The title will have many investors licking their lips with joy of course. Rents on the up, lovely. Mortgage rates at an all time low, excellent - all ingredients for a nice slice of profit pie. Let's take a moment though and analyse the why, how and what effect this will have on the medium to long term future. Don't worry, on the whole it's good!
The Royal Institute of Chartered Surveyors (RICS) reckons that rents will rise 20% over the next five years (source: Landlord Today). That's not actually that much I believe, some 3.7ish% compounded. That's really low in my opinion. But I'm a London investor and my clients are London based. The RICS also reckons that property prices will rise 18% over the next five years. If you are reading this and you know anything about the property market within the M25 you will laugh. Fact of the matter is that it is very well possible to get gains like that in 2 years! So why the "pessimistic" statement from RICS? Well as with any of these claims and opinions they are cast over a very great geographical location, ie nationally. Some parts of the country will not rise at all, whereas in London it is near certain that prices will go only in one direction. Near certain I emphasise - in general London property price rises do exceed other parts of the country.
So what will actually happen and why?
Allow me to whip out my crystal ball. Based on 15 years of London property market experience I see the following happen:
1. Accidental landlords and small-time landlords will start to sell up. Why? Increased taxation and the perceived stun of the capital growth in London ("uncertainty" due to Brexit will have smaller landlords sell up. They are likely only making a few hundred pounds after the mortgage. Factor in repairs and perhaps a void because they can't or don't want to spend time on their property (they have a career, perhaps children by now) and it becomes a millstone as opposed to an investment. These properties are likely to be FTB homes, such as they were when they were bought. This will feed the demand from this audience of buyers. They are now no longer competing with investors - after all, they are priced out from buying these flats because of stamp duty and lack of mortgage interest relief now make these types of property a poor investment.
2. Investors will shift to investing in larger properties. 1 bedroom flats have historically always been easy to rent, and a favourite among smaller investors because, put plainly, they are cheaper than a big house with lots of bedrooms. Lower barriers to entry. So you take that away from them and investors will scale up. Bigger properties hold the key to good returns. Landlords now buying property will most likely go for 3-5 bedroom properties, perhaps even bigger if they want to properly scale up. They are not afraid of HMO regulations, or even doing some work on a commercial unit's upper flat in order to rent it out as a massive unit with 5-8 bedrooms. Scale is king, you see, offering far superior returns. I actually find the sweet spot between 3-5 bedrooms and two storeys, staying clear of most HMO requirements. Each to their own of course, but larger number of bedrooms per unit certainly yield better returns. This is compounded by the ease of purchase, after all there are no FTBs chasing these bigger properties, and smaller landlords will want something easier, they may get out of property altogether if they are not ready to adapt. So commercial to residential conversions to provide a large number of bedrooms will be popular!
3. Rents will rise dramatically more than aforementioned in London. It is not uncommon for the London landlords to refinance frequently in order to reinvest, or purchase a bigger home for yourself. I would wager that a lot of property in the London PRS is leveraged quite substantially, and if care is not taken to minimise the finance costs then the lack of mortgage interest rate relief will hit hard. It will hit everyone to a certain degree; my prediction is that rents will really start rising next year (2018) once the first Self Assessments in Jan 2018 are done and the realisation of the dramatic increase in running costs will lead to a phone call to the agent to certainly be bullish on the prices this year. The thing is the majority of landlords will be raising their rents. Everyone will be at it, so renters have no option but to pay. I predict you won't have a void if you raise your rents because your competition - the landlord next door - will be raising theirs too.
4. The last point that I'd like to make on rising rents, and this is slightly further in the future, is that the consultation over tenant fee banning has not yet abolished said fees, but is likely to. What this means is that in the long run agents will have to charge the landlord more for their work in order to remain in business. You can't simply ask this fee to go away, you see. Businesses need to be paid in order to run, and if you take away 25% of their revenue it is very hard for them to swallow. Short term this may be swallowed, but it's certain that ultimately Mr. Landlord will have to pay. And that means rents will go up. If a business (be it letting agency or property rental portfolio) is not producing a meaningful profit then it will cease to exist. Tenants will pay for this in the long run. The cost will be spread over a longer term, but they will pay. I guarantee it.
What will this mean for my investments?
Well be prepared for more shake-up in the industry. Watch what happens with rents and talk to you agents and fellow investors as you will likely be able to command premium rent (because, of course, you offer premium product). The scarcity of good accommodation is still real, so if you continue to do what you do and offer good housing you will not have voids. I predict that your buy to let in London will likely see 5-8% rent rises if not more. I feel that once there is clarity on the fee ban this could give rise to double digit rent (%) rises in Clapham.
What should I do to improve my portfolio and achieve greater profits?
1. Look at your costs. Borrowing: You likely have property in your personal name. Don't rush to get these transferred as currently is the craze. Stamp Duty, CGT and transaction costs will outweigh any benefits for a long time. And then the government will think of something else. So my thoughts are to stick with what you've got. If you are buying new properties then incorporating is wise in my opinion, this at the very least spreads your risk and allows you to reinvest your profits relatively tax efficiently. Take advice though, everyone's circumstances are different. Secondly speak to your broker (and I'd happily recommend you one if you want, just ask) to make sure you are paying the lowest monthly payment you can.
2, Are you getting top rent? Get a portfolio review. Speak to your agent or email me if you like, I can advise you too. This will mean looking at your current rents, maximising your existing rentals in terms of layout, furnishings and overall presentation in order to get the best price.
3. Do you have money floating around? Look at what you can achieve if you spent it on your current property - you don't necessarily have to buy another property to invest the money wisely. For example if you can get an extra £1700pcm by adding two bedrooms to your house by way of a loft conversion that costs £50,000 that would mean a return of 40%. You can't buy a whole new property with £50k, let alone get a 40% return!
So in summary there is lots you can do to get better returns. Be mindful that these "rocketing rents" don't just land in your pocket, you will need to ensure you are doing everything right in order to capitalise on this rising market. Invest in bigger units, cut costs, make changes to enhance profits. If you would like a one-to-one to see how you can get better returns why not get in touch on jeroen@claphampropertyblog.com or come down to the Clapham Property Meet. This month we'll be focusing on building a property portfolio for long term wealth; building from the ground up and refinancing in order to keep the properties as long term rental investments. If you are interested in coming along then join the meeting group and RSVP YES.
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