What next for buy-to-let? - Hamptons International Research Spring 2018
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
What next for buy-to-let? Hamptons International Research Spring 2018
WHAT NEXT FOR BUY-TO-LET? Contents 2 Executive summary 3 Hidden figures 5 Yields: Unpicking the average 7 Total returns 8 Comparing gains 9 Build to rent
WHAT NEXT FOR BUY-TO-LET?
Executive Summary
• Despite changes in government policy the
private rented sector will continue to grow. Hamptons
International Research estimates there will be six million
households renting by 2025.
• Cash purchases are hugely important in the sector,
insulating it from regulatory and tax changes. 65% of
investor purchases were made with cash in 2017 adding
up to £21 billion worth of property.
• Strong house price growth has shrunk yields for new
buyers, especially in the South, but buying wisely brings
benefits. Average yields in London are 5.4% compared
with 7.9% in the North West, yet 20% of London landlords
achieve higher yields than their North West counterparts.
• Total landlord returns are a combination of rental
income and capital gain. On average, landlords selling
in 2017 made a total gross return of 69% over 8.5 years.
60% of that return was from rental income and 40% from
capital appreciation. Higher house price growth in the
South means capital appreciation accounts for more than
half of total returns.
• Lower house prices and weaker expectations of price
growth in the South are making the North more attractive
for landlords.
• The build-to-rent market is growing quickly in the
UK as interest from investors and tenants grows. Homes
within these schemes attract a rental premium of up to
25% above an existing flat in the private rented sector, or
11% above a new build flat.
2WHAT NEXT FOR BUY-TO-LET?
Hidden Figures
The outlook for the private rented sector (PRS)
Why recent policy changes won’t stop the
growth of renting
Landlords are buying fewer homes. Since the introduction trying to sell their homes decided to put those sales on hold
of the 3% stamp duty land tax (SDLT) charge in April 2016, and rent out their properties.
landlords have sold 50,000 more homes than they’ve
bought. Investors only made up 12.3% of purchases in 2017, Many landlords also inherit property. Statistics on
compared to 16.4% in 2015. Landlords seem to be thinking Inheritance Tax from the Office for National Statistics
twice before adding to their portfolio or replacing homes (ONS) show 200,000 estates were inherited in the 2014/15
they’ve sold. financial year that included a residential building. Most
years at least 200,000 homes change ownership through
Despite landlords selling more homes than they bought, inheritance. Many of these homes will be sold or used by
the private rented sector in England continued to grow in the heirs as a family home, but recent research from UK
the 12 months after the introduction of the higher stamp Finance shows that 16% of landlords acquired their property
duty charge. Between April 2016 and 2017 the number of without a purchase, which would include inheritance. While
households renting increased by 164,000, 3% more than we can’t apply these numbers to total rental households,
2016. We forecast that the sector will continue growing they do show that a meaningful amount of rental stock
in 2018, and over the next five years. By 2022, 20.5% of comes from inheritance, with a larger number supported by
households will be renting in Great Britain, up from 19.4% funds gained from inheritance.
today. By 2025 the sector will reach six million households.
In recent years we’ve seen the growth of a new part of the
Continued growth of the private rented sector may come rental market too, the professional build-to-rent market.
as a surprise in an environment where landlord purchase Generally, blocks of flats purpose-built to rent, owned and
activity has fallen, but there are greater forces at play. The operated by professional organisations. The sector only
growth in demand for rented homes is being driven by accounts for a small part of the industry today, but we
long-term structural shifts in demographics and the housing estimate there are more than 100,000 units in the planning
market, many of which aren’t unique to the UK. House pipeline and that is set to continue growing.
prices consistently growing above incomes has raised the
barrier to entry for many people, driving a steady decline These three sources of rental property, which are not
in home ownership and growth in demand for renting. dependent on individual landlords purchasing new homes,
The performance of property as an investment has also explain how the sector can expand while landlord purchase
discouraged owners from selling surplus property. numbers are sluggish. This means that, despite recent
And, a decline in social housing has seen more tenants policy challenges, ongoing changes to demand from long-
on housing benefit, seeking accommodation in the private term structural shifts in the market are helping landlords’
rented sector. wealth and purchasing power.
