Is it a Good Time to Expand Your Buy-to-Let Portfolio?
Despite the ongoing economic upheaval caused by COVID-19, temporary tax relief on property purchases has many of London's buy-to-let investors wondering if the current moment represents an excellent opportunity to expand portfolios. As the government looks to kickstart a national economic recovery by stimulating the housing market, landlords looking to invest in additional units certainly stand to benefit from tax relief introduced to encourage property transactions.
With the stamp duty threshold increased to £500k investors could save thousands of pounds on a purchase, meaning now is a great time to consider acquiring new assets. If you were already looking to expand, it is now worth bringing your plans forward to benefit from the stamp duty freeze before it ends in March 2021.
However, before choosing an investment landlords need to do their homework. The residential lettings landscape has been fundamentally altered by the economic consequences of coronavirus and renters’ experiences of life under lockdown. Many renters have reevaluated their key housing priorities or are looking to find cheaper alternatives to their current accommodation, either for financial reasons or because the shift to remote working means they no longer need to pay a premium to live close to the city centre.
Furthermore, with the Job Retention Scheme scheduled to end at the end of October and no sign from the Chancellor that the programme is set to be extended, the true scale of the damage to the economy is likely to be revealed shortly. The independent Office for Budget Responsibility anticipates that unemployment will reach 10% in 2021, or roughly 3.35 million people. Widespread unemployment will drastically reduce demand in the market and exert downwards pressure on rental pricing. With that in mind, investors must have a long-term strategy for value creation with a robust plan in place to weather a difficult market in the medium term.
Nevertheless, property remains an attractive option for investors during a recession due to its stability as an asset and low correlation to stock market movements. In the article below we explain why now is a good time to invest in the London residential property market and outline the key considerations landlords should bear in mind to minimise their exposure to risk while the pandemic takes its course.
Why now is the time to invest
The stamp duty holiday will save landlords thousands of pounds
The stamp duty threshold has been raised until March 31st 2021, meaning that buyers are only liable for tax on the amount they pay for a property above £500k while paying nothing at all on purchases below this amount. The stamp duty freeze applies to both second home and buy-to-let purchases and will save buyers thousands of pounds. For example, a landlord purchasing a property for £500k would save £15k under the new regime compared with standard rates. Not only does this reduce the overall cost of expanding a portfolio, the savings can be invested into the property to add value and adapt it with features currently popular with renters to minimize voids. One option would be to purchase furniture and set up attractive and functional home working space to appeal to tenants who now spend much of their week working remotely.
Interest rates remain at historic lows
In March, the Bank of England slashed interest rates to a historic low of 0.1% to mitigate the sharp economic shock caused by the coronavirus. The Bank’s Monetary Policy Committee has also launched an extensive quantitative easing stimulus programme, pumping several hundred billion pounds into the UK economy to lower the cost of borrowing even further. Landlords are thus able to secure excellent deals on mortgages with record-low interest rates to finance the expansion of their portfolio and borrow more than they might otherwise in different market conditions.
Residential property is likely to benefit from significant asset appreciation over coming years
Buy-to-let investors should expect to benefit from significant appreciation in the value of residential property over coming years due to the transition of institutional investors from investing in commercial property (e.g. office space, retail, hospitality) to investing in residential property due to the long-term impact of COVID-19.
The deputy governor of the Bank of England, Dave Ramsden, predicts that the commercial property sector is likely to suffer either semi-permanent or permanent scarring as a consequence of the pandemic-induced recession. When speaking before the Treasury Committee last week, Ramsden said that the move towards widespread remote working and shift to online shopping has drastically reduced the demand for commercial real estate in city centres. Unless trends (which have been accelerated by the pandemic) are reversed it is unlikely that the sector will ever fully recover.
Whereas commercial property was previously viewed as a safe asset class by institutional investors such as pension funds, it is unlikely that this will be the case moving forward as it continues to be one of the sectors hit hardest by COVID-19. When seeking alternative asset classes for investment, residential property is likely to attract much of the attention previously reserved for commercial real estate. Whatever the ‘new normal’ that emerges after the crisis looks like people are always going to need to buy and rent homes. Those who buy now may be able to offload assets at a significantly greater price later on should this come to pass.
