- Rental growth accelerated outside London in December, as tenant numbers increased
- Potential taxation changes and pressure on household income may dim the appeal of the market
After her tenant stopped paying rent over a year ago, landlord Candy Richards has stomached £7,000 in arrears from the single property she lets. “As a landlord it’s definitely made me think long and hard about whether I want to continue renting out that property,” she says. Mooted reforms to the Capital Gains Tax (CGT) regime have added to the feeling that the government is not on the side of landlords, she says.
Ms Richards is not alone in questioning her future in the market. A third of landlords surveyed by the National Residential Landlords Association (NRLA) at the end of last year said that they were more likely to either sell some or all of their properties, up from around a quarter during the third quarter. The risk of missed rent payments and a potentially higher tax bill under proposed CGT reforms have made the buy-to-let market more precarious.
Yet there was a sharp acceleration in rental growth in December, which rose by an annual 4.1 per cent, according to data from Hamptons International, marking the fastest rate of rental growth since July 2016. London rents also increased by 1.6 per cent, after turning positive in November for the first time since the onset of the pandemic. However, rents in inner London plunged by 11.5 per cent as a decline in tourism, corporate travel and student demand led to a jump in properties on the lettings market.
Richard Davies, head of lettings at Chestertons, said the estate agency had seen an increase of more than 90 per cent in properties on the London market in December. Together with falling demand, that prompted more landlords to offer a month rent-free to secure a tenant before Christmas, which helped boost enquiries via online property portals by an annual rate of 69 per cent. That is a trend that some landlords have continued this month, he adds. “Particularly those where they have got a whole building that they own and they don’t really want to reduce the rent,” he says.
The rise in rents outside the capital could be due to the steep fall in properties available to let, says Aneisha Beveridge, head of research at Hamptons. “I think it probably does come down to that supply and demand imbalance,” she says.
The number of homes for rent fell by double-digit percentages in every English region – except for London – in December, while prospective tenant numbers surpassed 2019 levels for the first time since the onset of the pandemic.
The extension of the government’s furlough scheme may have been one factor in boosting tenant numbers, says Ms Beveridge. “Another possibility was the threat of another lockdown, perhaps people wanted to get on and move before that happened again,” she says.
But will rising rents continue? Respondents to the latest Royal Institution of Chartered Surveyors residential survey said they expected rents to increase everywhere except London over the next three months, with a net balance of 15 per cent reporting higher tenant demand in December.
However, the anticipated rise in unemployment and potential affordability constraints will provide a challenge this year. “We still haven’t seen the full impact of the economic crisis and what that means for people’s jobs and income,” says Ms Beveridge. “We are probably not going to see the worst of that until the summertime.”
Just over half of landlords surveyed by the NRLA during the fourth quarter said they had lost some income due to the pandemic and around a fifth had lost over £5,000. Gaining repossession of a property has become a lengthier process, partly due to landlords being required to give tenants six months notice to vacate the property, save for some exceptional circumstances.
Some landlords that can afford to do so have offered struggling tenants the option to defer the rent until they are in a better financial position, says Elizabeth Oxendale, associate at law firm Forsters. “Some of the landlords I’ve been working with have taken the view that it’s better to have a tenant paying some rent, even if it’s a lower rent, rather than a tenant paying no rent for up to a year potentially,” says Ms Oxendale.
Despite the gloom among some investors, others have been caught up in the rush to take advantage of stamp duty savings ahead of the deadline for the tax break on 31 March. In November, investors buying property to let accounted for 15 per cent of sales agreed in the UK, the highest proportion in four years, according to data from Hamptons International. Over the entire fourth quarter that figure stands at 13 per cent, which the estate agency estimates translates into just over 51,000 completions, the highest figure for that quarter since 2015.
The stamp duty break is useful for landlords, says Chris Norris, director of policy and campaigns at the NRLA, particularly given the prospect of lost income elsewhere. However, he adds: “I certainly wouldn't want someone to disregard the current risks of more unemployment and greater difficulty in renting out property just because they were having to pay a smaller stamp duty upfront.”
The spectre of reform to the CGT regime is another risk to consider, particularly for those with smaller holdings. The Office for Tax Simplification has proposed that CGT be brought into line with income tax rates and the annual allowance for the tax cut from £12,300 to as low as £2,000. Currently, CGT on sales of second homes is charged at 18 per cent for basic income rate taxpayers and 28 per cent for higher rate payers. However, since companies do not pay CGT, any buy-to-let properties owned by a limited company would not be affected. Last year a record number of limited companies were set up to let property – a trend that could be hastened further if the proposed reforms take effect.
The affordability challenges associated with gathering a deposit remains the core impediment to first-time buyers, according to Nationwide’s latest affordability report, despite the low cost of mortgage borrowing. That is a difficulty that looks set to continue driving demand for rental homes. However, the spectre of a tighter squeeze on household budgets, along with a potentially higher tax bill, mean buy-to-let investors should weigh the market risks more heavily this year.