There are many routes homes can take to Tenure split (England)
the rental market
9,000
There are more ways for a home to make it into the rental 8,000
market than being bought for that purpose. A common 7,000
source of property for landlords are homes that were 6,000
Households
previously a main residence or second home. Couples who 5,000
4,000
are both homeowners moving in together, relocation for 3,000
work or simply keeping a starter home as an investment. 2,000
We tend to see a larger number of these moving into the 1,000
-
rental market when price growth and activity slows in the Cash Owner Mortgaged Owner Private Renters Social Renters
sales market. We estimate that in 2017, 80,000 homeowners
Source: English Housing Survey
3WHAT NEXT FOR BUY-TO-LET?
The sector is anchored by large amounts of housing wealth Tenure growth over 25 years
There is an incredible amount of wealth tied up in housing. The latest ONS
Growing Falling
Wealth and Assets Survey estimates there to be £4.6 trillion of housing wealth, Year
most most
a third of total household wealth. Alongside that, the English Housing Survey
shows 1.3 million more households own their homes outright than own with the 1993 PRS Social
help of a mortgage. Cash owners are the biggest of any tenure group, and their
1994 Cash Social
numbers have increased for 23 out of the last 25 years.
1995 PRS Social
The same is true for landlords, most individual landlords have no debt on their
rental property. 65% of investor purchases were made with cash in 2017, £21 1996 PRS Mortgage
billion worth of property. A similar proportion of landlords have no mortgage on
their existing portfolio too. 1997 PRS Social
1998 Cash PRS
This volume of cash has been able to build up largely through high house
price growth over the past 25 years, driving growth in landlord total returns. On 1999 Cash PRS
average 40% of a landlord’s return comes from capital growth. This helps us
understand investor behaviour today, house price growth is a key part of their 2000 Cash Social
return. It is no coincidence that the biggest falls in investor activity have been in
London, where the outlook for house price growth is currently weakest. 2001 PRS Mortgage
2002 PRS Social
The mass of cash in the market alongside increasing institutional interest in the
private rented sector is acting as an insulation to changes in policy and credit 2003 PRS Social
availability. This is creating a firm foundation on which the sector can continue to
grow, particularly as the drivers of demand for rented homes will continue. 2004 PRS Mortgage
Our forecasts for growth of the number of households renting 2005 PRS Social
7,000 2006 PRS Mortgage
6,000 2007 PRS Mortgage
5,000 2008 PRS Mortgage
Households Renting
4,000
2009 PRS Mortgage
3,000
2010 PRS Social
2,000
2011 PRS Mortgage
1,000
2012 PRS Mortgage
0
2013 PRS Social
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Actual Forecast Source: EHS & Hamptons International Research 2014 PRS Mortgage
Cash Owners: 7 years highest growth 2015 Cash PRS
Private Renters: 19 years highest growth, 4 years lowest growth 2016 PRS Mortgage
Mortgaged Owners: 12 years lowest growth
2017 PRS Mortgage
Social Renters: 10 years lowest growth
4WHAT NEXT FOR BUY-TO-LET?
Yields: Unpicking the Average
Landlords achieve a wide range of yields
In recent years the market has become less favourable are low who buy wisely and manage to outperform others in
for new landlords. Despite higher rents, a landlord buying places where the typical yield is higher.
now will be unlikely to achieve the yield available five years
ago. Since 2013 house prices have consistently risen faster Despite high house prices depressing yields in London,
than rents, squeezing landlords’ yields on new purchases. 20% of London landlords achieve higher yields than their
The average investor buying in 2018 starts off with a rental average counterpart in the North West. And even in the
return 0.6% lower than if they had bought in 2013. capital’s most expensive neighbourhoods, with some of the
lowest yields in the country, many investors substantially
Yet behind the figures describing the ‘average landlord’, outperform the market. The 10% of landlords in Westminster
there are many investors outperforming their peers. This achieving the highest yields achieve more than the average
doesn’t just mean landlords are heading North for lower Newcastle landlord – 7.8% compared to 7.4%.
