What Will Happen To UK Property Investment?

Great thought provoking article Mark.

If we define buy-to-let as buying a place pretty much at market value, in rentable condition (ie minimal refurb), and letting it out; then in the M25 zone, I would say BTL is dead (for now).

The way to make money will be from build-to-let or redevelop-to-let. These are the only types of deals I can get to stack in M25 zone.

Hi Mark

Good move. Malta is not for me but I hear its very nice!

Your question occupies my mind daily, especially as of late. This is how my mind churns it all up and delivers it to the keyboard

If all these recent nasty policies stick then the picture will be very different than it was a year ago. If they don`t stick then the picture will change again. There are still a lot of ifs and buts. But speculation is good because we base our business decisions on it to a certain extent to try and stay ahead of the game . Here are a few Ifs...

If we leave the EU
If George Osborne stays
If David Cameron stays
If the Tories survive
If Clause 24 survives
If 3% SDLT survives
If UC survives

UK Property Investment will survive whatever happens in my view . What will change is the attitude of new school v old school. Old school ( like you and me) have made their money and will just adjust their structures . The hard work has been done.

The Inbetweeners will be the disgruntled ones. I feel sorry for them They have their foot in the door, made plans and are in the middle of an exciting journey. But they have been sledgehammered recently and run off the road by Osborne. They may have 2 or 3 properties but planned for 10 and retirement was going to be well before they hit 65 but now it seems maybe not so likely . They will have to work harder at property adapt their strategy, cut their cloth to make a success of it all. They had hoped it would be more of a passive investment but they will now have to pay more attention to detail and be perhaps a bit more hands on with their DD . Some will relish that challenge. Some will give up bail out and look elsewhere.

The new school will happily accept it all . They know no different. They wont expect massive cash flow or an easy tax regime. Rather than pay £250 pcm into a traditional pension scheme though at 30 yrs they will be quite happy with a cash flow neutral small portfolio which will still double its capital value in 20 years. They may pay down in that time or sell at 50 yrs still well ahead of their peers who by then will probably have to work to 75yrs to get a state pension!

If they buy 5 x 200K properties today they will still have a million for their pension fund in 20 years . That`s not so bad even allowing for inflation

BTL`ers were getting to big for their boots in the government eyes. I understand that .We were starting to grow exponentially and would have been far too powerful within the next 10 years for what is I guess a rather rambling disjointed unregulated industry.

If our leaders were intelligent enough in 1996 when the modern BTL was essentially born then they would have regulated its growth and its structure far more efficiently and effectively for the benefit of all . But they were not and they didnt. But humans are not that good at effective forward thinking and planning. .

Few leaders really plan more than 5 years in advance. Tony Blair in 1997 didnt have,,, `the state of the PRS BTL sector in 2016` high on his agenda. I wouldnt expect him to, to be fair to him .

So it ran away with itself and got ahead of itself . A workable but more subdued BTL market will emerge I believe. New laws will continue to be drafted. More is to come i believe. Maybe enough for now though. More when the furore has died down a bit.

We will no doubt become regulated in time. Rents may be capped. Things like no more than 15 properties per person unless licenced . Maybe take one refugee as a tenant for every 10 you own. The housing crisis will get exponentially worse I believe so that may be our saviour as well. They will need us more and more so the respect and the power balance will slightly change in our favour. But if we dont play ball with the new rules then compulsory purchase orders may be the order of the day. We mustn't get too greedy or rebellious.

The relationships between councils and the PRS hopefully will improve but it will stifle entrepreneurship. Long leases and guaranteed rents and ROI will be introduced for a hassle free investment. Many BTL`ers will be attracted to this new style investment. A lower rate of return but a solid secure return just like a building society but BTL will still be much better. You may have an opt in / opt out golden handshake lump sum arrangement which they take out of the capital growth when you sell on in 20 years to another scheme member

But I think BTL will still be a distinctly viable asset to invest in. With leverage as we know it easily beats gold, shares, antiques, art, classic cars

That`s why I went into it in 1983 initially. Hibernated for a while but then went up through the gears 1999 onwards when I realised how good BTL mortgages were as a route to riches and I took full advantage of the system . My wings have now been clipped by the system because everyone has cottoned on to that now .

Property Investors will adapt and still flourish though and good luck to them. There is no better asset to put your cash into in some form or another. I`ve done my bit and made my wedge . New school can take over .

Anyone want to buy a portfolio. ( half kidding )
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Excellent response Jonathan, thank you.

Funnily enough, only the other day I was talking to some other UK ex-pat landlords over here in Malta and your name came up. They said they enjoyed reading your posts on P118 and PT. you're famous even over here my friend - or should that be infamous? LOL

All the best

Mark
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Highly leveraged portfolios are pretty much done for imo. The combination of C24, the BOE's recent consultation, BCBS risk weightings / Basel III means that high leverage (>50% or so) no longer works as far as I can see.

However, owning (or majority owing with a bit of leverage) freehold property that is properly managed / maintained and let to carefully selected tenants by service oriented landlords is still a valid business model. There is no reason to suspect that will change anytime soon.

I am sure it will not, over any particular period, be the best yielding asset class, or the best capital growth asset class, but the easy availability of leverage and the large ££ numbers involved in any particular transaction, can make it work very well indeed.

As either a prudently run business (take Mountview Estates for example), or a sensibly weighted element of an individual's investment portfolio, I think some exposure to UK residential property can be a sound proposition.

