Forget tax, it is big scale Build-to-Rent that will have biggest impact on UK landlords

Tax, it is that horrible three-letter word that we all hate and right now if you are a buy-to-let landlord in the UK you have even more reason to do so with changes to mortgage tax relief looming in April.

But before that we do have the Budget on March 8 and many landlords are hoping that Chancellor Philip Hammond will do a U-turn and change the policy put in place by his predecessor George Osborne which many believe could lead to rent rises as landlords try to recoup their tax ‘losses’.

They are also facing higher costs due to a forthcoming ban on letting fees in England and those looking to increase their portfolios now face an extra 3% stamp duty charge.

Much has been written about how this will translate into higher rents. Indeed, tenants in the private rented sector face potential rent increases of up to 30% as a result of tax changes according to a report from David Miles, professor of financial economics at Imperial College London.

His analysis was written before the recent publication of the government’s Housing White Paper which put a new emphasis on providing more homes to let as part of an overall plan to provide the much needed million new homes by 2020.

Miles argues that tax changes, including the 3% extra stamp duty on additional properties, that have affected landlords are having a negative effect on the supply of rental properties and are not the neutral, non-discriminatory system that had been suggested and he calls for the April tax change to be abandoned.

He finds it hard to understand why the government would want to deter provision of private rented accommodation from smaller landlords and says that generally rents would need to rise between 20% and 30% to offset the impact of the government’s tax rises. He does point out, of course, that not all rents would go up this much.

But you have to wonder why rents would need to go up this much in the first place. His argument is backed by calculations which show that to maintain current yields, rents would need to go up by a certain percentage. But that argument is flawed because yields are not a concrete entity, landlords know that they can go up and down and don’t expect them to remain the same.

It is very easy to think that there is a lot of landlord bashing going on, but there are also a lot of positives for landlords and tenants. Letting agent fees are already banned in Scotland, but there was no sudden rise in rents.

Also, research from the Council of Mortgage Lenders has found that the majority of landlords do not intend to buy or sell more properties to let in the next five years. The survey, one of the biggest of it kind, set out to gain an insight into how landlords are coping with changes in the lettings sector and how tax is affecting buyto-let property owners.

It found that landlords tend to make different decisions about financing, managing and expanding their properties depending on where their properties are located. For example, yields are strong in Manchester and less so in London and that can influence decisions on portfolio size. Scotland also has some of the strongest yields, suggesting that the fees ban has not had much impact on the market.

The latest index from Countrywide shows that rents have increased by 2.6% as a whole in the UK, but have fallen in London. Interestingly, the index report also shows that a record number of landlords are paying cash rather than going for a mortgage, despite low interest rates. In 2016, some 61% paid cash compared with 41% in 2007 and it suggests that more are doing so because of stamp duty and tax change.

I don’t think landlords are badly off, they know that property investment is a long term one and it has its ups and its downs. I think the push for large Build-to-Rent development in cities, as outlined in the Housing White Paper, is a far bigger deal for landlords as it represents a shift away from the traditional flats and homes let by portfolio landlords to a big scale release of apartments aimed at young people who cannot afford to buy or don’t want to buy. That is what I would be paying attention to if I was a landlord.