prices and hence higher yields - although many do. Even
within a local authority the 10% of landlords achieving the Underpinning a yield is the price that a landlord pays for a
highest yields earn 4.1% more than the average landlord in property and how much rent a tenant is willing to pay for
the same place. Conversely the 10% of landlords earning the it. Our yield measurement is gross, a comparison of prices
lowest yields get 2.3% less than average, or £3,900 a year paid on recently purchased homes and the rents achieved
less in rental income. on those individual properties. That means to increase
yields landlords can either buy well or let well (i.e. achieve a
A landlord’s yield is the product of both market rents and higher rent). But by some margin it is the level of buying well
house prices in an area. Around two-thirds of the typical rather than letting well which separates the most and least
yield comes from where in the country an investor chooses successful landlords. On an average home, the difference
to buy, while the remaining third is a product of how well in rent between a landlord who achieves a top 30% yield in
they negotiate when buying and letting a property. This a neighbourhood and one who achieves the lowest 30%, is
means there are landlords in places where average yields just £20 per month.
The yields landlords achieve in London and the North West
30%
25%
Proportion of landlords
20%
15%
10%
5%
0%
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%
Yield London North West
Source: Hamptons International Research
5WHAT NEXT FOR BUY-TO-LET?
While there is a hefty £41,000 difference between what the In practice this means more investment decisions being
two sets of landlords pay for a similar property. And in the driven by potential yield and less by a property simply being
last couple of years this figure has been magnified further just down the street from the landlord. Furthermore, slower
by the introduction of the 3% investor stamp duty surcharge. house price growth over the last year means landlords will
For the average landlord the amount paid for a property has have to pay more attention to yields than before.
around three times the impact on their yield as the level of
rent they are able to achieve.
Some of the ways landlords achieve top yields
This £41,000 figure is explained by how well landlords
Buying well Getting the best rent
negotiate with the seller, the type of home they buy, the
amount of work they are willing to undertake and their ability 1. Leverage flexibility 1. Marketing when most
to efficiently utilise space within the property. Landlords tenants are looking
achieving the top 10% of yields in a neighbourhood routinely 2. Not competing with 2. Offering a home that’s
do all these things, paying around a third less for a home owner occupiers ready to move into
comparable to one bought by the average landlord in the
3. Converting a house into 3. Renting rooms rather than
area. Those who manage costs well stand to gain the most. flats the whole house
For landlords, yield will be increasingly important in 4. Buying something 4. Tailoring to a potential
attractive to tenants tenant
the future. In part this is down to lenders taking a more
cautious view on landlord’s returns but, it is also down to 5. Ensuring charges and 5. Remembering a tenant’s
the professionalisation of the sector, with larger numbers of maintenance costs are track record is as
low important as the rent
portfolio landlords running their properties as a business.
How much purchase price and achieved rents affect landlords’ yield
40%
30%
% difference to the average landlord
20%
10%
Bottom Median Top
0%
10% 10%
-10%
-20%
-30%
-40%
Landlords paying higher Landlords paying lower
than average purchase Price difference to average Rent difference to average than average purchase
prices while achieving prices while achieving
lower than average rents. higher than average rents.
Source: Hamptons International Research
6WHAT NEXT FOR BUY-TO-LET?
Total Returns
Capital gains are important
Although one of the most attractive benefits of being a The average landlord who sold in 2017 made a gross total
landlord is receiving a regular stream of income from rent, return of £185,094, including 8.5 years of rental income and
a substantial proportion of investors’ overall return comes the difference between the buying and selling price of the
from capital growth. But landlords can only see these property. On average, this equates to a total gross return
returns once they sell up or re-finance. Landlords who sold of 69% over 8.5 years, which works out at an 8.1% average
in 2017 had typically owned their property for eight and a annual gross yield. 60% of that return comes from rental
half years and sold it for an average £87,263 more than they income and 40% comes from capital appreciation, but the
paid for it. This equates to a gain of 54% on their composition varies across the country.
initial investment.
