Buy-to-Let Investment Insights: London & Edinburgh, Winter 2021
Published 31st December, 2021
It is fair to say the events of the past 2 years have led to some significant changes in property investment. The aftermath of the pandemic will be felt in the buy-to-let sector for some time.
Added to the pandemic are the end of stamp duty, the end of furlough and a cry from businesses to come back to the workplace. After 18 months of working from home, quiet city centres and sporadic, if any, inner city transport networks, both London and Edinburgh have sprung back to life.
Although the details are complex, the main take away is that rents have risen steeply recently and demand for rental is predicted to continue to rise well into the future, which means exciting times for buy-to-let investors, be they institutions or private buyers.
General Rental Market Overview
Research from Nationwide suggests that first-time buyers need to save up 113% of their entire annual salary for a deposit to buy a property, a large outlay that shores up demand for rental property.
However, landlords have been adversely affected by covid-related arrears, rent breaks or reductions, plus more onerous tax burdens and tenancy regulations. In light of this, many private landlords may decide that a buy-to-let investment portfolio is just too much to bear and diversify into alternative investments. This will result in a reduction of rental stock available on the market for prospective tenants.
We predict fewer property entrepreneurs over the next 5 years as big institutions enter the market with Build-to-Rent Schemes. But, due to a lack of social housing, there will be more demand than ever for rented accommodation, which implies rents can only increase.
Factors Affecting Property Investment/Acquisitions
Stamp Duty and Low Interest Rates
To understand the impact of these financial incentives firstly one must bear in mind the impact of the onerous regulations and taxation measures introduced in 2016. There’s no need to go into detail but as a result of extra Stamp Duty/Additional Dwelling Supplement burdens, a tapering of tax relief on mortgage interest, and changes in tenancy regulations in 2016, the attraction of being a buy to let landlord wavered due to higher financial burdens and higher property management issues. As Helen Crane reports, the buy to let tax changes saw 250,000 less rental properties bought between 2016-2021. This same report states that 81% of all rental homes in the capital were bought prior to April 2016. The positive result of this was that, as a consequence, stock has reduced and rents have increased.
Hamptons report that Scotland and the North have seen the fastest rate of rental growth than anywhere else in the country and also state that due to fewer rental homes in 2021 compared to pre-2016, rents are rising six times faster than inflation as the number of tenants returning to the city centre remains the same and prices are driven up due to scarcity value (lack of available stock on the market).
Locked-Down Life, Supply and Demand
Having spent the best part of the last 18 months inside their homes tenants are more aware than ever of their living space. The pandemic and Brexit have both affected the supply of maintenance materials.
In both London and Edinburgh the criteria for rental accommodation is now biased towards the following:
Balanced accommodation – evenly spaced, sensibly configured accommodation is in high demand.
Works sensibly as a WFH area – this doesn’t have to be a self contained study but there has to be an alcove or space in a room that works sensibly as a working area.
Outside space – gone are the security fears of living on a ground floor, even for single occupiers. Any sort of outside space is in high demand in the aftermath of several lockdowns.
Cleanliness, space and light – the 3 key features a prospective tenant looks for. Brilliant white and its relative sterility echoes those months of self-sterilisation to protect against disease. Room to comfortably co-habit with others is also key and a light, fresh space again echoes cleanliness and healthy living.
Well-maintained and good quality fixtures and fittings – another consequence of being cooped up indoors avoiding close contact with others is that tenants don’t want tradespeople entering the property.
Supply issues – Brexit has resulted in delays to products arriving for repair or replacement and any inconvenience to the tenant is a red flag and is best to be avoided. An unhappy tenant can result in a vacant property which equates to lack of income.
Continued Low Interest on Landlord Mortgages
2-year and 5-year fixed rate mortgages are currently available with rates as low as 1.18% and 1.44% respectively for 60% LTV lending. There are many diverse and flexible mortgage products available on the market as the buy-to-let market celebrates its 25th year this year.
As interest rates may probably increase over the next couple of years, buy-to-let investors are targeting these competitive products for leveraged investment now by compiling an acquisition strategy to take advantage of the 5 year fixed-rate deals currently available.
In November 2021, Zoopla reported the strongest level of annual rental growth across the UK as a whole in 13 years.
London Buy-to-let Market Overview
London rental values were the most adversely impacted in the UK as a direct result of the combined effects of Brexit and Covid-19. Mass population movement from the inner city to alternative domestic or non-domestic locations as the workforce adapted to working from home — and internationals were unable to return to the workplace or to education — resulted in the rental sector having to brace itself for a challenging 12 months as again and again lockdowns were implemented and business sectors battled with essential overheads.
However, as the country began to return to the ‘new normal’ under the vaccination rollout there has been a significant bounce in rental values as reported by Savills in Q3 2021 with Zoopla stating that average rental values in London increased by 5% for this period alone. To further support this figure, Rightmove has just confirmed that they have recorded a 5.6% increase in rental values for Q3 2021 which is further valid evidence that the market is on the turn.
My recent experience in Central London
There just is not enough available rental stock to meet current demand. This is across the whole of London. As reported by Marsh & Parsons an average of 31 people are chasing each letting and this is exacerbated by smaller landlords (those owning less than 4 buy to let investments) having departed from this sector post 2016 and diversifying into holiday lets or investments in Northern regions where acquisition prices are lower.
I have just advertised a property in Central London for which I received over 24 inquiries in the the first 24 hours. I was able to cherry pick a tenant, taking into account employment status, monthly income, past rental history, credit score etc and successfully negotiated extremely favourable terms for a fixed term contract with 4 months paid in advance.
For the buy to let investor this is a very compelling statistic indeed.
Edinburgh Buy-to-let Market Overview
Every major city in Scotland is experiencing high demand for rental accommodation as there just isn’t enough stock available to cater for influx of students, workers and internationals returning to the city.
Multiple inquiries for each advertised property is now standard. I just advertised an Edinburgh property for rent which received another 40 inquiries with incentives being offered by prospective tenants to secure it. According to Citylets there is a 65% reduction in available stock to let. They further report that many letting agents are calling it ‘the strongest and most sustained period of letting activity on record’ and that 3 bed accommodation has seen the sharpest increase in rent over the past 10 years with a 53% increase followed closely by 4 bed accommodation which has enjoyed a 49% increase in rental values. Both the 1 and 2 bed properties are not dissimilar, with Citylets reporting 46.9% and 44.6% increase in rents over the past 10 years. As more landlords leave the market due to increased tax burdens and more onerous tenancy regulations these rental values are looking like they will only continue to rise as stock grows scarcer.
Conclusion
While uncertainty and increased costs and bureaucracy continue to affect the rental market, a lack of rental stock which is predicted to exacerbate over the coming years means rents are very likely to keep growing in the London and Edinburgh markets.
With the right expert in place to take manage the details of the buy-to-let process, you could enjoy the benefits of these predictions by diversifying into property investment. If you would like to discuss how I could help with your property investments, get in touch today.
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