Recent property market data indicates that tax changes and property price growth in London and the south of England putting pressure on rental yields has started to change the face of the UK’s buy-to-let market. Land Registry data analysed by research company Residential Analysts show a clear drop in transactions involving the kind of residential units favoured as investment properties over last year. Over the course of 2017, 10% less flats were purchased in England and Wales in comparison to the previous year. That’s against a wider fall over all property transactions of just 2.1% over the same period.
Residential Analysis director Neal Hudson explained to the Financial Times that the combination of an increase in the tax buy-to-let investors have to pay and inflated prices in the south of England means mortgage-backed landlords are struggling to find properties offering the yields they are looking for. This is pushing landlords looking to acquire investment properties further north.
Henry Pryor, who works as an independent buying agent, sourcing properties bases on the requirements of his clients, explains:
“What we have lost is the opportunity to get a respectable yield in the south-east. Yields are typically 4 per cent in London or 4-point-something in the wider south-east. I think property demands 6 per cent or better, and you have to go north to achieve that. I’ve had clients buying in Newcastle and Manchester because they can get decent yields there.”
The move north by the investment sector has also not opened the door for south of England-based first time buyers, who are still being priced out of the market. Mortgage multiples are coming in above what their income levels make them eligible for. Rather than lower asking prices, property owners in the south are showing a preference to wait.
This has resulted in a drop in transaction numbers. While most of the recent attention has focused on the slowdown in the London prime property segment, Residential Analysts’ research indicates that most of 2017’s drop is accounted for by transactions involving more modest properties in the £400,000 band. In London and its surroundings, that means flats and terraced houses.
Hudson believes that with no obvious external trigger, the London market can be expected to stagnate for the next few years. However, he anticipates prices to move sideways over the period and doesn’t expect any major drops. If rents grow in the meanwhile, that could help improve rental returns for London landlords. Those who do want to sell faster will also have to be open to compromise on asking prices and a slow market for flats could also see the occasional bargain come up.
However, the general trend can be expected to be a continuation of the recent migration north, with cities in the Midlands, North West and Scotland in particular attractive. Strong local economies in the likes of Manchester, Liverpool, Birmingham, Glasgow and Edinburgh are complimented by the prospect of rental yields of 6%+, while London and the south will, exceptions apart, likely remain stuck around 4%.