As Jonathan Clarke points out above, the market today is very different to how it was previously. It will be different again in the future. There will likely always be some participants in the market that view it as the best home for some of their money.

I believe, prospect for long term property investment will remain sound, this is based on strong demand for rental property due to huge influx of Immigration and Labour Mobility.

There will however be some short term fluctuations in the market, due to Stamp Duty Changes and Mortgage Interest Relief Changes over the coming years. Savvy landlords will adjust these changes systematically by increasing their rents or the way they rent their properties i.e. by converting their existing properties to HMO in order to increase Cash Flow and to offset the extra costs.

Long Term Capital appreciation is almost inevitable...looking at historic data property prices have always doubled in 20 years in UK whereas in South East and London these figures have been achieved within 7-10 years.

Strong capital appreciation is due to Brits obsession with property ownership together with lenders appetite to lend together with the fact, Interest Rates are likely to remain below 5% for decades, in fact, I do not think we will ever see, Interest rates going above 5%! Last by no means least, the government desire to encourage home ownership due to their vested interest of raking Stamp Duty and the fact buoyant property prices are fundamental factor of strong economy which is interlinked with the whole of UK economy therefore it would be counter-productive for any government to derail the strong house prices.

Some great comments above and really interesting to see how other people view what may or may not happen over the coming months/years to UK BTL.

With change comes adaptability. The more flexible in your thinking you can be, the better for your future prospects. My husband and I have been landlords now for 15 years and have an established portfolio. We have also been working out what re-structuring needs to take place since the recent tax changes have been announced.

I agree with other comments above that although the market may be impacted in the short-term, that the industry will remain strong overall and still offer good prospects for the longer term. Most people I speak with still view property as the best asset class due to the control and tangibility factor compared with other investments.

Of course, there is one major alternative which has not yet been mentioned which is, of course, the ability to buy properties into a Ltd Co. Although there are some initial higher costs to setting up this type of structure, the pros of holding properties this way could far outweigh the cons over time. For example, the ability to bring in additional shareholders (in order to offset inheritance tax implications) without compromising the mortgages, all mortgage costs still allowed to be deducted before tax calculated on profits, flexibility of income derived from profits thus workable around other personal income, ring fenced liability, more future proof structure, etc, etc.

I also agree that by purchasing well and adding value over above costs incurred, you can continue to create a stable and profitable portfolio. With the variety of strategies available and by educating yourself well, this business is still very viable.

The last point I would add is this...the more interest and passion you have for the business, the more likely you are to continue to make a success of it. These changes will certainly sort out the players who are really into the game than those who are just dabbling.

Reply to the comment left by "Hazel de Kloe" at "03/04/2016 - 19:57":

Hazel, you mention '...the ability to bring in additional shareholders (in order to offset inheritance tax implications) without compromising the mortgages, all mortgage costs still allowed to be deducted before tax calculated on profits, flexibility of income derived from profits thus workable around other personal income, ring fenced liability, more future proof structure, etc, etc.'

Do you think that the C24 short term tax grab strategy may actually turn out to be be heavily resented by future Chancellors, after much of the PRS is transferred into lower tax paying corporate structures and loss of IHT, CGT and IT as a direct result?

Indeed, I really don't think they've thought it through at all Mark. Certainly not for the longer-term. What may be a short-term cash flow 'win' for the Government could turn out to be a longer-term disaster waiting to happen (for them).

As already mentioned above in previous comments, demand for rental stock is only going to increase with the level of immigration as well as many other market forces and the level of new supply simply cannot keep up. With a squeeze already on the PRS, this can only mean rents hiking up and, I believe, property prices continuing to rise in the market as a whole.

The main solution for anyone who continues to hold down a career alongside building their portfolio is to restructure and transition down the company route. Indeed, this will have a more negative impact longer-term for the Government's coffers. Unless their intention is to create a more transparent industry and force people into this situation.

There are many ways of looking at it. The less scrupulous landlords will still continue to operate 'under the radar' for as long as they can and the rest of us will have to play by this new set of files as best we can. Where there's a will, there's a way!!

I'm lucky to have come into this business relatively recently, so I'm able to take the changes into account when planning for the future. I am wary about investing in London because it's not a market I understand but apart from that I'm quite excited about the future and I'm enjoying being a landlord, and being involved with property. There are some bad landlords who expect their tenants to live in awful conditions and don't pay tax and I hope those ones will be the first to panic and get out as they do everyone a disservice. For my part I'm optimistic and looking forward to the future.

I suspect the histories of similar events elsewhere will prove to be the most accurate predictors. Supply and demand issues elsewhere in the world led to similar short sighted government policies being either fully or partly withdrawn... and this has been so whether it has involved rent level restrictions or punitive tax changes.Why on earth governments dont take the time to look at those histories is a mystery. Even allowing for populist policy decisions...it doesnt look good to be back tracking and someone has to house our population and that someone/whoever has to be paid at a realistic rate. To deny this is to deny capitalism and market forces.... linked also to population trends.We will see a level of reduction/removal in Clause 24...if not by our court case..which personally i think is quite strong..then by the bigger forces/ pictures ive alluded to here. For me its not IF but when and by how far..but my gut is it will be quite a big shift back towards a free market. Other interferences with markets..away from housing..also have similar histories. They dont last..being removed or reduced...and markets return towards freedom of operation. If these sort of events didnt generally trend towards a return towards" free market" then capitalism ..upon which the democratic world is based...would eventually collapse.