in association with the nla the rent check … · the rent check interviewed 1,557 landlords across...
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Issue 8: Spring 2017 - covering England & Wales
TheRENT CHECKIssue 8: Spring 2017 - covering England & Wales
Residential Investment; is it still worth it?
In association with the NLA
Issue 8: Spring 2017 - covering England & Wales
TheRENT CHECK
Introducing
The Rent Check is a collaboration of expertise from BDRC Continental - the UK’s largest independent market research consultancy - and Allsop LLP - one of the leading property consultancy firms and advisors on the residential property market.
The Rent Check is a unique measure of the rents being agreed by landlords for Private Rented Sector tenancies across England and Wales. This research tracks the experience of a large sample (1,557 in Q3 and Q4 2016) of members of the National Landlord Association (NLA), providing a statistically robust overview of the rental market - covering 11,595 properties.
The Rent Check is supplemented by the ‘Tenant Panel’ in order for us to gain the perspective of the tenants. This provides us with an inclusive outlook of the private rental sector that other indices do not cover.
These surveys will continue to track movements and evolutions in the private rented market each six months, analysing movement in agreed prices, regional variations and providing unique landlord and renter insight.
The Rent Check is a survey forming part of the BDRC owned ‘Landlords Panel’ which will provide supplementary analysis on future rental trends, tenant profile and landlord confidence in future survey releases.
The integrityThe data included in the Rent Check has been analysed and scrutinised by BDRC Continental’s research analysts and draws on their experience in the consumer research arena. BDRC Continental has a seven year history of conducting research with residential landlords and have carried out focused research on the buy-to-let market and private rental sector on behalf of a wide range of clients and interested parties.
The methodologyBDRC Continental’s Landlords Panel is the only regular, commercially available study of the UK’s private rental and buy-to-let sectors. Established in 2006 and run in partnership with the National Landlords Association, the subscription based study provides important insight into the market dynamics of this multibillion pound industry. Each quarter more than 1,000 online landlords across the UK are interviewed about the key aspects of their letting activity, as well as general economic indicators including optimism and market outlook. Results are independently analysed and published by BDRC Continental.
The Tenants Panel will be carried out quarterly, with around 1,000 private tenants participating in the survey each wave. For sake of clarity, the tenants are randomly selected from commercial lists within which participants self-select by declaring that they are private tenants. They are not connected to NLA members, although we do not rule out that some may coincidentally rent from them.
Issue 8: Spring 2017 - covering England & Wales
PRS Barometer
Q3-Q4 2016
Annualchange
Outer London (zones 3-6) £1,200 £10
South East £810 £35
East England £700 £50
South West £690 £0
Yorkshire & Humber £625 £30
East Midlands £615 £25
North West £595 £25
Wales £595 £5
West Midlands £570 £0
North East £505 -£30
of landlords are higher rate income tax payers
of landlords structure their business as a limited company, 15% are considering doing so
of landlords currently say rents are rising in their area of operation
45% 6% 53%
Q3-Q4 2016
Annualchange
Outer London (zones 3-6) £1,685 £225
South East £1,045 £50
South West £890 £15
East England £850 £60
East Midlands £685 £10
North West £674 £49
West Midlands £670 £20
Yorkshire & Humber £655 £30
Wales £635 £20
North East £610 £10
Average 2 bed flat pcm Average 3 bed Property pcm
Reg
iona
l Sna
psh
ot
Reg
iona
l Sna
psh
ot
37%
LET
44%
83%16%
FOR
SALE
2%
The Rent Check interviewed 1,557 landlords across England & Wales in Q3 and Q4 2016
of landlords anticipate rental growth over the next 6 months (up 36% year on year)
of landlords have lowered rent across their portfolio in the last 12 months (down 3%)
of landlords are making a profit from their lettings activity
of landlords intend to purchase at least one more property in the next 12 months (an all time low)
of landlords rate their expectations of their own letting portfolio ‘good’ or ‘very good’ for the next 3 months
of landlords have found obtaining buy to-let finance more difficult in the past 6 months
84%
£
Issue 8: Spring 2017 - covering England & Wales
So, for the time being at least, it would seem that, from landlords’ perspective, the Brexit result has not been the calamity initially feared; although sentiment clearly is fragile. It is a fair assertion that landlords are wavering currently, understandable given the political and economic climate presently. The appetite to purchase versus divest among landlords is currently balanced with one in six landlords actively looking to increase the size of their rental portfolio during next 12 months and the same number considering selling.
