On the back of the most recent Rental Price Tracker (Q4 2016), the following summary is based on a short conversation with Sam Mitchell, Head of Lettings at Rightmove during the second week of January 2017. We explored the validity of the portal´s data sources as a means of assessing local market dynamics; the reasoning behind the reported drop in London´s overall rental figures; the future impact of Section 24 (of the Finance Act 2015) and other top-down policy changes as well as some useful tips on achieving healthy yields moving forward.
- Rightmove base their yield calculation using rental and sales asking prices. With no equivalent of the Land Registry for the rental market, it can be difficult to establish real prices (i.e. what properties have actually been let for). However, the portal typically has around 300,000 rental properties on the site at any given time – offering a relatively clear indication of the what is actually occurring across the board. Rightmove can continually observe rental movements and therefore make fairly educated guesses about future patterns;
- As with the stock market, history is not a great predictor so often external factors such as policy and legislative changes can be “layered” on to generalised trends. Current examples include the impact of 3% stamp duty surcharge; changes in buy to let criteria (5.5% stressed payrate and 145% rental cover under the Prudential Regulation Authority framework resulting in higher deposit requirements) and, in the coming years, the erosion of mortgage interest relief from rental income;
- Ideally, in a similar manner to sold price listings on Rightmove (on the right hand panel of each listing), offering rental price data would enable landlords to have a more accurate understanding of local market price points. Realistically however, with over 20,000 agents on site, overcoming the data protection issues to validate and publish this information would be a mammoth task. Nonetheless, organisations such as the Association of Residential Letting Agents (ARLA) are able to provide anecdotal information on the relationship between asking and let prices (see the monthly PRS reports here). Landlords should also keep their ears to the ground by regularly networking with other property professionals and building connections with lettings agents who are usually willing to divulge this type of information;
- Sam attributed the 4.4% drop in London rental values to the 3% Stamp Duty surcharge from April 2016. A massive rush of people purchasing buy to let properties in the first quarter of the year led to a general level of over-supply (there were 80% more transactions in March of 2016 compared to the year before). Demand had broadly stayed the same (high but flat) and rental growth has been most pronounced in the outskirts of Greater London;
- There is likely to be some form of rental market rebalance in the coming year as supply contracts and the buying constraints highlighted above come into play. There are a lot of London landlords that are highly geared who will simply decide to sell off. Those that are not highly geared may well believe that the market is peaking and dispose. With potentially lower capital appreciation prospects in London, yields will become more important. Nonetheless, despite higher acquisition costs, long-term landlord investors will remain attracted to the low interest rate environment that looks set to remain for the foreseeable future;
- With regards to the impacts of Section 24 (of the Finance Act 2015), it is still probably too early to understand how the market will react as the policy will be phased in over the next 4 years. The growing trend of incorporations is likely to continue as landlords buy through Special Purpose Vehicles (SPVs) to avert the financially onerous nature of this legislation. Many of the highly geared landlords will have to sell off, quite possibly to the owner occupier market which could have a knock on effect of restricting rental supply. The result could be that landlords with low LTVs may well see rents rising, provided they´re not spooked by sentiment;
- As a result of these factors, Sam estimates that it will make sense for investors to “cast the net” further. Although a lot of London-focused investors may be weary of getting out of their comfort zones, the ability to research is significantly more advanced these days. The most recent Trends Tracker, for example, flagged up healthy yields in parts of Liverpool, Swansea and Glasgow – where there is more comparable data, sales and lettings activity than ever before (interestingly, Rightmove listings grow in volume further out of London). It is also worth considering the potential growth prospects as a result of infrastructure projects such as HS2 and Crossrail 2. Early exploration of these areas is always advisable as the market moves pretty quickly once there is certainty and plans start to finalise;
- There are several parts of the country where landlords may struggle to raise rents – especially in heavily concentrated Local Housing Allowance (LHA) areas. Affordability ceilings are geographically dependent – in Greater London, for example, rising rental pressures have resulted in many tenants taking rooms in Houses of Multiple Occupation or living with parents. Outside of the capital, the situation is different and, although people generally earn less, they can get more space for their money. However, yield dynamics could change in the coming years should London undergo a correction and there is a visible growth in supply of build to let units coming on to the market;
- To conclude, with yield likely to be more important than capital appreciation over the next couple of years, Sam encouraged investor landlords to engage in thorough due diligence and ensure they have a deep understanding of any new areas being explored. Uncertainty, Brexit or otherwise, usually creates solid buying opportunities.