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Recent research from Countrywide, the UK’s largest property services group, shows that Britain’s property investors have been remarkably resilient in recent months. Radical policy changes and slowing price growth mean it’s easy to be downbeat about the prospects for buy-to-let. Despite the introduction of the 3% stamp duty charge for second home buyers and the prospect of less generous rules on tax relief, investor activity levels in late 2016 were nearly back to normal.
3% additional stamp duty charge
The 3% additional stamp duty charge is raising more than expected by the government, as more are getting caught up in the surcharge. Countrywide estimates that around a quarter of buyers will pay the stamp duty surcharge in 2017. Only 60% of those paying the extra 3% are investors, the rest are home owners who have not sold their main residence (21%), second homeowners (9%), small developers (8%) and those buying with a child or family member (2%).
Good news for first-time buyers
But some first-time buyers have won out against investors because of the new change. Since its introduction c.9,000 fewer people buying their first home lost out to a landlord than over the same period in 2015. And since April, 56% of first-time buyers competing with a landlord, walked away with the house keys.
Landlords adapting investment patterns
A changing environment in buy-to-let policy means landlords are adapting their investment patterns, for instance by purchasing through a company, expanding their portfolios or acquiring property further from where they live. Since 2010 the proportion of landlords with a portfolio of 2 to 4 properties has almost doubled from 17% to 30% today. Investors are looking further afield in search of better yields too. Now only 56% of investors from London buy investment property in the capital, a significant decrease from the 65% recorded in 2015, but even more remarkable when considering the 80% recorded in 2010.
Long-term capital gains still important
The effect of stamp duty is evident on landlords’ short-term margins as they are competing with owners-occupiers. Nevertheless, the stamp duty surcharge is unlikely to substantially affect the investment decisions of landlords as they tend to be more focused on long-term capital gains rather than short-term yields. 70% of landlords say that rental income accounts for less than 25% of their total income.
Still a changing landscape
But the overall rental landscape is changing. The buy-to-let sector has evolved over the last few decades, from just 120,000 outstanding buy-to-let mortgages in the year 2000 to more than 1.7 million today. Large institutional investors are also increasing their interest in the build-to-rent sector, although they still only represent 2% of landlords. So far, this segment has targeted a relatively small tenant demographic who tend to be young and childless. Although the size of their target market is limited, they can still potentially capture around 1 million UK households.
Overall we expect rental growth to rise broadly in line with income growth, increasing 2.5% in 2017. But the path of the economy and its impact on employment and pay will dictate the performance of the market in 2017. Of course, uncertainty remains around forecasts in the residential market, given the lack of detail about the transition of Brexit and its impact on the UK economy and households income.
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