So are there any explanations for this? Well, being objective, rental property offers an interesting investment post-Brexit. The underlying fundamentals appear strong; we still aren’t building anywhere near enough homes to redress the supply / demand imbalance and the population continues to grow - exacerbating the problem. The supply of land for residential development is limited and, whilst forecasts for future price rises
are uncertain, housebuilders are slowing down on production in order to maximise price, as any manufacturing business would do. Until there is a good prospect for stable, and preferably growing prices
this control on supply is likely to continue.
In addition to supply, demand for rental property is enduring, particularly in London, the South East and the major economic centres of the regions. The increased opportunity offered by a global economy has cultured a currency of flexibility, particularly for those leaving university, with mobility in housing facilitating the chance to live and work all around the world. And adding to this the well documented situation of those finding themselves in ‘generation rent’, it is clear that the demand for rental housing continues to grow.
At the same time there are a considerable number of perceived downside risks with buy-to-let investment. The change in the way rental income is treated for tax purposes and increased stamp duty levy for purchases of residential investments undoubtedly impact on financial returns from the sector.
In the last nine months, we at the Rent Check have recorded rental income growth in most UK regions both for two bedroom flats and three bedroom houses; an average of 0.5% for two bed flats and 2.2% for three bed houses. The exceptions are the North East, where rents have been most under pressure and the East and South West of England where rents have been broadly static.
The last six months have illustrated that uncertainty continues as the market seeks to make sense of its new taxation rules of engagement. As the graph below shows, landlords did voice renewed confidence in the sector - back up to Q4 2013 levels in Q3 2016, but this fell back significantly in Q4. Confidence remains well below the long term trend as recorded by the Rent Check.
Market Snapshot
0
10
20
30
40
50
60
70
80
Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16
Capital gains
Rental yield
UK financial
Private rental
Own letting
Issue 8: Spring 2017 - covering England & Wales
In a housing crisis which is not showing any signs of going away, the role of residential investors and smaller scale landlords has been an issue of growing controversy, contention and debate for much of the last 18 months.
With an increasingly stringent legislative framework, the requirement for additional compliance checks and a worsened taxation position (both on entry with a surcharge in SDLT on second homes and on income via a reduction in mortgage interest relief), the investment motivations and expectations of residential landlords are being fundamentally challenged at a granular and ideological level.
£
The future of Residential Investment in the UK
Issue 8: Spring 2017 - covering England & Wales
Given the increasing confidence in buy-to-let investment despite the adverse legislative changes, we thought it would be of interest to estimate future returns for investors in terms of worth using our Rent Check research findings and the Office for Budgetary Responsibility’s (OBR) November 2016 forecasts for national wage growth and house price growth. For this analysis we assumed the position of a higher and lower rate tax payer in each of our reporting regions and applied the following variables:
• Borrowing based on a 145% rent cover at an assumption of 5.25% interest rate
• Running costs of 25% of income to cover management, maintenance, insurance and rental voids etc.
• A five year fixed term mortgage at an interest rate of 3.25% and 4.5% for the remainder of the term (in line with the average of the ‘best buy-to-let mortgage deals’ on a leading comparison website)
• Legal fees at £1,450 (in line with published industry averages for freehold and leasehold acquisitions)
So what's it worth?
four years. For those falling into the basic rate tax bracket, however, tax relief will continue for all mortgage interest payments. Thus even for the same property, the returns in terms of ‘worth’ will differ between different investors at each tax level.
The motivation to enter the sector is clearly driven by investors’ perception of worth from a particular investment; and by ‘worth’ we mean the return they can derive given their own unique choice, opportunity and circumstances. For analysts, the difference between Market Value and worth (more properly known as Investment Value) is crucial. Whereas Market Value provides an opinion of the amount an asset would trade at in the marketplace, worth is an estimation of the value to a specific investor given their own circumstance.
