In uncertain times, are UK investors better off switching to more concrete assets?
With the ongoing threat of COVID-19, the unknown Brexit effect, and the FTSE suffering its largest daily fall since 1987 (plunging 10.9% on the 12th March), traditional UK stock market investors might consider the nation’s property market as a potential long-term alternative. Certainly, the numbers would suggest this, with potential yields hitting 8% in some parts of the country (particularly in northern UK cities) which have seen a significant rise in businesses relocating to these areas in recent years.
However, with the swathe of new government regulations and reduced tax concessions, how viable is this for a new investor? We look at some of the challenges faced by the UK private rental sector.
With over 125 regulations and pieces of legislation governing the sector to date (80 of which have been introduced since 1990), it is a minefield of complexity to the unsuspecting investor. While regulation is certainly needed to maintain minimal standards and to identify and penalise people who break the rules, political pressure from key voting groups (in particular “Generation Rent” millennials) has led to knee-jerk policies which could potentially do more harm than good.
Case in point is the ban of letting agents’ fees being charged to a tenant except in relation to rent, security deposits, holding deposits or breach of contract – which, as reported by the Association of Residential Lettings Agents, has led to record numbers of rent increases by its members.
The situation is not helped by the UK Parliament which has seen a ministerial merry-go-round. Since 2010, 10 have taken the post of Housing Minister with only two remaining more than two years. With such unrest it is hard to achieve a continuous long-term housing strategy.
However, it is not all bad news in regards to regulation. The introduction of the Tenancy Deposit Schemes (which require landlords and letting agents to protect deposits on assured shorthold tenancies) provides protection for both tenants and landlords. For tenants, it protects their deposits and provides a faster, cheaper and fairer way of settling disputes. For landlords, the schemes offer the Alternative Dispute Resolution service (ADR) – a free independent adjudication at the end of the tenancy.
Similarly, the increase in safety regulations such as mandatory working smoke alarms on each floor, carbon monoxide detectors in each room that contain a solid fuel burning appliance, and a minimum Energy Performance Certificate (EPC) rating have increased standards across the sector.
Finance is a challenging element with tax changes and more stringent lending criteria having an effect on the sector. Since April 2017, tax relief on mortgage interest payments has been phased out for individuals and from April 2020 will not be deductible at all. Furthermore, lenders have tightened their criteria particularly with regards to rental-cover stress tests whereby the potential rent on a property must cover a specified percentage (typically a minimum of 125%) of the mortgage repayment.
How do these changes affect the future of the sector? With the increasing burden of legislation and more stringent lending criteria, record numbers of landlords with smaller portfolios are leaving the sector entirely, or downsizing on their assets. A study published in February 2019 of almost 2,500 landlords by the Residential Landlords Association found that one in four will sell at least one property over the next year, whereas only 15% are planning to buy. The effect of this is reduced supply in the sector. This increases competition among tenants that ultimately drives up rent.
Furthermore, we can expect to see a regional shift with landlords selling in less profitable areas (such as London) and investing in higher yield areas (such as the Midlands and the North).
So, is property a viable alternative? Certainly, the returns would suggest that it is, however with increased barriers to entry into the market and more stringent regulation, it is increasingly becoming more of a lifestyle choice when compared to other investment opportunities.