I’m looking forward to meeting lots of landlords and property professionals at this year’s event and in particular exploring some of the key challenges that we face. These are my top ten challenges for London landlords as we move into Autumn 2018:
1. Your Tax Strategy: Do you have one? We are now in year 2 of the section 24 tax changes which restrict the tax relief on mortgage interest payments even though they are a reasonable cost of running our businesses. Worryingly, only 49% of landlords fully understand the changes according to NLA research. There is a slow trickle of landlords that are changing their structure – around 15% – and nearly 4 in 10 of us say we will buy properties through a limited company structure in future. Make sure you know roughly what your tax bill will be in January 2022 and if you have a high street accountant who doesn’t seem to be very knowledgeable on property matters, consider seeking somebody more expert. Think long and hard before re-structuring your business for tax purposes, it can be very expensive and who knows when the tax rules might change in the future?
2 Buy, Sell Or Hold?: Recent statistics shed considerable light on landlord behaviour and how the market is shifting. NLA research tells us that whilst 15% of landlords plan to buy in the next 12 months, 22 % pan to sell some of their properties. UK Finance reported in July 2018 that buy to let lending was down by 22% and lending to first time buyers was up by nearly 10% over the previous 12 months, showing that government policy to supress landlord borrowing and encourage home ownership is working. Meanwhile house prices are up by 3.2% nationally according to the ONS, but down 0.2% in London. Continuing uncertainty about Brexit, the economy, house prices and indeed government policy alongside hefty stamp duty bills are continuing to put the brakes on the market. Many seasoned investors are holding, some are throwing in the towel, but one or two see this as a buying opportunity. I’m nesting up for the Autumn and keeping a watchful eye on things till the Brexit clouds blow over. Where do you stand?
3. Stay On Top Of Regulation: The government has been piling regulation on us over the past 12 months. The key message is that it is really important to stay on top of it and stay compliant. The list is never ending: new HMO definition, fees ban, redress scheme, GDPR, Minimum Energy Efficiency standards, electrical safety checks. If you are struggling, join a landlords association as they will really help keep you up-to-date.
4. Getting A Mortgage: The mortgage landscape has changed significantly since the Prudential Regulation Authority Changes came in last year. Most applications will be subject to a stress test of rent covering 125% of the cost of the mortgage at a hypothetical rate of 5.5%. If you have (or will have) four properties or more you will be classed as a portfolio landlord and a stress test will be applied to your whole portfolio. 60% of landlords report that they are finding it harder to get mortgage finance. I have consoled myself recently with a couple of five year fixes which allow more flexibility, particularly if you are trying to capital raise. There is a growing cohort of specialist lenders like Precise, Axis, Fleet, Vida and Landbay whose technology driven business models can provide more flexibility, but you may pay for it in higher rates and fees. If you haven’t remortgaged recently and you have a low loan to value, consider switching as there are some great rates to be had.
5. Your Article 4 & Licensing Strategy: Do you understand selective, additional, and mandatory HMO licensing? If not, it’s important to really understand how they work as 22 London boroughs now have or are consulting on what is termed discretionary licensing. 9 London boroughs have article 4 directions restricting lets to non related people. These rules are all likely to affect your business and you need to work around or comply with them. They are also affecting the rental market in some areas and could impact your choices in terms of business strategy. www.londonpropertylicensing.co.uk is the best place to go for information.
6. Transformation Of The Letting Agent Sector: The government promised to fully regulate letting agents at the Conservative party conference in October 2017. Already subject to a redress scheme and transparency regulations, they must now have client money protection in place by April 2019, and in future be members of a trade body plus sign up to a legally enforceable code of conduct. All agents will also have to have an approved qualification and lettings fees will be banned, likely from Spring 2019. Letting fees typically make up about 30% of agents’ turnover, so we are likely to see a change in pricing strategies and many commentators believe there will be consolidation in the sector and/or business moving to cheaper online models. I recommend you choose an agent who has always been a member of ARLA, NALS, RICS or UKALA. If you have an ongoing relationship with a good agent, you may be able to negotiate more favourable terms.
7. Disruptive Regulatory Forces: Politicians are considering policy shifts that could be disruptive for the private rented sector. At the Labour Party conference, shadow housing minister John Healey said that a Corbyn government would abolish no fault eviction, introduce compulsory three year tenancies, rent controls and renters unions to strengthen tenants rights. This could increase the number of sales by landlords, reduce the availability of private rented housing and cause house price deflation. At the Conservative party conference it was announced that local authority spending on house building would no longer be capped. The right of centre think tank, Onward, has also floated the idea of tenants of 3 years or more buying their privately rented property. If the landlord agrees, the sale would be exempt from capital gains tax and instead the amount of tax would be rebated 50% to the landlord and 50% to the tenant. Landlords might however lose other allowances like wear and tear and lettings relief and it is uncertain whether there would be any element of compulsory right to buy.
8. Getting Good Yields: Landlords face greater pressure to show good rental yields to obtain a mortgage and recent falls in tenant demand have caused rents in London to soften to -0.2% in the 12 months to August according to the ONS. Although there are signs the market is recovering, getting a good yield is at the forefront of many landlords concerns. Take pride in your property and set high standards so that you attract the best quality tenant. I aim to buy properties within 10 minutes of a well served station and close to amenities. Professional Sharers, Students or multi lets can generate the highest yields, but you need to be prepared for more turnover of tenants and a higher level of management. Working family tenants may produce a lower yield but often stay long term. Managing properties yourself can obviously reduce your costs but you need to way this up against the cost of your time and the expertise that your agent may bring to bear on your business.
9. Subletting: Subletting is a particular problem in London, as some tenants find a way to share their costs, or unscrupulous rent to rent operators exploit our assets. There may be cultural dimensions where tenants assume it is acceptable for them to move extended family into the property without permission. Article 4 directions also force us to let to related people, but some tenants may exploit this by moving in additional relatives and we are then left feeling it would have been much better to let to a small group of professional sharers, if only regulations permitted this. Ask applicants who will live in the property before you agree to let to them. Ask them again at the check in meeting and warn them that they must not move anybody else in without your permission. Periodic inspections every 3-6 months are vital to check occupancy and reinforce your policy. Make sure that neighbours have your contact details so that they can report possible problems to you. 10. Avoid The Void: In the current lettings market, it can take longer to find a new tenant, so make sure you plan for tenant changeovers. Take marketing pictures when the property is unoccupied and keep them on file. Always let on a 12 month contract to help you plan and check at month 9 what plans the tenant has. Ask them to confirm by month 10 so that you can advertise the property well in advance of their departure. If you are using an agent, get keys to them quickly – you don’t want to miss a possible viewing, particularly at weekends. Manage the check out process clearly by writing to the exiting tenant with a list of check out issues and discuss possible areas of conflict like cleaning, left over belongings and damage. Line up tradespeople to do any work that is required as soon as they move out. With new applicants be prepared to be flexible on price and furniture as that will be more cost effective than holding out another month for the idealised tenant that might not exist.
Originally published on 27 October 2018
