Confidence rebounds as landlords move to limit impact of taxes changes

Landlord confidence bounces back from record low in 2016 as they take action to soften the blow of the upcoming tax changes.

Landlords confidence has bounced back following recent government intervention as investors look to secure mortgages through limited companies or increase rents in reaction to higher tax costs, according to the fifth edition of the Kent Reliance Buy to Let Britain report.

Landlords’ confidence is at its highest in a year, with 54 per cent of investors confident over the prospects for their portfolios, according to a survey of 900 property investors, run in association with BDRC Continental. This is a marked recovery from the second quarter of the year, when confidence hit a record low (39 per cent) as a direct result of higher stamp duty charges.

Property investors have taken action to mitigate the additional tax costs they will face when tax relief is lowered on mortgage interest payments for individuals. This has seen landlords increasingly turn towards incorporation, and borrowing through a company structure, where finance costs can still be offset against rental income.

Kent Reliance’s analysis shows that there have already been more than 100,000 limited company loans issued in the first nine months of the year, double the total amount in the whole of 2015. Over 12,000 a month in the last quarter.

Demand for this type of arrangement is likely to intensify as the tax changes bite. one in ten (11 per cent) of landlords state they have already incorporated, or have moved holdings to a lower-rate-tax-paying spouse or partner to limit their tax exposure, while a further 25 per cent are considering doing so.

This alone would account for over half a  million landlords nationwide making the move. Kent Reliance estimates limited company lending in 2016 could total 143,000 for the year as a whole, rising to 163,000 in 2017.

Rents to rise

The forthcoming tax changes are also driving up rents. The average rent in Great Britain has hit a record high of £881 per month, despite the supply of rental property homes hitting an 18 month high in the period, a knock on effect of the rush to beat the stamp duty hike. Annual rental inflation slowed a little in the last quarter, but even so, rents still rose by 2.4 per cent. With a growing tenant population, and rising rents, landlords in total are now collecting approximately £4.6 billion in rent each month.

Rent rises are likely to accelerate in 2017. A third of landlords expect to increase rents in the next 6 months alone, by an average of 5.4 per cent – equivalent £571 per year for households. Two thirds cite higher future taxes, and 43 per cent the strength of tenant demand.

Indeed, twice as many landlords are seeing an increase in tenant demand as the number seeing a decline. The recent budget announcement to ban letting fees, while providing a welcome reduction in tenants’ upfront costs, will see any additional costs for landlords factored into rents.

Extra pressure will also come from the Prudential Regulation Authority’s new underwriting standards, due for implementation next year; these will see landlords needing to demonstrate higher yields to secure finance, unless they can provide larger deposits. As a result, Kent Reliance forecasts that rents will rise by an average of 3 per cent in 2017.

Number of households growing

Growth in the number of households has moderated, growing at 5.4 per cent in September compared to 5.5 per cent in the first quarter, with 5.3 million rented households in total. Combined with strong house price growth, the value of the PRS in Great Britain has risen to £1.3 trillion, with £174 billion added since September 2016.

Andy Golding, chief executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy to let, comments, ‘Property investors have had to roll with punches in 2016. The stamp duty levy clearly took its toll on the market, and combined with the forthcoming tax changes, landlords have felt at the mercy of a political agenda.

‘But confidence is returning as landlords take action to limit the damage to their finances. The use of limited companies is soaring, and rents are increasing, even after one of the biggest surges in rental supply in recent history.’

Golding concludes, ‘The raft of recent measures aimed at the buy to let sector singularly sought to increase home ownership levels. Ironically, they will achieve the opposite, with even greater upward pressure on rents combined with the prospect of declining real incomes likely to stretch affordability even further.

‘We have warned all along that the tax changes will push up rents, and this is already starting to happen. The ban on often unjustifiably high letting fees is well intentioned. However, it also means landlords could pass higher costs onto tenants, doing little to bring down the overall cost of renting.’

Further reading on tax changes

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