In essence, the Budget – like many a good football match – was a game of two halves, particularly for landlords.
A somewhat pleasing start with your ‘team’ as an underdog, only to find that what you feared – an increase in CGT levels for the sale of second homes – doesn’t materialise, followed by an unexpected hammer blow of a last-minute concession, or in this case, the increase in the stamp duty surcharge from 3% to 5%.
In all the pre-Budget previews I had read, not one had suggested the Government was likely to go down this increase in stamp duty route and the fact it was introduced with immediate effect meant there was no chance of any sort of pre-change cliff-edge which landlords could take advantage of.
Instead, we now have this greater charge and no change to CGT, which I would suggest the Government believe is going to help steer more landlords into selling up now, rather than waiting, at the same time attempting to put off landlords from adding to portfolios.
Whether this has the desired impact, we should all know this is a bad Government take on what the private rental sector really needs, given how a lack of supply and a growing demand has resulted in the significant increases in rents we have seen in recent years.
It is quite obvious that if rents are to become more expensive – as seems likely – then it is going to take would-be owner-occupiers that much longer to save up for a deposit, which keeps them in rental properties for longer, at the same time as you have more demand fighting it out for less homes.
Quite simply, the cost of purchasing more properties for landlords has gone up, and the supply also isn’t there. As the Government will learn, you can’t just conjure up 1.5 million new homes overnight.
So, where might this leave the buy-to-let and PRS sectors? Well, it clearly makes purchasing more expensive but I doubt it will put off those already deeply entrenched in the sector. They will still need remortgages, they will still be looking for opportunities, and they will take them albeit by having to pay more tax to do so.
Those huge swathes of landlords who the Government is now expecting to sell up, I don’t believe exist in any significant numbers. Plus, keeping CGT the same means they won’t get hit harder for selling, so why might they sell?
Especially when you consider that rental yields remain very strong, dipping slightly off their highs according to our most recent Rental Barometer, but not likely to dip much further.
At the same time, mortgage costs are also not as high as they used to be, and while the jury might be out in terms of how far and fast rates will fall over the next year or two, they are likely to be less costly and this will deliver stronger yields and stronger profitability, because rents – as mentioned – are not likely to fall.
It presents a positive picture for existing landlords who can stay invested, maintain rental levels, secure good long-term tenants, with the caveat that the Renters’ Reform Bill might throw a spanner in the works in terms of how the landlord/tenant relationship will work in the future.
We will have to see how that plays out, but if landlords can secure greater levels of profitability then they of course will be in a better position to purchase and add to portfolios, even with this new extra stamp duty charge.
I’m not suggesting this isn’t a complicated picture but certainly for professional/portfolio landlords this sector continues to present a strong investment opportunity, with higher yields and lower mortgage costs driving greater profits which can be utilised alongside the increased capital values that property still offers over a long-time horizon.
Again, we find ourselves in a position where the landlord population, and therefore the advisers and lenders that service them, has to cut its cloth accordingly, but also where the fundamentals – strong tenant demand, a lack of property, the continued difficulty in getting on the housing ladder – all continue to work in their favour.
The opportunities remain to be grasped, and if we do see some rate drops, then I suspect not only will those already active see further advantages in growing their investments, but those who also want to diversify their assets will continue to see the obvious positives in doing so via property.
Overall, it was not the full 90-minute Budget performance we wanted, but it was also not a season-defining result that many had feared.
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Steve Cox
Chief Commercial Officer
Fleet Mortgages
