The recently-announced changes to tax and mortgage interest relief for landlords seems to suggest...
The recently-announced changes to tax and mortgage interest relief for landlords seems to suggest that individual landlords have fallen out of favour with the government, while large institutional landlords, such as Grainger and Legal and General, or housing associations such as Derwentside and Orbit Group, are the Government’s preferred providers of rented accommodation.
The first support large landlords received was via the ‘build to rent’ fund, which was first announced in 2012, with funding allocated in April 2013. The Government made £1 billion available to help support building projects that were to be rented out. The fund makes a loan available, which can cover a maximum of the agreed development costs. Being a loan, the money does then have to be paid back through refinancing or selling the properties to institutional investors, such as pension companies.
45 projects received funding in the first instance, with 25% of the monies going to projects in London. Some of the funding went to private schemes, including Grainger, who secured funding for 219 homes in Gun Hill & Military hosp, Aldershot, and a further 104 homes in Berewood, Waterlooville, in Hampshire. Other monies went to housing association schemes such as Genesis, for which the Government helped to fund 485 homes across Chelmsford, Barnet, Ealing and Newham.
The expectations are that this ‘build to rent’ initiative alone will bring 10,000 extra rental homes to England. The properties can be rented at market rate, i.e. what tenants can afford, but some could be rented at 80% of market rent, classed as ‘affordable’.
The good news for individual landlords is that 10,000 new rental homes is a drop in the ocean, compared to the number of rental properties that already exist and are required for the future. Currently, the formation of new households is projected to grow at a rate of 210,000 annually between 2012 and 2037. With 15-20% of the population renting in today’s market, that could mean a requirement for an additional 30,000 to over 40,000 new properties a year. So the extra 10,000 rental properties is likely to have minimal impact on individual landlords overall.
However, there is a ‘but’ to this, because the support given to large-scale landlords does impact at a very local level. Unlike private sales of new-build development sites, which may number 50-100 units a year, these larger-scale rental projects will typically come onto the market at the same time and the landlord needs to rent the properties quickly to start recouping funds. In addition, if some of these new builds are being rented at 80% of the market rate, it could make it much harder for an individual landlord to let their property, particularly if they are trying to get full market value, and it may be necessary to reduce the rent to secure a tenant.
The second benefit that larger landlords will have moving forward is, because they operate as a company and are likely to buy 15 or more properties at a time, they will be exempt from the planned additional stamp duty costs and won’t be affected by the changes to mortgage interest higher rate tax relief, as companies pay a lower rate of tax. In contrast, most individual landlords will be financially adversely affected, some in a significant way.
Finally, larger landlords tend to be fairly rigid about putting through annual rent rises in line with inflation. In comparison, individual landlords tend not to increase rents to existing tenants, only raising them when the property is re-let. Although it’s worth knowing that from April 2016, housing association providers will have to reduce rents by 1% each year for the next four years.
So can individual landlords survive against large, institutional ones that are heavily supported by the Government?
The answer is a definite yes, especially in areas where there is a stock shortage. But you need to know whether these big landlords are moving into your area, as initially it could cause a glut of properties on the market, which will reduce rents, at least in the short-term. If these properties are coming to your area, it is worth considering you have let your properties prior to the new stock coming onto the market.
Secondly, they are worth learning from. If they increase their rents every year in line with inflation, you as an individual landlord should be doing the same - or at least putting rises through in line with wage growth (currently around 2-3% according to the Office of National Statistics). Although this may be tougher on your tenant, it means you should be earning enough money to make sure you can let the property legally and maintain it properly on their behalf. When you factor in inflation, not increasing rents each year means you are effectively cutting your own wages and will therefore have to cut costs if you want to maintain profit levels.
For more help on how to maximise your rent and find out what’s happening in your local market, please contact your Belvoir team at Belvoir Warrington...