In the South, where prices have risen fastest, capital
In 2017, 88% of landlords who sold their buy-to-let property appreciation makes up the largest part of a landlord’s return.
made a capital gain. With the highest house prices and This is particularly true in London where just over half of a
strongest price growth, sellers in London and the South landlord’s total return comes from capital appreciation.
East made the most in absolute terms. The average London
landlord made a gain of £263,000, over 10 times that of a In contrast, rental income is much more important in the
seller in the North East. In fact, one in four London landlords North. 71% of a landlord’s total return comes from rental
selling up last year doubled their money. Landlords in the income compared with 54% for the average landlord in the
South East were most likely to make a profit, with 96% South. But as house prices have risen faster than rents,
selling their property for more than they paid for it. overall gross returns of capital and income are much higher
in the South.
Total returns vary across the country…
Even though the prospect of regular rental income drives More landlords are choosing to invest further North, which
landlords, capital appreciation is becoming more important may suggest their priorities are changing towards favouring
to help offset the additional costs from the squeeze on net a long-term income stream over fast capital growth. In any
yields from the tapering of tax relief on mortgage interest event the stamp duty surcharge for second homeowners will
and the 3% stamp duty surcharge for second homeowners. encourage landlords to hold onto their property for longer to
recoup the extra cost. The lure of lower purchase prices with
the potential for price growth is also likely to be a driver.
The composition of total returns
% of total gross
Average yield of top 10% % of total gross return
Region Average yield return from capital
landlords from rental income
appreciation
London 5.4% 9.3% 49% 51%
East of England 5.8% 9.2% 54% 46%
South East England 5.6% 8.8% 54% 46%
South West England 5.8% 9.0% 61% 39%
East Midlands 6.8% 10.3% 65% 35%
West Midlands 7.0% 10.8% 66% 34%
Scotland 6.7% 10.3% 68% 32%
Wales 7.4% 11.3% 69% 31%
North West England 7.9% 11.9% 70% 30%
Yorkshire & Humber 7.3% 11.9% 71% 29%
North East England 8.7% 13.0% 75% 25%
Great Britain 6.1% 9.8% 60% 40%
Source: Hamptons International Research
7WHAT NEXT FOR BUY-TO-LET?
Proportion of return from capital appreciation
Over 50%
40% to 50%
35% to 40%
30% to 35%
Under 30%
Source: Hamptons International Research
8WHAT NEXT FOR BUY-TO-LET?
Comparing Gains
Homeowners and Investors
Landlords tend to make smaller gains when selling their The average owner-occupier selling their property in 2017
property than owner-occupiers. The average owner- owned it for nine years compared to eight and a half years
occupier selling their home in 2017 made a £92,886 profit, for a landlord, which gives them more time to capture price
that’s 6% more than the average landlord gain. But the growth. But homeowners also tend to spend more on their
gap is due to the difference in the length of time each own home, which helps support the value.
their properties for, rather than their ability to ‘buy better’.
Owner-occupier v. Landlord gain
Owner-occupiers Landlords
Over £100,000 Over £100,000
£80,000 to £100,000 £80,000 to £100,000
£60,000 to £80,000 £60,000 to £80,000
£40,000 to £60,000 £40,000 to £60,000
Under £40,000 Under £40,000
Source: Hamptons International Research
Owner-occupiers Landlords
Average Average Proportion Average Average
Proportion
Region capital gain capital gain making capital gain capital gain
making a gain
(£) (%) a gain (£) (%)
London £250,744 108% 98% £263,523 96% 95%
South East £128,714 70% 97% £107,513 61% 96%
East of England £114,605 76% 98% £83,820 58% 94%
South West £82,801 59% 94% £56,773 45% 90%
West Midlands £56,737 52% 92% £39,679 39% 85%
East Midlands £56,168 56% 93% £38,485 44% 87%
North West £47,897 53% 86% £33,935 43% 78%
Yorkshire & Humber £45,146 50% 85% £31,921 38% 76%
Wales £43,437 55% 86% £30,490 42% 78%
North East £32,458 43% 77% £24,427 33% 70%
England and Wales £92,886 64% 92% £87,263 54% 88%
Source: Hamptons International Research
9WHAT NEXT FOR BUY-TO-LET?
