Are Landlords Facing the End of Buy-To-let_ - FT

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January 22, 2016 11:07 am

James Pickford

Buy-to-let has been good to Rupert Godfrey but not by design. When the former

marketing consultant left London for Dorset in the 1990s, he found he could not sell his flat

in the south-west of the capital. Instead, he was forced to rent it out, becoming an archetypal

accidental landlord.

It was an inauspicious beginning of what turned out to be a highly fruitful period of

investment. Finding himself with a reasonable return in rental income and with some

capital to invest, Mr Godfrey liked the look of the sector and decided to expand his portfolio.

By 1998, he had bought a dozen properties in south-west

London by borrowing on the strength of 200,000 in capital and remortgaging when prices

climbed. His stake is now worth around 8m 40 times what he put in.

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re landlords facing the end of buy-to-let?

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Its been unbelievable, said the 62-year-old. With low interest rates, theres no pressure

on me to sell and despite the fluctuations in 2007-8, which were a minor blip in the London

market, its been a very good investment.

His experience is matched by many of the thousands of investors who put money into rented

property over the past 20 years and saw spectacular returns from a combination of rising

house prices, an expanding population in property hotspots, freely available mortgages and,

more recently, rock-bottom interest rates.

But there are reasons to think that the buy-to-let story may have entered a new phase one

that is much less certain, fraught with political and economic risks and unlikely to generate

the outsized rewards enjoyed by the likes of Mr Godfrey. As government and regulators

introduce a series of constraints on amateur landlords, FT Money has taken soundings from

agents, brokers and lenders suggesting an ambivalent future for the sector.

Buy-to-let bombshell

Last year, George Osborne made it clear that buy-to-let lay squarely in the governments

crosshairs. Responding to calls for action over a shortage of housing and the problems facing

first-time buyers, the chancellor unveiled a series of measures backed by moves from the

Bank of England, which voiced its concerns over the risks of buy-to-let overheating

designed to cool the ardour of landlord investors.

His first foray came in the Summer Budget, with the removal of higher-rate tax relief on

mortgage interest repayments. Over three years from 2017, Mr Osborne will do away with

reliefs of up to 45 per cent on mortgage interest costs, restricting them to the basic 20 per

cent rate of income tax for all landlords.

Alongside this, the chancellor also removed a generous 10 per cent annual allowance for

wear and tear on furnished rental properties, which could be claimed whether or not the

landlord incurred any expenditure. From April, landlords will only be able to claim for the

costs they actually bear in replacing furniture and fittings.
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Meanwhile, the Bank of England has raised concerns about the risks to the stability of

financial markets from the growth in buy-to-let, which it fears would amplify the peaks

and troughs of the housing market cycle, as it accounts for an expanding share of overall

mortgage lending. The Banks Financial Policy Committee is now consulting on taking on

powers to limit buy-to-let loan to value ratios and the ratio of rental income to mortgage

interest payments.

If any landlords remained unconvinced about the changing political climate, however, theirdoubts were dispelled by the bombshell of Mr Osbornes Autumn Statement. Applying

further pressure on the brakes, he announced a three percentage point stamp duty

surcharge on purchases of buy-to-let and second homes in England and Wales from April

a tax he expected would raise an extra 1bn for the Treasury.

Reaction to reforms

How will the changes reshape a sector spanning landlords with hundreds of homes and

those, like Mr Godfrey, with more modest portfolios who have nonetheless seen significant

growth in value?

The looming April deadline already appears to be influencing investors behaviour. A survey

by the Royal Institution of Chartered Surveyors this week found the demand for new

properties had reached a three-month high, with surveyors citing a rush to buy ahead of

new measures.

Simon Gammon, managing director of Knight Frank Finance, said: Theres no doubt it hasfocused the minds of those considering an investment purchase or buying a home for

themselves when they have other property. For those who were in the process of buying,

there is a genuine quickening pace to be completing purchase.

