking for, and no longer do they associate success with homeownership.

With renting such a conscious lifestyle decision, there is no longer a compromise on quality. Tenants want the best facilities. They want to live in dense urban environments. They want to be surrounded by people that share the same values and interests as they do. And they want industry-leading standards of management to deal with problems efficiently and professionally.

Buy-to-let simply cannot satisfy these demands. Unsuitable housing intended for the owner-occupied sector is often antiquated in design, surrounded by neighbourhoods of varying demographics in the outskirts of town. Crucially it’s managed by landlords based off-site that simply cannot provide the level of service now required by today’s tenant.

A product preventing homeownership

Buy-to-let is a product that’s stifling the owner-occupied sector, too.

Between 2011 and 2014, just 457,490 of the 974,000 homes Britain needed were built, underlining the scale of the country’s property shortage. Its scarce supply that’s continually in demand from both tenants and prospective home purchasers.

But when a landlord buys a property to let, while they’re providing accommodation for the rental sector, they’re also simultaneously shrinking the market, removing a home intended for owner-occupation.

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With this move, it seems the government wants to take back buy-to-let homes in the parts of the country where shortage for buyers is most chronic.

“Our primary focus is increasing supply and home ownership,” commented UK Housing Minister Brandon Lewis on the new changes. However while the government acknowledges the need for more homes for the owner-occupied sector, these changes have also been introduced to enhance the quality of product in the private rented sector.

Lewis added: “We want more institutional money and more professionally managed property. Buy-to-let is still an area with capital security and revenue returns so there is still an attractive revenue model.”

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But this is a change that should be embraced by investors

This is a move to benefit all parties.

By increasing rates of SDLT, it’s an admittance that buy-to-let isn’t working, and that change is necessary. A better product for tenants. A product that doesn’t create a barrier to homeownership.

And the introduction of a better quality product will undoubtedly enhance the investment longevity of the assets investors have in their portfolios.

Investing in a new rental alternative, a solution to the outdated buy-to-let model, will provide the UK tenant market with what it’s desperately searching for. This will not only create demand that will drive returns, but a higher quality product will also be better placed to achieve larger volumes of capital growth.

Furthermore, this change will create a more easily regulated marketplace; a rental product intended solely for the rental sector, and a distinctly clearer and more efficient working environment for investors.

UK build-to-rent ─ the future of British property investment?

The £50 billion opportunity

Build-to-rent is the natural evolution of buy-to-let. Property built for the tenant. Developments that provide the amenities and lifestyle touchpoints tenants demand. A market that Knight Frank believes will be worth £50 billion by 2020.

Build-to-rent is the revolution Britain’s rental market was looking for.

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