Many private investors’ horizons in the property market extend no further than buy-to-let. But with financial and licensing legislation increasingly loading the dice against residential landlords, the time has come to explore pastures new.
The rise and fall of buy-to-let
Even at its peak, buy-to-let could be pretty hard work if you ran the property yourself. If you appointed a managing agent, it had an unwelcome effect on yields, which might just reach 6-8% gross if things were going really well.
Void periods were always a concern, but on the plus side there were tax and planning breaks which made buy-to-let a reasonable proposition – especially if you were handy with a tool belt.
There was a ready-made tenant market across the UK made up of students, who at the end of their first year were largely excluded from university halls of residence in favour of a new intake of freshers. They weren’t particularly fussy about the finer points of domesticity (which saved the landlord a few pounds), nor were they bothered if a sitting room or a lean-to suddenly became an extra bedroom. For the landlord, of course, such conversion into a home in multiple occupation (HMO) meant a couple of welcome extra rents each year.
Another popular investment was the holiday let; while it wasn’t always a guaranteed money-spinner for 12 months of the year, the peak and shoulder seasons allowed landlords to charge absolutely top dollar during periods of higher demand which subsidized the void periods. It also gave landlords a nice little bolthole when they fancied a free break.
Unfortunately, there wasn’t just one, but two flies in the ointment.
Outstanding performance of UK universities
After decades and decades of steady growth, the British higher education system went into overdrive.
Of the UK’s 135 universities, nearly half have been created this millennium and the consequent increase in the student population has been substantial.
Four consecutive years of record intakes and the removal of the admissions cap in 2015 means there are now 2.3 million students enrolled at UK higher education establishments. And, as we’ve noted, the universities can’t house them.
The dwindling supply of UK housing
Our population is growing, we’re living longer and too many of us live alone. Property prices are prohibitive for first-time buyers and there’s a desperate shortage of family rental accommodation. The Royal Institution of Chartered Surveyors forecasts a housing undersupply of 1.8 million by 2025 – just 8 years away.
With students and families all in need of accommodation from a painfully finite property pool, something had to give. Sadly for buy-to-let landlords, it was them.
Out with the old…
The first step in the campaign against owning multiple properties was the imposition of a 3% surcharge on Stamp Duty for all second home purchases. Also, any owner wishing to convert the property into an HMO could now be subject to stringent local planning and licensing regulations.
The next was the removal of the flat rate 10% wear and tear concession; now landlords can only claim for actual expenses incurred.
The beginning of the endgame was the phasing out from April 2017 of tax relief on mortgage repayments – to be abolished totally in 2020.
Mortgage borrowing conditions have been tightened to choking point, and affordability tests and total portfolio scrutiny have added layer upon layer of bureaucracy and uncertainty to the prospective investor’s burden.
…in with the new
But of course, this higher education sector which contributes so much to the UK economy needs to have its students housed; at the same time, the universities need to concentrate on delivering outstanding facilities and academic excellence – not halls of residence.
By classifying purpose built student accommodation as commercial property, the government is extending a welcome to private sector investment. Commercial property is not liable to Stamp Duty until £150,000, way above the average student property price, nor to Capital Gains Tax when it’s subsequently sold.
Serviced apartments receive the same classification. UK tourism is at an all-time high, with the weak pound attracting both record numbers of overseas visitors and ever-increasing domestic staycationers. These units are the star performers in our hospitality industry.
Open to all investors
Understandably, when people see a student block being built, or a holiday complex, they often assume that it’s being put up by a university or a leisure operator.
But it probably isn’t – the chances are it’s being put up by a private sector developer who is keen to spread the site purchase and construction costs across multiple unit owners – usually 100+.
This is why prices start below £50,000 – which isn’t just excellent value, it actually compares favourably with the deposit required for many buy-to-let mortgages.
Absentee landlords welcome
These new-style investments come with a new-style, hands-off operating structure.
Onsite management teams are charged with delivering maximum occupancy, taking care of every aspect of the property’s operation – letting, collection of rent, delivery of yields, along with all repairs, maintenance and replacements to keep your property in peak condition and enhance its appeal to tenants and potential buyers alike.
After purchase, you really never have to lift a finger – your income is truly effortless.
And what an income – if you look around carefully, you should find a property that delivers a contracted 8-12% NET every year for 10 years. But do make sure it’s genuinely a NET income – after purchase, you should never have to pay out another cent during those 10 years – no ground rent, no service charges, nothing at all.
The length of income period is important – some developers offer shorter periods which could leave you lumbered when it comes to resale. They also offer lower fixed yields; together, these factors indicate that a property has an artificially inflated sale price to give the developer an upfront profit with no concerns to your future security.
A fully transferable 10-year term, on the other hand, will allow you to offer a buyer an irresistible income at resale, while making yourself up to 40% capital growth.
How long will the demand be there?
James Harrington, Business Development Manager at specialist agents Emerging Property, is bullish about the prospects for both sectors – “Right now, across the UK, 74% of students can’t find a place in purpose built student accommodation – that’s a real shortage.
“My only caveat would be that this is a national figure and so to pick your location carefully – some cities like Liverpool and Manchester are actually approaching saturation. We tend to focus on less obvious but hugely successful regional universities, like Stoke-on-Trent – where the undersupply of student housing is verging on the chronic.”
When it comes to serviced apartments, Harrington recommends tried and tested locations with proven visitor appeal – “The last few years have seen record overseas visitor numbers to the UK, but the state of the pound has also stimulated the domestic staycation market. People will always flock to the British seaside and popular resorts, such as Ilfracombe and Westward Ho!, are proving a big draw for investors as well.”