As the buy-to-let sector continues to be targeted by the government, with tax changes, increased lending scrutiny and new licensing laws, some landlords are reducing their portfolios or even leaving the sector – but swathes of savvy investors are switching to new opportunities in off-plan investments.
The number of buy-to-let mortgages taken out in the final quarter of last year fell to 12.5% of total lending, down from 14.4% the previous year, according to the Bank of England – a dip that could be linked to the new rules brought in by the Prudential Regulation Authority in September that introduced stricter underwriting processes for portfolio landlords.
However, the private rented sector continues to grow, as does the number of people searching for rental accommodation. The fall in lending can be explained in a number of ways – there are new methods of investment in property, such as crowdfunding, while cash buyers continue to make up a large proportion of investors, particularly as more landlords cash in on their mature London investments and re-position themselves in the emerging markets of the north.
Top challenges for landlords
Landlords have faced a number of challenges in recent months, and continue to do so. For example, from next month, landlords will only be able to offset 50% of their mortgage interest payments against their tax bill, reducing to zero by 2020 (known as Section 24); minimum EPC ratings of E will be required on all rental properties, meaning some properties will need added investment; and more landlords will soon need to apply for licences, particularly for HMOs.
A better investment
However, it is not all doom and gloom for the sector, as the vast majority of buy-to-let landlords intend to stay in the market, and almost half (44%) still plan on growing their portfolios in the first half of this year, according to Mortgages for Business.
To counteract the extra costs levied on landlords due to the government’s changes, it is nevertheless imperative that they find the best, most high-yielding investments for the future, which is why many are now turning towards off-plan developments in up-and-coming and emerging markets.
Looking outside London
Manchester, which has been named one of Europe’s fastest growing cities by Deloitte, is one of the most important cities outside of London, having seen house prices jump by 6.7% over the past year, according to Hometrack – with further hikes of more than 20% to 30% expected over the next two to three years. With the north-west in general expected to see property prices rise by around 18% by 2022, compared to London’s 7.1% growth forecast, Preston is another exciting emerging market that is expected to see a snowball effect in the coming years.
Meanwhile, the West Midlands, and Birmingham in particular with the upcoming Commonwealth Games 2022, is about to see huge investment from both public and private sources, and investors and landlords are already snapping up opportunities in the region.
Buying off-plan property in these areas is enabling landlords and investors to secure high-quality, well-located properties before they are built at the most competitive prices, as opposed to buying second-hand or after completion – meaning maximum potential profits. Many such properties are designed to be rented out – build-to-rent, a sector which has grown fivefold since 2013 according to BPF and Savills – and some come with assured net yields for the investor. And in terms of one of the upcoming pitfalls of owning a rental property, the minimum EPC rating, investing in a new-build development means owning an energy-efficient property, which will also be a huge draw for potential tenants looking for a modern home.
To see some of the opportunities currently available for investors and landlords, as well as owner-occupiers, see our investments page.