Landlords in the buy-to-let sector are coming under increasing legislative pressure. Matthew Sarson, Researcher & Market Analyst at Emerging Property, examines why this is and what the alternatives might be for property investors.
For years now, there’s been disquiet about the UK’s housing shortage, with the Royal Institution of Chartered Surveyors estimating a shortfall in rental homes of 1.8 million by 2025.
In 2015, there were 27 million households in the UK, according to the ONS, with 5.4 million of them living in privately rented accommodation – an increase of 3.1 million since 2001.
Nor are things going to get better in a hurry. The UK population is on the increase, people are living longer and too much housing is taken up by single occupancy. We’re a small country and we’re running out of space.
Understandably, the government felt compelled to start redressing the balance, and student buy-to-let property was an immediate, easy target.
Why student property has an important role to play?
There are currently 135 universities in the UK, offering degree courses to around 2.3 million students – including nearly 450,000 from overseas. Student numbers have been on the rise for decades, and have hit record levels in each of the last four years.
Existing university halls of residence simply can’t cope with this kind of volume, and even allowing for private-sector developments, today 74% of the country’s student body have to look elsewhere for a place to live.
The majority of them end up in residential property, which over the years has proved a lucrative draw for a whole generation of property investors who have made good money out of the relatively undemanding student market.
By converting the living and dining rooms, a 4-bedroom home can become a 6-bedroom student let – a more lucrative option for a landlord than renting to a family.
But the downside of this purple patch for property ownership has been steadily rising rents for tenant households along with increasing house prices – to the dismay of families and first-time buyers alike who have been pushed out of whole areas of university cities.
What the government is doing
So, part of the government’s housing strategy has been to take on the buy-to-let sector as a whole and hit landlords where it hurts most.
They started with Stamp Duty Land Tax; any homeowner’s second and subsequent properties would be subject to it at all price levels, with a 3% surcharge on all bands above £125,000.
They finessed it by targeting Homes in Multiple Occupation (HMOs). By allowing councils to invoke Article 4 legislation, which requires planning permission for any conversion or extension work to a residential property, they have made it more complicated and more expensive to create the archetypal student let. And, even assuming the permission is granted in the first place (which it may well not be), landlords have to buy and thereafter renew a licence to run the property.
An incidental bonus for the local authority is that students don’t pay council tax, so the more housing they free up for families, the better for their budget.
Then landlords were hit by changes in tax legislation, initially by the abolition of the automatic 10% wear and tear allowance, and more recently by the phasing out of tax relief on mortgage interest rates – scheduled to cease completely by 2020.
And although Capital Gains Tax was reduced last year to 10%, the exception was property – where the charge is 18% for basic rate and 28% for higher rate taxpayers.
Given all this, buy-to-let has suddenly begun to look like an awful lot of hard work for very little reward – or, if landlords appoint a third-party manager, hardly any reward at all.
So, what now for property investors?
But there is an alternative, an alternative which requires no effort whatsoever and which delivers a contracted, fixed income. Because of the measures outlined above, students are being actively directed towards purpose built student accommodation (PBSA).
And it seems to be working – the Sunday Times on June 12th 2017 ran an article about Headingly in Leeds, observing that the district had “…for decades been dominated – some say occupied – by students” who were now “moving on to the comfort of new purpose-built accommodation, and families, couples and first-time buyers looking for a period terrace are moving in.”
Many people simply don’t realise that the new student blocks that they see going up aren’t owned by the universities; they are being built by private sector developers and are either owned by large institutional funds or occasionally individual units within them are available to private investors.
They are proving popular with the universities, students (and their parents) and local residents.
According to Knight Frank, PBSA has been the UK’s highest-yielding asset every year since 2011 and, if investors choose wisely, they can earn themselves an annual NET income of 8-10%, contracted and fixed for 10 years.
James Harrington, Business Development Manager at sector specialists Emerging Property, emphasised that it was important to shop around to get the best returns.
“Some developers offer quite short fixed income periods, sometimes less than six years, which indicates that they’re taking their profit from an inflated initial sales price without being invested in the long-term performance of the property.
“We would always advise investors to look for a 10-year fixed income term, with full onsite management and a guarantee of no further charges or outgoings throughout that period.”
Where to begin looking?
The best performing properties, perhaps surprisingly, aren’t in the obvious student hotspots like London, Liverpool or Manchester – the industry rule of thumb uses a PBSA supply figure of 40% to indicate saturation, and these cities are there or thereabouts.
The key is to find a town or city with a thriving, ambitious university, which is popular with students but which is chronically undersupplied with purpose built student accommodation. These tend to be in less obvious regional centres, such as Bradford, Huddersfield and Stoke-on-Trent, where student numbers are soaring yet dedicated accommodation is at a premium.
Harrington also notes a massive increase in interest from disillusioned buy-to-let landlords: “At first, they’re quite cynical about it – they’ve worked their socks off for years to scrape an income of about 6% gross, so what’s the catch with our properties?
“But when we explain about the levels of demand in our handpicked locations, the economies of scale we bring to bear and our properties’ proven performance, well, they soon come round to the idea.”