February 2016

Buy-to-let is dead – long live buy-to-let?

To paraphrase Mark Twain, rumours of the death of the buy-to-let market may have been exaggerated. Research from estate agent Knight Frank has put some numbers to a fairly obvious proposition – that regardless of the UK Chancellor’s tax raids on the individual buy-to-let investor, demand for privately rented accommodation is only headed in one direction. According to government figures, the population of London is expected to rise to 11 million by 2039, up from just over 8.5 million at present, as part of a UK-wide increase in population of 15%. While there are signs that rates of house building are rising, it is hard to see new-build volumes reaching a level where they have a big impact on affordability – leaving many with no choice but to rent long term. Indeed, the Knight Frank research shows strong increases in rents in 2015, with rents up in London by 4.1% in the 12 months to September.

Rents have risen a total of 19% over the last four years, and Knight Frank forecasts cumulative rental growth of 15.4% in London by the end of 2020, and 11.9% in the rest of the country. By that date, investors expect gross yields to settle at around 4.75% in London, and 6% in the regions.

These sorts of returns are attractive to investors given current low interest rates – which the Governor of the Bank of England is in no mood to hike any time soon – and highly volatile equity markets.

Certainly, the recent increases in stamp duty and the planned reduction in mortgage interest tax relief will likely see institutional investors or wealthier high-net worths rather than individual investors provide much of the capital needed, and this is an area in which we are expanding our offering at Black Brick. But we also expect individual investors to remain active in this part of the market.

“We continue to see some clients shrugging off the three percentage point rise in stamp duty as simply part of the cost of acquisition,” says Caspar Harvard-Walls, Black Brick Partner. “Rising rents will also go some way offset these additional costs. The fact of the matter is that London remains an attractive city in which to invest, and that isn’t likely to change.”

Keeping a closer eye on what tenants want

Demand may be likely to remain high for properties to rent in and around London, but competition for high quality tenants will also remain fierce. Moreover, with higher acquisition costs, landlords need a laser focus on maximising rental yields – and should give serious thought to what potential tenants will expect from a rental property. As a starting point, it is worth remembering that tenants tend to be considerably less emotional than buyers: the key considerations are proximity to transport and to shops, especially supermarkets. A buyer may ask, “Do I love this house?” A young professional renter will rather consider, “Does this fit in with my lifestyle?” Potential buy-to-let investors also need to be mindful of the additional services that developers are increasingly offering. On-site gyms, pools, parks, even private cinemas are on offer to attract buyers and, by extension, future tenants.

Take Embassy Gardens, the development in Nine Elms, Vauxhall, next to the new US embassy. It offers its “show-stopping” Sky Pool, as well as membership of Eg:le Club, which offers leisure, business and fitness facilities. With studio apartments changing hands for below £500,000, access to such facilities is no longer the preserve of millionaires.

Generally speaking, however, landlords will need to ensure that their properties will work as hard for them as possible. Through our Property Management Service, we can offer advice on the best letting agents, provide independent rental valuations, and work with our network of designers and tradesmen to ensure the property is kept in the optimum condition to maximise rental yields. While the service was designed with offshore landlords in mind, it is also proving popular among time-poor UK-based investors and those who want professional support in managing their investments.

Signs of life in the sales market?

While 2016 is unlikely to be a banner year for prime sales, there are signs of increased activity in some parts of the market, and positive signals from some parts of the world. “The recent falls in sterling have made investing in the UK more attractive,” says Camilla Dell, Black Brick Managing Partner. Since June, sterling has slipped around 11% against the dollar. “I’m talking to dollar-based investors in the Middle East who are looking closely at London again.”  There is little sign of London’s perennial attraction fading among international high-net worth investors (HNWI). Research from Savills finds that London and Dubai remain top of the list for HNWI real estate investment, with both cities expected to be “net buys” in 2016. There are also positive indications from domestic buyers. According to another report from Knight Frank, viewings of Prime Central London properties in November were higher than the previous November, before the changes to stamp duty were introduced. The estate agent finds that buyer demand is concentrated in areas with good transport links and good schools.

It also found that sales of £2 million-plus prime country house properties in the last quarter of 2015 were up 15% on the previous three months, and more than double the number in Q1.

For owner-occupiers trading up from London, buying in the country offers much more space and a better quality of life. Our recent acquisition in Kent for a British client is a good example. We sourced a 7,100 sq ft period property, set in a four-acre estate, with its own swimming pool and tennis court – paying just £242/sq ft – a fraction of prices in the capital.

We also see opportunities for owner-occupiers looking to buy at the luxury end of the Surrey market in the golden golfing estates of Wentworth and St George’s Hill. In the past, developers here have tapped into demand from wealthy foreigners. But the fall in overseas interest – particularly from Russian buyers – and an oversupply of stock means bargains are to be had.

Acquisition of the month- Ambrose House

As we noted in last month’s newsletter, the difficult global economy is creating opportunities for those buyers committed to a Prime Central London purchase. We are pleased to report that we have closed on an off-plan acquisition in Phase 1 of the Battersea Power Station redevelopment, snapping up a bargain for our client. That development was marketed actively to Malaysian investors, but the recent fall in the Ringgit has encouraged some of those investors to sell. Given this, we have been actively seeking such motivated sellers on behalf of our client, and we have managed to secure a unit in one of the best positions in the development – on the 14^th floor of Ambrose House, with enviable views of the River Thames, the power station and the adjacent riverside park.

Our client paid around £1,500/square foot – significantly below the £1,800 level that units have sold for recently. Luxury riverside developments with access to shops and leisure facilities command a premium, and we expect this phase of the development to be highly sought after once completed.