Renter behaviour has changed drastically following lockdown so now is a good time to rethink your portfolio
The residential lettings landscape in London has been radically reordered in the wake of lockdown. The transition to remote working and people’s experience of lockdown, often made worse by cramped living conditions in densely populated inner city neighbourhoods, has led many renters to move to the suburbs for more space and affordable accommodation. With that in mind, now is a good time to rethink and diversify your portfolio to hedge the risk of your investments. Consider investing in different asset types and in areas that are better suited to the new era of renting, for example by purchasing a spacious property with a garden in a suburban location.
Discounted assets should be available shortly
While in the short term demand is skyrocketing as buyers take full advantage of generous tax relief and low interest rates and prices are soaring accordingly, this is unlikely to last. As the furlough scheme winds down in October the true extent of the economic damage caused by the pandemic should become clear. With unemployment rising, incomes squeezed, and demand for rental property shrinking, discounted assets may become available as distressed sellers (particularly large developers) become highly motivated to offload property if they cannot withstand the immediate financial strain.
By contrast with owner occupiers, buy-to-let investors have the capital and flexibility to move quickly to secure the best deals if desirable assets become available at heavily discounted rates. Landlords should keep an eye on market developments with a view to acting quickly if prices drop significantly after the furlough scheme ends.
While we believe that now is a great time to expand your portfolio if you can afford it, there are several measures that landlords should take to safeguard their investment against the potential perils of a rental recession. Here are some practical considerations to bear in mind when managing your new asset.
Have a long-term plan for value creation
With lower rental pricing likely to persist for some time as the economy struggles to recover from the damage inflicted by coronavirus. Landlords should therefore undertake any investment with a view to maximising value over the long term. This means that your finances must be robust enough to weather any storms in the short term, such as prolonged periods of vacancy or rental arrears. To that end, investors should only target properties in a tenant pricing bracket that they can afford in the event that they need to cover costs out of pocket for a while.
Streamline your operation to manage costs
The likelihood of a prolonged rental recession means that margins will be thin, while the cost of managing a portfolio increases as new compliance regulation is introduced and existing measures are enforced more stringently. It is therefore essential that landlords have a plan for managing costs and increasing revenue.
Landlords should look for alternatives to traditional agencies to avoid costly marketing and operational fees. There are many proptech services on the market that can reduce marketing expenses. At Home Made, we offer an end-to-end service including property marketing and tenancy administration for £948 plus VAT. This represents an average annual saving of 60-90% on letting fees for our clients.
Beware of varying market demand and supply by area
The impact of COVID-19 has not been felt evenly across the city. Central neighbourhoods are by far the worse affected by circumstances. The collapse of the short-let industry has led airbnb owners to migrate stock to the long-let market in prime central locations, increasing overall supply by roughly 40% according to data from Zoopla. Additionally, the shift to remote working means that fewer Londoners need to commute to offices in central London on a daily basis. This has drastically reduced demand for property in Zones 1 and 2, as renters look to move elsewhere to satisfy newer priorities such as access to more green space and less cramped living conditions.
Market research is essential for landlords looking to invest in property that will yield a stable income stream shortly after purchase. At Home Made, we have citywide market expertise as we operate from Zones 1-6 and we’re always happy to discuss the lay of the land with landlords looking for insider market intelligence.
Be selective when choosing tenants
In a slow market, landlords might be tempted to relax certain criteria they use to filter out potential tenants. This is a mistake. It is better to be more selective with prospective renters and ensure that they go through a strict referencing process. With 54% of landlords reporting in an NLA survey that their rental income has been affected because their tenants are experiencing Covid-induced financial difficulty, it is more important than ever to target renters with secure incomes. When selecting a property, be sure to consider location and pricing value based on the type of tenant that is likely available in that area.
It’s prudent to take out rent guarantee insurance to protect your investment against any losses if your renter falls into arrears. These policies have always had strict eligibility criteria contingent upon thorough tenant referencing, and with many providers withdrawing rent guarantee products from the market due to the increased risk of arrears the threshold for approval is higher than ever. Thoroughly referencing renters allows landlords to access insurance policies that provide invaluable additional security.
The current measures in place to support a higher number of property transactions represent a departure from recent government policy that has significantly increased the tax liability of private landlords. Once the crisis passes, landlords should expect to see a return to housing policy that supports higher levels of home ownership by disincentivising buy-to-let investment through punitive taxation. Investors should thus avail themselves of this narrow opportunity to grow their portfolio while relief is available.
Nonetheless, with a looming rental recession and grim economic forecasts predicting significant economic upheaval well into 2021, landlords must do their research to mitigate their exposure to risk. Thorough research is essential prior to selecting a property and investors must have a robust plan to manage costs and vet prospective renters.