UK Buy to Let Property Investment Fundamentals

• Buoyancy underpinned by demand
• Where owning property is impossible for first-time buyers
• Population growth effect on house prices
• Where UK property is affordable
• The future of the property market

The buoyancy of the property market is underpinned by demand

House prices in the UK are buoyed by soaring demand. For years now, housebuilding has failed to keep up with the need for houses, and as houses become a more sought after commodity, it is understandable that prices have risen. This is the same whether you are looking to buy a house or apartment as an investment in the UK.

In the 30 years between 1989 – 2018, 3,328,850 houses were built in England. Compared to the previous 30-year period 1959 – 1988 where 7,449,160 were built. This demonstrates a shortfall of 3,120,310 homes or 104,000 a year for the last thirty years. It is not just the number of houses being built, but also the house type and location. Data suggests that most houses built in the past thirty or so years have been in places were local economies are sluggish, or in previous green belt land miles away from the city centre.

Owning property in some parts of the country is almost impossible for first time buyers

In some parts of the country, property prices are so unaffordable that even government-backed initiatives do little to help first time buyers. In London, the average property price is £671,989. The government’s Help to Buy scheme allows buyers to put down a lower deposit and pay less for the first five years. The issue is it can only help if the property is £600,000 or less in value, so already below the London average. Also even if the scheme was used on a £600,000 property, individuals would have to raise a £30,000 deposit and obtain a mortgage on 55% of the value of the property or £330,000 (a government loan of up to 40% is available on London property). As mortgage lenders typically lend 4x the applicant’s annual salary, they would need to be earning £82,500 per annum to be successful. This is way above the average salary. As you can appreciate, getting on the property ladder in London is very difficult unless you are a very high earner or have significant savings.

When considering buy-to-let property investments in the UK it important to focus on areas where property prices are lower. You will find that you can achieve better rental yields and there is more capacity for capital growth. See our best places to invest in property post to find out the areas we think are worth considering.

Population Growth Will Push Up House Prices Even Further

Back in 2015, Moody’s observed that population growth will push up house prices. The Office for National Statistics has predicted that by 2027, the UK’s population will increase from 64.6 million in 2015 to 70 million. Several factors have contributed to that increase; more people are moving to the UK than emigrating to other countries, and people are living longer so births are currently outnumbering deaths.

Not only will population growth push up house prices, but also the change in the family dynamic. In years past, it was normal for a household to have two parents and two children, whereas nowadays a household can be made up of single persons. In fact, in 2018 15% of all households accounted for in the UK were one-person households. This further depletes the availability of stock.

Moody’s stated that Britain has the ideal environment for property investment due to its rising population. In to March 2020, accoridng to the Office of National statistics, net inward migration increased to 313,000. Thereby increasing the demand for houses while building works stopped due to Covid-19 and is set to slow down as there is a shortage and increased cost of labour meaning that there will be less homes being built. This makes investing in rental properties a good idea and the perfect time to start building a buy-to-let portfolio.

There Are Still Affordable Pockets of the UK

London is not just unaffordable for first time buyers. There is opportunity if you look beyond London, as we have found many investors are now doing. London’s property market is a precarious one, as although rents are high, they never really compare to the high property prices and therefore yields are generally low. Those banking on capital growth will be hoping that the London bubble does not finally burst, as many are predicting it will.

Other towns and cities, especially up north, provide good value for money when it comes to housing. As we mentioned above, it felt at times that people often sacrificed either having an affordable home or living somewhere with a good local economy. Fortunately, with government plans to regenerate and stimulate economies outside of London, business in other parts of the UK are growing without compromising house prices (for now at least).

Two major cities that have undergone significant regeneration include Birmingham and Manchester. They often vie for the title of the UK’s second city, but they’re both top when it comes to property investment. You can find out more about regeneration in Manchester throughout the years and similarly how Birmingham has been rejuvenated with parts even being dubbed a second Shoreditch. We also explain how those projects have made the cities better places to live. In 2019 Manchester was named by The Economist as the “Most Liveable City in the UK”. Being attractive places to live will correlate with property prices. Property prices in Manchester are forecasted to see the highest spike of any UK city over the next five years, and since 2016 property prices in Birmingham have risen by 16% - the highest of any UK city.

