You may have read our report on The Great Landlord’s Debate at April’s Property Investor Show in May. At the same time, we attended The Great Landlord’s Debate 2, with different panellists…
Vanessa Warwick, of Property Tribes, chaired the second Great Landlord’s Debate, with her two panellists: Paul Shamplina, the Founder of Landlord Action, and Richard Blanco, a London Representative for the National Landlords Association (NLA).
Warwick kicked off the debate with a statement that so many of us know to be true: “There’s so much ground to cover, so many challenges facing landlords”.
Warwick, who has been a landlord for 14 years, can’t remember a time when landlords have faced so many challenges.
“It’s easy to lose faith; there’s a lot of anti-landlord sentiment in the media and we’ve faced an attack by the Government, but we have to look for some of the positives,” she began. “The first place is start is section 24, which is a significant challenge for landlords.”
“It’s all about money to a certain extent,” Shamplina responded. “The Government wants landlords to give longer tenancies, but landlords are breaking up their portfolios and serving section 21 notices to get vacant possession. By imposing taxation on the industry, landlords are selling and evicting, which increases homelessness.
“The Government thought that landlords would sell their properties and first time buyers would snap them up. That’s not the case, there’s no data to prove that has happened.
“If you have interest-only mortgages, perhaps you’re adjusting your business model, increasing rents, or undergoing cost-cutting exercises. But we’ll wait to see the stats on how much the Government is earning – I don’t think it’ll affect one, two, three-property landlords.”
Blanco continued: “There’s been a lack of joined up thinking from the Government – we’ve had a double-whammy of PRA [Prudential Regulation Authority] changes and section 24, which were designed to slow down the buy-to-let market, but they’ve actually slammed the brakes on it. We’re dealing with the uncertainty of Brexit, but also section 24, PRA and Stamp Duty; it’s putting people off buying.
“You have to decide whether you want to chase better yields to increase profits, or head to the North West and Midlands for better capital growth. You might be thinking about whether to incorporate. NLA research found that one in four landlords are thinking of incorporating, but not many have actually done so. That’s because you can get a buy-to-let mortgage for 1.4% at 75% loan-to-value [LTV], but limited company mortgages are much closer to 3% – is it worth paying that extra interest? Will it out-weigh the extra tax? You need to speak to your accountants and know what your tax bill will be in 2022.”
Shamplina agreed: “You need to be stress testing the liabilities of tax when it comes to lending – get advice. There are extra charges to consider when changing to a company.”
“Do some comparative analysis, have a business plan,” Blanco added.
The Great Landlords Debate 2 – Spring 2018
Warwick went on: “If you don’t, there will be an awful lot of pain over the next three years, with section 24, rents may start rising; I’m banking on what happened in Ireland when it was introduced. It was repealed three years after its introduction, because rents went up significantly. Now, they’re incentivising landlords to come back into the sector. It’s a pain for landlords and tenants; there’s less choice and higher rents. It’s in the South East where lower yields are being hit the hardest. Incorporated landlords are hoovering up tenanted properties because individuals have sold. It has to be repealed – there needs to be a complete U-turn and the Government has to incentivise landlords.”
However, Blanco pointed out: “It takes a while for it to sink in, so it’s difficult to do anything, because it comes in over four years. There needs to be a generational change; it’ll be 20 years before we get the change, as it’s politically difficult to make tax cuts for landlords. We need a new system whereby we’re taxed as businesses.”
An audience member insisted that it will be impossible for the Government to back out of.
“You need to focus on increasing your profitability,” Blanco answered. “The irony is that, if you’re more profitable, you pay more tax.”
Warwick had another interesting point: “The Government’s not taken into account the disconnect between central and local Government. Central is attacking landlords, while local authorities are dealing with a housing shortage; battling to get people into houses, they don’t have the social housing to accommodate them, so they’re discharged into the private rental sector. But then central Government is deterring landlords from being involved in the sector.”
Blanco carried on: “Local Housing Allowance [LHA] rates have been frozen, properties need to be well below market rents, but when they procure properties from the private rental sector, they’re not returned in a very good state. There needs to be more social housing, but there’s too much of a shortage. Local authorities are in an impossible position.”
