Private rented sector landlords in the UK are adapting to changes brought on by the Government but rents are set to rise as a result, a new analysis report suggests.
Buy to let landlords have seen changes to stamp duty which means now paying an extra 3%, have to carry out immigration checks on new tenants, face tougher lending conditions in the New Year and then tax changes in April 2017.
But the research report from Kent Reliance suggests that landlord confidence has bounced back following the Government intervention as they look to continue investing in the sector.
It says that landlords’ confidence is at its highest in a year, with 54% of investors confident over the prospects for their portfolios, a recovery from the 39% recorded in the second quarter of the year, according to the survey of 900 property investors run in association with BDRC Continental.
It also reveals that property investors have taken action to mitigate the additional tax costs they will face when tax relief is lowered on mortgage interest payments for individuals. This has seen landlords increasingly turn towards incorporation and borrowing through a limited company structure where finance costs can still be offset against rental income.
Indeed, Kent Reliance’s analysis shows that there have already been more than 100,000 limited company loans issued in the first nine months of the year, double the total amount in the whole of 2015 and over 12,000 a month in the last quarter.
The report suggests that demand for this type of arrangement is likely to intensify as the tax changes bite. And 11% of landlords state they have already incorporated, or have moved holdings to a lower rate tax paying spouse or partner to limit their tax exposure, while a further 25% are considering doing so with this alone accounting for over half a million landlords nationwide making the move. Kent Reliance estimates limited company lending in 2016 could total 143,000 for the year as a whole, rising to 163,000 in 2017.
However, the forthcoming tax changes are set to drive up rents. The report says that the average rent has hit a record high of £881 per month, despite the supply of rental property homes hitting an 18 month high in the period, a knock on effect of the rush to beat the stamp duty hike. Annual rental inflation slowed a little in the last quarter, but even so, rents still rose by 2.4%. With a growing tenant population, and rising rents, landlords in total are now collecting approximately £4.6 billion in rent each month.
The survey found that a third of landlords expected to increase rents in the next six months alone, by an average of 5.4%, equivalent £571 per year for households. Two thirds cite higher future taxes and 43% the strength of tenant demand. Indeed, twice as many landlords are seeing an increase in tenant demand as the number seeing a decline. The recent budget announcement to ban letting fees, while providing a welcome reduction in tenants’ upfront costs, will see any additional costs for landlords factored into rents, the report adds.
It points out that extra pressure will also come from the Prudential Regulation Authority’s new underwriting standards, due for implementation next year which will see landlords needing to demonstrate higher yields to secure finance, unless they can provide larger deposits. As a result, Kent Reliance forecasts that rents will rise by an average of 3% in 2017.
‘The stamp duty levy clearly took its toll on the market, and combined with the forthcoming tax changes, landlords have felt at the mercy of a political agenda. But confidence is returning as landlords take action to limit the damage to their finances. The use of limited companies is soaring, and rents are increasing, even after one of the biggest surges in rental supply in recent history,’ said Andy Golding, chief executive of OneSavings Bank which trades under the Kent Reliance and InterBay brands in the buy to let sector.
‘There is still more to come for the buy to let sector next year. The PRA’s new underwriting standards are due to be implemented, the tax changes begin to take effect, and there is yet more potential intervention in the form of the Bank of England Financial Policy Committee’s new powers. If the cumulative effect of constant change undermines the expansion of rental properties, this will simply exacerbate the housing crisis,’ he explained.
‘The raft of recent measures aimed at the buy to let sector singularly sought to increase home ownership levels. Ironically, they will achieve the opposite, with even greater upward pressure on rents combined with the prospect of declining real incomes likely to stretch affordability even further,’ he pointed out.
‘We have warned all along that the tax changes will push up rents, and this is already starting to happen. The ban on often unjustifiably high letting fees is well intentioned. However, it also means landlords could pass higher costs onto tenants, doing little to bring down the overall cost of renting,’ he added.
‘Only through a substantive and long term building programme across all tenures will we see an end to escalating house prices and rents. The Chancellor has moved to provide more support for house building, but it is not yet enough to see the step change in supply that we need,’ he concluded.
Source: www.propertywire.com