Measuring the Build-to-Rent Premium
So far investors for the most part have maintained high premiums
As the demand for rented accommodation has increased, Such facilities make these schemes more attractive to
the build-to-rent market across the UK has grown too. residents, creating a price premium for the investor,
The East Village in Stratford was home to the first large above both a comparable new build flat and existing
build-to-rent scheme in recent years, but the model soon private rented homes.
spread to other UK areas such as Portsmouth, Ilford,
Bath and Basingstoke. Hamptons International Research Most new build properties achieved a rental premium
estimates that there are now 113,000 build-to-rent units compared to second-hand homes. With the added bonus
currently under various stages of planning in Great Britain. of extra on-site facilities, the build-to-rent premium is greater
The number of build-to-rent applications have been than the new build premium. On average the premium
increasing rapidly throughout 2017, and compared with a associated with a build-to-rent product is 9% against a
year ago, applications have doubled. new build property outside of a scheme and 24% when
compared to the existing market. This can be further
Of current applications about two-thirds are in London with separated out by bedroom types:
the remaining 47,000 in other towns and cities. But the
bias to London has been changing and Manchester is now 1 bed build-to-rent premium against the new 11%
showing the largest increase in planning applications for build market
build-to-rent schemes. The types of investors funding build-
1 bed build-to-rent premium against the 25%
to-rent are changing too. In particular more public and third
existing stock
sector organisations, such as Local Authorities and Housing
Associations, are entering the market. Planning to help 2 bed build-to-rent premium against the new 7%
build market
relieve the shortage of housing in their localities, but also
contributing to revenue to fund more housing development. 2 bed build-to-rent premium against the 22%
existing stock
The demographics in the UK have also led investors to
diversify their offerings to build the right types of homes Source: Hamptons International Research
for the changing needs of the people living in our cities.
Many schemes target the young professional market in A premium of course translates into higher rents,
large cities, but some build-to-rent homes are now also itself raising the question of affordability. Developers of
catering for the elderly. The end customer is very important build-to-rent schemes need to consider a sensible balance
to the product as the build-to-rent model offers more between the additional services offered, the target market
than just a flat to live in. The aim is to provide the services and consequently the premium. But many
and amenities to support residents’ lifestyles and build renters are prepared to make the sacrifice of a central
community spirit within each scheme. location for a better quality of life in a place that is still well
connected. And so far, strong demand means that many
These schemes are less likely to just be apartment blocks schemes are fully-occupied, some with waiting lists. But it is
now, many are mixed-use buildings that blend residential, yet to be seen, how long or how high premiums will remain
commercial, cultural and social functions. Whether it’s a given the competition from new schemes. By offering
single apartment block or entire neighbourhood scheme, extra facilities and a different lifestyle, there will always be
services such as concierge, gyms, free broadband, a premium above a no-frills new build. The challenge for
community and business facilities are all integrated. developers is getting the balance right for the price.
10Johnny Morris
Research Director
morrisj@hamptons-int.com
Aneisha Beveridge
Analyst
beveridgea@hamptons-int.com
Kami Nagi
Analyst
nagik@hamptons-int.com
© Hamptons International 2018. This report was published for the purpose of general information and
Hamptons International accepts no responsibility for any loss or damage that results from the use of
content contained therein, including any errors or negligence from third party information providers. It is
your sole responsibility to independently check and verify the facts contained within this report. All opinions
and forecasts within this report do not in any way represent investment or other advice. Reproduction of
this report in whole or part is not allowed without the prior written consent of Hamptons International.You can also read
