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Rightmove´s Head of Lettings on the Current State of Play

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Below are some of the highlights of a recent conversation we had with Sam Mitchell, Head of Lettings at Rightmove – largely based on the portal´s Q2 2017 Rental Tracker:

  • The quarterly data is extracted from Rightmove´s portal, based on properties marketed by both online and offline letting agents. Achieved rents may be lower and even higher, relative to the level of demand;
  • The Q2 figures revealed that, while the national average asking rent (excluding Greater London) rose by 1.9%, Greater London´s rental values actually dropped by 3.2% (with a quarterly drop of 0.2%);
  • However, the general feeling moving forward is that the supply of rental property is likely to be constricted as a result of the 3% Stamp Duty Land Tax (SDLT) surcharge implemented in April 2016, Section 24 of the Finance (No. 2) Act 2015 and Prudential Regulation Authority (PRA) stricter borrowing criteria. Yet these legislative / policy changes have not impacted as quickly as some have been expecting;
  • Firstly, with regards to the SDLT surcharge, the volume of investors buying ahead of the April 2016 statutory deadline was significantly higher than many imagined. With transactions in March 2016 being 80% higher year-on-year, the increase in supply is still having an effect on the market. This spike in transaction levels was heavily weighted in London as investors, particularly at the start of 2016, sought to avoid what has now become an onerous acquisition cost – which could explain the annual falls cited above.  This trend may change in the coming years as the supply / demand dynamics “normalise”. However, the issue of affordability in London remains a prominent issue; the average price to rent a home in the Capital is £2,000 so things are certainly feeling toppy relative to the Midlands and the North.  With wages stagnant and rising inflationary pressures, any notable rises in rental values would seem unlikely for the foreseeable future;
  • Secondly, although the Section 24 issue is likely to wind down supply to a greater level than anything witnessed in the buy-to-let industry for some years, the real effects of the tapered restrictions on mortgage interest relief will also take longer to “bite”. The effects of this legislation initiated from the 2017/18 tax year and people will only realise the true effects when the tax is actually owed in January 2019.  Even then, landlords will be liable for 25% of the full policy and will still be able to claim relief on any interest paid at the basic rate of tax (currently at 20%).  Many landlords are still quite uncertain about what this policy change actually means for them and have been taking advantage of the low interest rate environment, getting their costs as low and effectively “sitting tight”.  Ultimately, highly leveraged landlords with unfeasible business models could eventually end up selling – thereby diminishing supply across the PRS (although this could possibly be counterbalanced by the growth of the build to rent projects, as mentioned below);
  • Thirdly, the stricter criteria imposed by the Prudential Regulation Authority (PRA), particularly for portfolio landlords in autumn 2017, will also gradually filter through into the market – as will the challenges in securing Limited company (SPV) buy-to-let mortgages. Ultimately, both new entrants to the market and investors looking to secure extra borrowing may well be required to inject extra capital as a result of the more stringent stress-testing / borrowing requirements;
  • The result of the changing buy-to-let operational landscape is that landlord-investors are generally moving towards areas with stronger yields. With reported capital appreciation occurring in urban conurbations outside of the capital – particularly those in reputed university towns such as Manchester, Liverpool, Birmingham – such a move makes a certain level of sense;
  • It is, however, also important to take note of the long-term implications that will result from the growth of purpose built private rented sector developments (build to rent) of which there is an unprecedented volume of schemes currently going through the planning system. A lot of the areas mentioned above may be good places to invest in terms of short-term yield – however there is a chance that there will be a large increase in supply once these completed projects come to market. The majority of these units are “full-service” as this is what is being perceived as desirable by the market and will ultimately mean that private landlords will have to “step up their game”.  However, many of these schemes do tend to be located in town centres so landlords with peripheral 2-3 bedroom properties that have good commuting times are unlikely to see their local areas disrupted in the same way.  First time buyers are increasingly well into their 30s and it would be fair to assume that the young family renting market is here to stay;
  • Wider economic impacts such as the myriad of risks related to Brexit are unlikely to work in the market´s favour and will ultimately mean that many investors may choose to take a step back in the coming years. However, property is still a relatively safe place to invest at the moment – the stock market seems overvalued, bond yields are low and there are very few places where private investors can leverage capital in the same way.  However, on the issue of Brexit, Rightmove´s conversations with lettings agents in areas with high European concentrations have been reporting wavering demand. In such rental markets, landlords would be wise to play close attention to the changing dynamics and adapt accordingly. Ultimately, this comes down to making sure that any property investment strategy has longevity and can take the proverbial “hit”, regardless of what is happening across the broader economy.

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