Wind of Change
Few can deny that the Buy to Let and the property sector generally have sustained significant change over the last few years. Indeed our current economic and political environment are such that further change is almost inevitable and so this month I thought we could take a look at some of those potential changes as well as the ongoing impacts of some current policies.
Embracing change is important to the growth and sustainability of a business. There have been a number of high profile firms who have recently entered administration and it is often cited that their failure is due to their inability to adapt to change to the altering behavior of their customers, the regulatory regime within which they work or as a consequence of a political or economic issue (that “B” word!).
The property sector is no different and landlords should be carefully calculating and making allowances for the further affects of Section 24 relating to the ability to offset mortgage payments for tax purposes. The changes, once fully implemented over the next two tax years, will mean some deals which would have previously been viable will become less so and it may even require you to use a different vehicle entirely to acquire property. For those highly geared with bank lending, it may require a complete overhaul of your business to remain in profit. You must not underestimate this tax change. It is almost unique to property businesses whereby you are taxed more upon the turnover rather than the profit of your operation.
The Government are currently consulting on the abolition of section 21 notices and it is widely rumoured that this potential policy will be enacted. I believe this could have a significant affect on the housing market as it will in essence create assured, rather than assured shorthold, tenancies. Lenders may view lending in such circumstances as having more risk, as they did prior to the 1988 Housing Act which introduced Assured Shorthold tenancies and may therefore have a reduced appetite for it or may seek to gain a greater return to offset their greater risk.
Given the inability for an individual to offset mortgage payments this could create a double blow for the landlord.
An additional issue relating to the abolition of section 21 notices could be some pressure for rent controls. If landlords are unable to use the non fault eviction process then it is possible they may seek to encourage their tenants to vacate by increasing the rent. This is particularly likely if, in parallel to the abolition of section 21 notices, the court system is not streamlined and improved for those possession hearings proceeding under Section 8. Draconian rent increases may therefore be met with some legislative change to prevent landlords increasing rents.
Lenders may further be nervous about this sector if the landlords inability to increase rents could lead to the borrowers inability to meet mortgage payments as interest rates increase.
Another change landlords are starting to become aware of is local authorities seeking to charge council tax on individual rooms within an HMO rather than billing it as one building. For those who have significant mortgages on HMOs or those who operate HMOs as rent to rent, this could have a devastating impact upon your profit margins and the viability of your projects. Also, until the policy is implemented fully it creates an uneven playing field meaning that landlords cannot ask the tenant to pay the Council tax as long as there is another property locally which is rated as one building and where the council tax is included in the rent.
For those committed to our business for the long haul, there could be opportunities. Section 24, once fully implemented, means that fewer people will enter the property investment arena unless they have a significant deposit and lending restrictions following an abolition of section 21 notices may create further barriers to entry. Those left in may find less competition when acquiring units and a flattening of prices where demand has eased.
Change is ongoing, not least given the current unfolding political environment and the seemingly relentless attention being given to housing. In order to survive it is imperative that you understand these changes and adapt your property business to accommodate them.
Perhaps this month it would be a useful exericse to stress test your business to establish your results once section 24 is fully implemented and your reliance on lending institutions. In addition, it may be prudent to explore what other property strategies or opportunities are available with a view to diversifying and potentially reducing the risk to your business.
After all, failing to plan is planning to fail!Back