Shamplina brought up Universal Credit: “Landlords are having to evict housing benefit tenants because they’ve been paid but not passed it on. Councils need to remember that they don’t know the debt situation of that individual. Benefit tenants usually stay longer, but you can ask for more from young professionals.”
“Direct payments are a big issue,” Blanco agreed. “They were lost in 2008, meaning that tenants had to learn how to budget, but without the intensive support they need.”
“Vulnerable tenants don’t have a support network,” Warwick pointed out.
“Universal Credit was created to help get people back to work – the theory was good, but the practicality doesn’t work,” Shamplina added. “It creates more challenges for landlords, it turns them off – is a benefit tenant a gamble?”
Blanco looked at what’s caused these issues for landlords: “The underlying challenge is the image of us – the Government is capitalising on that, but it’s not good for the housing crisis and it’s unfair on us.”
“The rogues are in minority; most of us provide decent, safe, compliant homes for our tenants, but the issue is a lack of housing,” Warwick argued. “The powers are already there, but they’re not being enforced; there’s nowhere else to put people in a shut-down HMO [House in Multiple Occupation].”
However, Shamplina was supportive of new banning orders and £30,000 fines for rogue landlords/letting agents, as this money will be “reinvested into environmental health officers”.
“I think that that encourages them to do more enforcement,” Blanco believed. “The media loves stories of bad landlords – it does happen, but the media does us a disservice; it doesn’t educate the public about real issues.”
Going onto how landlords can improve their profitability, Warwick warned about chasing higher rental yields: “You might think that they’re better up north, but you must have caution – on a low value property, which you’ve bought for £90,000 and earn £450 per month in rent on, if the boiler goes, it’ll be the same price to replace this boiler as it is in the South East, where you might have a £300,000 property earning £1,500 per month.
“In the South East, you’ll cover the cost in one month, but, up north, it’ll take four to five months to pay off. It can be tempting, but you must make sure you know the area; yields can change from street to street, so don’t be seduced by promises of high yields.”
“I agree in some ways,” Blanco responded. “I only invested within half an hour of where I live; I’m a very hands-on landlord. I’ve paid £400,000 for a property in London – I could get four properties for that up north, but that’s four times as many tenants and repairs.
“If you’re looking at capital growth, then it’s higher up north over five years than in the south, but you can still achieve lots in London over five years. If you’re going to buy up north and live down here, you’ll need an agent to manage, which will eat into your profits.”
Warwick was positive: “There are lots of different strategies now – I’m a huge advocate of holiday lets; they’re not subject to section 24 and there’s been a renaissance in Great British holidays over the last five years.”
“It’s a different business though,” Blanco pointed out. “You have towels and sheets to think about.”
“It’s beneficial to have a diverse portfolio now, with commercial and serviced offices in there,” Shamplina added. “You’ve got to strategise a little deeper.”
“With the PRA affordability and stress tests on portfolio landlords, everything’s become much less forgiving for investors,” Warwick cautioned. “The Government is restricting how fast landlords can grow.”
“There are too many measures all at once,” Blanco agreed. “It’s become political rather than prudential. In London, you now need a 40% deposit to borrow enough money to fit all of the criteria. If you’re clever and hunt around, you can find some good products – finance is the lifeblood of our business and it’s been restricted. New lenders are quite creative, but you need a really good, specialist broker.”
Warwick also pointed out: “We cannot rely on low interest rates – there’s only one way they’re going to go. We also have the threat of increasing landlord licensing; there’s a new consultation every eight days.”
“Grim is the word I’d use,” Blanco stated.
“They’re picking out individual streets for licensing now,” Warwick explained. “There’s one thing that landlords hate: uncertainty. Again, it’s deterring landlords from moving into certain areas.”
“One of the drivers is lack of funding,” Blanco believed. “The easiest way to fund a private rental sector operation is to set up a licensing scheme. When you’re business planning, you must account for these fees.”
Warwick suggested that investors should consider joining an accredited association: “There are now 2.5m landlords, but only 60,000 are in associations.”
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