Buy-to-let investment in the long-term still has strong potential to beat savings rates by a significant margin over the coming years, despite tax increases.
This is according to Allsop’s latest issue of The Rent Check, a barometer for the rental market in England and Wales published with BDRC Continental.
In brief:
· 36% increase in landlords expect rents to rise over the next six months compared to the same period last year
· 44% of landlords rate the prospects for their own letting portfolio as ‘good’ or ‘very good’ for the next three months
· Landlords more optimistic about rent increases compared to same period last year
· Assuming Office for Budget Responsibility national forecasts, London is the worst performing region – 5.75% pa for basic rate tax payer over five years compared to 11.25% for East Midlands and Yorkshire.
The survey reveals that 37% of landlords anticipate growing rents over the next six months, a year-on-year increase of 36%, and 44% of landlords had ‘good’ or ‘very good’ expectations for their own letting portfolio over the next three months.
However, the percentage of landlords intending to purchase one or more property in the next 12 months fell to 16%, the lowest level in just over four years, since the Rent Check begun in the autumn of 2012. Around four fifths (83%) of landlords reported that obtaining buy-to-let finance had become more difficult in the last six months.
For each region, The Rent Check has calculated the estimated annual return for three, five and ten year periods after tax for basic rate 20% tax payers and 40% tax payers, and has analysed rental yields, house price growth and running, finance and legal costs. For this analysis, variables applied included borrowing based on a 145% rent cover at an assumption of 5.25% interest rate, a five-year fixed term mortgage at an interest rate of 3.25% and 4.5% for the remainder of the term and running costs of 25% of income.
Using Office for Budget Responsibility national forecasts for wage growth and house prices, the top performing regions for indicative returns are the East Midlands and Yorkshire, with returns of 11.25% per annum over a five-year period for a 20% tax payer, and a still significant, 9% per annum for a 40% tax payer. Using the same national analysis, London was the worst performing region at a still respectable 5.75% per annum for 20% tax payer and 4.75% per annum for a 40% tax payer over the same period. Of the landlords polled, 45% were higher rate income tax payers.
Paul Winstanley, partner at Allsop, said: “For those with equity to invest, buy-to-let returns still have the potential to outstrip savings accounts over the long term. Whilst tax changes and toughening lending criteria is challenging landlords, most are in it for the long term and we still only expect a small minority to exit as the tax changes feed through.
“With no quick solutions to the housing crisis, long-term private landlords providing decent accommodation will continue to play an important role in housing our population. As long as there are no new tax rises targeting landlords, buy-to-let will remain a stable and attractive sector for long-term investors.”