Is buy-to-let still a good investment?

There was a surge in demand for buy-to-let properties in recent months from investor landlords keen to beat the recently passed 1st April deadline, after which they now have to pay an extra 3% above existing stamp duty rates on acquiring a buy-to-let property.

Having long provided bumper double-digit returns for investors, investment in buy-to-let has outperformed all major asset classes in recent years, with total annual returns from buy-to-let properties reaching 12% in 2015 or £21,988 in absolute terms. But various clouds on the horizon have recently prompted concern that the buy-to-let bonanza may be coming to an end.

New measures
The changes to stamp duty, tax relief and new tougher mortgage application rules could make it harder to make a profit from letting property. Aside from the extra 3% stamp duty surcharge, the tax relief on mortgage interest payments will be slashed back to a 20% tax credit from 2017, which will eat into many landlords’ rental returns, especially higher and additional rate taxpayers.

Additionally, the automatic 10% wear-and-tear tax relief for landlords who rent out furnished homes has recently been scraped, leaving landlords free to claim only for the amount that they have spent, making buy-to-let a far less attractive proposition; and with it, the upward trends seen over the last few years in London’s buy-to-let market could be reversed. “Over the past four years, there have been 14 tax changes targeted at residential property and in particular buy-to-let landlords, making the economics of such an investment less and less attractive,” said Dermot Callinan, at KPMG in the UK.

Restricted supply
Analysts expect the new buy-to-let tax measures to dampen demand for buy-to-let investments, while there is every chance that some landlords will opt to sell up ahead of the changes being introduced.

But if there are fewer buy-to-let properties available as a result of the tax changes, as well as concerns over Brexit and global economic uncertainty, thereby creating a squeeze on the market, there is every chance that this could result in higher rental rates as landlords seek to compensate for increased costs.

“If investors and landlords are put off purchasing new buy-to-let properties, this can affect the supply of properties in the rental market which is likely to push rents up,” said Wayne Treveil, CEO of Tenants Plus.

Attractive yields
Research by the Centre for Economics and Business Research found that rents are set to rise by 28% over the next 10 years on the back of greater demand. By 2026 some 7.2 million households in England and Wales are estimated to be privately rented; this is around two thirds more than now. “A future significant rise in interest rates and savings returns may influence this slightly, but I still expect rental yields to out perform ISA or other savings vehicles available to private investors,” said Marcus Whewell, CEO of The Guild of Professional Estate Agents.

Secure investment
The changes being introduced will likely cause a short-term blip in the buy-to-let market. However, the sector will recover. Attractive rental returns and house price growth means that capital returns are still strong and despite the housing crisis of the last decade, bricks and mortar will probably always be seen as a safe investment.

In the end, the losers are most likely to be tenants who will have to cover their landlord’s increased tax costs through their rent.