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But he said several clients had come unstuck in the mistaken belief that the new rules did

not apply to them, such as when they themselves were buying a home but renting out their

previous home, thus moving from one to two properties. Its not what the measures are

there for, but Ive seen quite a few people caught out.

A survey of existing buy-to let-landlords by the Council of Mortgage Lenders suggests a

mood of relative equanimity, with 60 per cent of respondents saying they would take no

action in response to the tax changes. While landlords appear able to take the measures in

their stride though, the CML still believes the overall impact will be to lift rents higher and

to narrow the availability of homes in the private rented sector.

Alistair Hargreaves, executive mortgage consultant at broker John Charcol, said some

clients who had been planning to buy before last years announcements were now fighting

shy. One, an accountant with a series of rental properties bought in his name, had

withdrawn from his latest purchase after realising the changes to interest repayment relief

would take him from a higher-rate to a top-rate taxpayer. Its not worth him doing it, MrHargreaves said.

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Another client, with three buy-to-let properties to his name, had cited his divorce

arrangements as a reason to demur. He too would move into the top rate of tax after the

30,000 annual rental revenue from the flats is treated as income by HMRC. This would

also raise his maintenance payments to his ex-wife, since these were linked to income in

their settlement. Hes been done on both sides, said Mr Hargreaves.

Even those with no buy-to-let or second homes are feeling the impact. Mr Hargreaves is

dealing with a couple who are selling their home in Suffolk to buy in London. They own no

other property so are not subject to the stamp duty surcharge, but their buyer is purchasing

the seaside house as a second home and has demanded the deal go through before April to

save 15,000 in tax under threat of stepping back from the purchase.

Long-term prospects

Most in the industry agree that the changes to the treatment of mortgage interest relief an

annual, ongoing reduction in their profits will make a more profound dent in their

business models than the stamp duty surcharge, a one-off charge.

This is because many landlords are looking to own properties for 10 years or more to

maximise capital gains and lenders and brokers certainly do not advise buyers to

speculate over the short term so the extra costs of purchase can potentially be absorbed

over a longer timeframe. What is more, when a landlord finally does come to sell, stamp

duty as well as other expenses of acquiring a property such legal and agents fees and thecost of advertising the home can currently be offset against capital gains tax, with no time

limit. But advisers say those planning to hold their properties for 10 years or more should

not be surprised if the Treasury decides to amend this arrangement in future.


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But the prospect remains that the cost of buy to let purchase may simply become

unaffordable to some, particularly if the government revisits the 3 per cent figure at future

Budgets. Ed Mead, executive director of agent Douglas and Gordon, said: Whats going to

come next? Will we go up to 5 per cent or 7 per cent next year? Thats what concerns

people.

Asked if the changes themselves might have an impact on house prices, Christian Faes, chiefexecutive of peer-to-peer lender Lendinvest, said prices in London and the south-east were

already softening. But when the stamp duty surcharge takes effect, he said sellers were more

likely to blink first. I think initially vendors will cave a bit.

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One thing is for sure, Mr Godfrey says: it would be hard for anyone now to replicate his

experience, since the bargains to be had during his 1990s buying phase are no longer

available. His entire portfolio of 12 flats and houses in Wandsworth, Battersea, Clapham and

Stockwell cost just 1.1m. One of his purchases was a 5-bedroom Victorian house in

Stockwell, bought in 1996 for just 95,000. Similar properties are now advertised on

Rightmove for between 1.1m and 2.2m. The returns were phenomenal because prices

were so low, he says.

Since then, though, prices in his location have risen around sevenfold while rents have

doubled. Anyone going into the market now, he says, is on very dangerous ground: with

interest rates at record lows, the arithmetic may look good currently but a 2 per cent rise in

mortgage rates would mean many would struggle to make any money at all, he warns.