This is particularly relevant to those buy-to-let investors falling into the higher rate tax band. Changes to the current relief on mortgage interest for these tax payers will see allowable relief reduce from the present 100% of mortgage interest down 25% per year to 0% over the next
Issue 8: Spring 2017 - covering England & Wales
We also used the following Rent Check data:
• Rent Check average rents, indexed for the general mix of property types in the PRS according to the English Housing Survey
• Rent Check landlords average property values in each region (calculated against gross yields provided)
InvestmentPeriod (Years)
Internal rate of return (IRR)* analysis based on OBR house price and earnings forecasts, 40% tax payer
East England East Midlands North East North West South East South West Wales West Mids Yorkshire London
3 2.25% 3.50% 3.00% 2.50% 2.00% 2.25% 2.50% 3.25% 3.50% 1.00%
5 6.25% 9.00% 7.75% 7.00% 5.75% 6.50% 6.75% 8.75% 9.00% 4.75%
10 6.25% 8.50% 7.50% 7.00% 5.50% 6.25% 6.50% 8.25% 8.50% 5.00%
20 5.50% 7.25% 6.50% 6.00% 5.00% 5.50% 5.75% 7.00% 7.25% 4.50%
Clearly these are returns based on national (rather than regional) house price and income growth expectations, and given that ‘worth’ is personal to individual investors’ assessment of risk and reward, the figures above are indicative only. What this does show, however, is for those with equity to invest, the longer term returns our model suggests are obtainable are significantly above the saving rates available in today’s low interest rate environment. Debt may well be more difficult to obtain with more stringent lending rules for buy-to-let lenders - and equity requirements based on income cover much more - but rental investment,at least in the long term, arguably remains an asset worthy of consideration for both higher and lower rate tax payers.
InvestmentPeriod (Years)
Internal rate of return (IRR)* analysis based on OBR house price and earnings forecasts, 20% tax payer
East England East Midlands North East North West South East South West Wales West Mids Yorkshire London
3 3.50% 5.50% 4.75% 4.25% 3.00% 3.50% 3.75% 5.50% 5.75% 2.00%
5 7.75% 11.25% 9.75% 8.75% 6.75% 7.75% 8.25% 11.00% 11.25% 5.75%
10 7.50% 10.75% 9.50% 8.75% 6.75% 7.75% 8.00% 10.50% 10.75% 6.00%
20 6.75% 9.50% 8.25% 7.75% 6.25% 7.00% 7.25% 9.25% 9.50% 5.50%
For 40% Tax Payers
For 20% Tax Payers
So what's it worth?
*The internal rate of return (IRR) for an investment is the percentage rate earned on each pound invested for each period (say years) it is invested. IRR gives an investor the means to compare alternative investments based on their yield.
Issue 8: Spring 2017 - covering England & Wales
No matter how we look at it, private rented housing has a crucial part to play in solving the UK’s housing crisis and housing our population. The emerging build to rent sector is encouraging in terms of new supply, but will likely be insufficient in providing quality housing across the whole of the UK. And while buy-to-let and build to rent sectors are no more important than owner-occupier homes and affordable housing to the UK’s residential accommodation provision, they are certainly as vital a part of any solution.
As a nation of aspiring homeowners we do need more houses for ownership, but this is not necessarily immediately compatible with an increasing flexible and global economy. Settling down and getting onto the housing ladder as early as possible is arguably not as practical as it was a generation ago. This indicative research illustrates that, based on nationally published forecasts and Rent Check data, returns continue to be positive for housing and are worthy of consideration against other investment opportunities; the most obvious of which is bank deposits.
The supply / demand imbalance in housing is nothing new and is unlikely to go away any time soon. Having said that, residential property investment does remain a long term investment choice and, with the current lending criteria tightening and increased front loaded costs, the horizon from our rudimentary return analysis suggests a minimum of five years hold period. That is not to say that earlier profits are not possible, just that the risk is greater of receiving the returns needed to more than recover the initial costs.
Conclusion
Issue 8: Spring 2017 - covering England & Wales
TheRENT CHECK
To subscribe to THE RENT CHECK please email: [email protected]
To join the Landlords Panel please contact the National Landlords Association on:020 7840 8900 or at [email protected]
Paul WinstanleyPartner, Allsop
07789 405 [email protected]
Beth MitchellAssociate, Allsop
0113 234 [email protected]
Mark LongDirector, BDRC Continental
07966 454 [email protected]
Bethan CookeAssociate Director, BDRC Continental
020 7400 [email protected]
Disclaimer: This report is for general information purposes only. Whilst every effort has been made to ensure that all content is accurate, Allsop LLP and BDRC Continental do not accept responsibility whatsoever for any loss incurred directly or consequentially from the contents of this report. This report may not be published, reproduced or quoted (as a whole or in part), or used for any contract, prospectus, agreement or other document without prior consent. This report is copyright of Allsop LLP and BDRC Continental and may not be reproduced without written consent from both parties. 05.16
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Information, not advice or recommendations:Our publication does not offer investment advice and nothing in them should be construed as investment advice. Our publications provide information and education for readers who can make their investment decisions without advice. The information contained in our publications is not, and should not be read as, an offer or recommendation to buy or sell or a solicitation of an offer or recommendation to buy or sell any properties. Our publications are not, and should not be seen as, a recommendation to use any particular investment strategy.