For the first time in a number of years, there are murmurings of discontent within the UK’s buy-to-let property sector.
A range of key legislative changes have meant that many landlords now face an uncertain future, with a large number simply deciding that it’s time to sell up.
One of the world’s largest property markets doesn’t simply die overnight, however. Rather, the savvy among these ex-landlords are seeking opportunities elsewhere, in markets unaffected by the recent shifts.
James Harrington, Business Development Manager at UK property investment consultancy, Emerging Property, explains more about these new buy-to-let alternatives.
Why buy-to-let collapsed
Before getting into the property investment opportunities of today, it is important to understand why the buy-to-let property sector is being increasingly labelled as fundamentally over as an investment vehicle.
The key influencing factor behind all the recent changes is the housing shortage currently present in the UK. RICS estimates that the UK will need an additional 1.8m homes by 2025, with this number increasing further as we move through the 21st century.
The UK has a population that is living longer and increasingly living alone. Together with a large number of new arrivals to the country, demand for housing is certain to continue along an upward trajectory.
As part of efforts to make more homes available to families and first-time buyers, the UK government has thus decided that it’s investor profits that must be sacrificed.
By increasing certain taxes and removing breaks elsewhere, buy-to-let landlords have seen their income reduced drastically. On top of this, new legislation also makes both the mortgage application and HMO (Homes in Multiple Occupation) licencing process increasingly complex and costly.
Considering that buy-to-let property investing in recent years has already required a huge amount of time and energy, while returning yields of 6-8% gross at best, these new changes are making the minimal yields simply not worth the effort.
It is no small dent either – higher rate taxpayers will often see their profits cut down to more than a quarter of their previous size, making mortgage-leveraged buy-to-let more often than not completely uneconomic.
One window closes…
As any investor or entrepreneur in any sector will tell you, when one window of opportunity closes, another large door opens – it’s just a case of finding it.
One large and ever-growing demographic in the UK is students – the majority of whom live in the buy-to-let properties that the UK government is attempting to free up for families and first-time buyers.
Most of these students are transient in nature – they move to a city for their studies and then return back home or head on to greener pastures elsewhere in search of work upon completing their degree.
These students and the universities they attend are, however, hugely beneficial to both the local and national economy. The issue, quite simply, is that there is not enough purpose built student accommodation (PBSA) available – leaving many to settle for often sub-standard housing in the increasingly stretched residential property sector.
It is not only a minority having to rely on such housing options either, but rather close to three-quarters of the total student body. Though some of these are able to live at home and a very tiny percentage own a property, most are sharing HMOs.
Not only does this dynamic exacerbate current housing undersupply issues, but it is also the source of tensions within communities, where a large student presence increases rents and creates divisions between permanent populations and transient groups.
So, where’s the opening?
With university funds committed elsewhere, it is the private sector that has been tasked with plugging the supply gaps in purpose built student accommodation.
As commercial properties, investors into this thriving sector are free from all the new legislation currently causing so many headaches for buy-to-let landlords – there is zero Stamp Duty and no HMO licensing requirements. Indeed, many PBSA investments are completely free of any ongoing costs and require little or no effort on the buyers’ behalf.
As with all property investments, the presence of sustained demand is key – and this is certainly there in abundance in the student sector. There are approximately 2.3 million students currently registered at UK universities, with only 26% of these able to access PBSA (Knight Frank) – far fewer in some locations.
Previous intake caps were removed in 2015, meaning that since then universities have been able to accept as many students as they wish. Numbers were consistently rising even before this and there have now been four consecutive years of record intake levels.
As the UK’s highest yielding property sector since 2011, investment inflows have been consistently increasing over the past years. Peaking in 2015, the following year also saw investment more than twice the previous five-year average, while current projections indicate a further 17% increase in 2017.
Economies of scale enable developers to position professional management teams onsite, while the same benefit also splits the cost of land acquisition – meaning that PBSA can be developed in prime close-to-campus spots. Both of these perks further support the ability of such properties to secure the sustained demand required for long-term high yields.
And what are the key considerations?
As with all property investments, location is vital. Though nationwide the 74% undersupply is hugely appealing, this figure has been reduced closer to 50% in many larger, more popular cities – Liverpool and Manchester are prime examples.
In addition to this, collegiate universities, like Oxford, never had the undersupply required in the first place, while premium real estate prices in London wholly restrict the potential for high yields.
We have always handpicked prime development sites in key regional cities – Bradford, Stoke, Huddersfield and Preston, to name a few.
Not only is the level of undersupply in all these locations conducive to sustained high demand, but also we have been able to secure prime close to campus sites and properties at sub-premium prices. This limits the number of current PBSA units and potential future PBSA units between our properties and the universities – further securing ongoing high demand.
Another key is the quality of the developer and, consequently, the developments. With so much opportunity in the sector, there has been somewhat of an influx of inexperienced developers chancing their arm.
We have an exclusive relationship with the UK’s only NHBC-certified student property developer, which ensures all our new builds must exceed typical building regulations and all benefit from a unique 10-year construction warranty.
The final piece to the puzzle is the fixed income agreement you sign. Firstly, this should be signed directly with the developer – and not a third-party shell company. This developer you sign with should operate free from debt and ideally have a sizeable asset base.
The next crucial part of your fixed income agreement is its length – short fixed income terms should immediately raise alarm bells. Not only do they limit resale opportunities, often trapping investor capital, but they also enable the developer to leave buyers responsible for a range of expensive maintenance and replacement costs.
Long-term fixed income periods provide attractive and flexible resale options, while also incentivising the developer to ensure that management and maintenance is conducted to the highest possible standards – any unnecessary costs will be the responsibility of the developer, not the investors.
The final thing, of course, is the size of the yields. Though almost always higher than the income generated from buy-to-let property investments, there are variances. The very top of the market is 10% NET, with 8% on existing operational properties also appealing.
It is important to remember that in such yield-driven property sectors, this income level doesn’t only impact your annual earnings, but also increases your potential for capital growth when reselling your property.