Rules and exemptions

The Treasury has published a consultation over the stamp duty change, setting out the

complex ramifications of the measure with flowcharts to help buyers understand whether

they will be affected, containing over 40 worked examples. One exemption is that of the

cohabiting couple. Unmarried couples living together can escape the stamp duty surcharge if

they buy and hold two properties in their separate names whereas married couples are

treated as a single unit for the purpose.

Unintentional second homeowners which might happen when a sale falls through at the

last moment are asked to pay the surcharge, but have 18 months in which to claim it back

if they subsequently succeed in selling their original home.
https://www.gov.uk/government/consultations/consultation-on-higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties/higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-propertieshttp://www.ft.com/cms/s/0/2b2a01c6-3779-11e5-bdbb-35e55cbae175.html#axzz3xgdQtnJY


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The biggest group exempted from the stamp duty requirements is professional landlords

defined as those with 15 or more properties whom the government is keen to encourage in

the hope of adding scale to housebuilding programmes and the nascent build to rent

sector. (It is still consulting over whether to grant the exemption to those buying 15 or more

homes in bulk, or simply to those who have a portfolio of 15 or more).

Some argue that favouring institutional buyers should not mean penalising smaller-scale

individual landlords particularly when the pension funds and insurance companies that

are looking at the private rented sector have yet to reach critical mass in the sector.

Mr Mead says: It would be fine if you had large build-to-rent portfolios but that doesnt

seem to be happening. Institutions have always talked about residential lettings but to

manage hundreds of short hold lets is an intensive process...Until that eases, to take

property out of the market suddenly is not a well thought out solution.

Mr Godfrey is less combative about Mr Osbornes moves on the sector, describing the

previous tax breaks as astonishing and incredibly tax efficient, adding: The surprise is

that is had taken so long [to change them]. But he has sympathy with the argument that the

forces of higher immigration and lower rates of housebuilding are going to cause more

people to want rented accommodation. With the rises in residential stamp duty in recent

years, he says, the measures will make the market much more stagnant.

Twist or stick?


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Buy-to-let, London, UK Property TaxationRELATED TOPICS

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The Treasury consultation ends on February 1 and the new tax measures are due to come

into effect at the beginning of April. Until then, agents and brokers expect the rush to buy

to continue but some warn the real deadline may be earlier still, because of the time

needed for buyers to carry out surveys and legal searches as well as secure mortgage

financing, if they need it. That period will typically be longer for those seeking to buy an

already occupied property or buying through a company structure, since this requires more

complicated administrative treatment.

The clock is ticking, and may already have stopped for some, Mr Gammon suggests. If

youre buying an investment flat that is empty and you dont need a mortgage, its feasible. If

youre buying a house with people in it, its possibly going to be too late to exchange and

complete and have those people move out [before April].

Even if you are on the right side of this divide, judging whether to invest today is harder than

ever. Mr Godfrey illustrates the difficulties of knowing when the moment is right: he bought

his last property in 1998, before an upswing in prices lasting over a decade. I thought priceswere getting a bit frothy. In retrospect I should have carried on. But when youre buying

stuff [properties] that cost twice as much as they did previously, it feels wrong.

Buyers from overseas

What will be the impact on overseas buyers of the governments buy-to- let incursions? If

you own property abroad and are making your first or subsequent purchase in this country,

you will face the stamp duty surcharge. For international investors interested in London,though, it is unlikely that the attractions of the capital including its culture, amenities,

obs market and legal stability will be overshadowed by higher costs on purchase.

Simon Gammon, managing director of Knight Frank Finance, says transaction costs in other

cities and locales that compete at the top end of the property investment market will remain

higher than the UK capital, even after Aprils tax changes. If you were buying in Singapore,

New York or the Caribbean, it would cost you more. Were one of the most expensive

countries in terms of property transaction costs but were not the most expensive.

For British people considering a second home purchase, the transaction costs of buying in

France or Spain are now becoming comparable with those in England and Wales. Simon

Smallwood, joint managing director of lender International Private Finance, says: The

measures bring the cost of buying a UK second home closer in line with those on the

European continent.
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