If you’re looking at areas closer to London, we recommend considering London commuter towns. More and more people are moving out of London to commuter towns for improved life satisfaction and property that is affordable. Luton for example, takes around 25 minutes on the train to get to King’s Cross, yet the average property price is £265,269 – less than half that of London.

Regeneration and the movement of people from one city to another is a major driver in house price growth. Prices do not rise unilaterally across the country, there are always cities that experience accelerated growth and those where increases are sluggish. The strategy here is to pick the right city and the right time because every area hits a peak eventually.

Read our list of UK property hotspots where we think it is worth considering due to high capital growth potential, good rental yields or regeneration plans in the area.

The future of the property market

Government policy continues to shape the future of the property market, whether for better or worse. The Help to Buy Scheme, which helped get many first-time buyers onto the property market, is gradually being phased out and is due to end in 2023. This will of course, come as a massive blow to young professionals looking at buying their first property. We think this could mean that many more young adults could be renting for longer, and high tenant numbers can affect rental yields that can be achieved.

Although a larger number of potential tenants can positively affect rental yields, landlords may have a tricky time maximizing profits with the new measures the government has introduced. Landlords can no longer deduct mortgage interest payments from their rental income before paying tax. Instead, their entire rental income will be subject to tax. Also, landlords are required to obtain a licence to rent out an HMO property, and at £500 it will eat into profits.

Regardless, many American funds are investing in the private rental sector (PRS) and it continues to be a multi-million-pound industry. Capital from north America accounts for almost half (GBP15.8 billion) of the total amount targeting the UK’s PRS sector. If large funds are still seeing opportunities in the UK property market, there is hope for the individual as well. If you are looking at investing in the UK property market on a larger scale, you can participate in a joint venture on UK property development opportunities.

Alternatively, we source buy to let opportunities in areas where we predict there to be high capital growth and good rental yield prospects. To bypass some of the government measures recently introduced, you should buy property in a limited company name. Investing in buy-to-let property in the UK through a company would mean you would still be able to claim the interest expense of your mortgage payments. To find out more about financing your investment, read our buy to let mortgage guide.

*The long-term fundamentals of the UK residential property market are strong. If you would like to discuss the current market trends and discuss our buy to let properties for sale with an informed property consultant, please do arrange a strategy meeting and we will be glad to to assist you.

Investing in buy-to-let property

• Buying a bargain property
• Making alterations to your property
• High income social housing as buy-to-let
• Off-plan property developments
• Conclusion about investing in rental properties

Buying a bargain property

Finding a below market value property can immediately add equity to your property. In recent years’ it has become increasingly challenging to find a property bargains because unemployment rates have been low and the Bank of England interest rates at all time low has meant that it has been easier for people to afford their mortgage interest payments.

Due to Covid-19, there have been several company closures – particularly in the retail sector – which could see unemployment rise to 10% according to the Financial Times. Increased unemployment could result in more distressed sellers seeking to make a quick sale.

How to find BMV property:

1. Mail merging an entire post code of your target area
2. Place targeted Google advertising to a specific location
3. Working with property buying companies
4. Befriending local estate agents
5. Attending property auctions

Unless you have a lot of free time and significant resources, you will probably avoid options 1 & 2.

Working with property buying companies

There are various companies such as such as National Property Buyers, We Buy Any Home and Property Cash Buyers that offer to purchase property from a distressed sellers. They would take an option agreement with a distressed seller at a 20% below market value and then try find a buyer for the property.

If you were to purchase the property, you may be able to achieve 10% below market value and still have to pay a property sourcing fee in the region of 3% - so the net benefit is 7%. The sales transaction is often complicated; the distressed seller may not want to leave the property and is highly emotional charged.

Read the reviews on these companies and if you feel that you are ethically aligned to business model, then it can be possible to financially benefit from another person’s misfortune. BMV property and distressed sales is not a part of the market that One Touch operate in.

Befriending Local estate agents

Another way to find property is by befriending local agents. They can give you first dips on some outstanding rental investment properties. You would need to be able to show that you have the ability to move forward quickly with a property purchase by having a mortgage in place. They would have a lenders decision in principle – to find out more about that check out our BTL mortgage guide.

Attending Property Auctions

In the recent years property auctions have been a very successful way for property owners to sell their properties. Bids are even accepted online or by telephone. Prominent auctioneers including Savills, Bernard Marcus, Allsop and Clive Emson have been achieving 85%+ success rate of total lots on offer being sold, with the most attractive properties securing sales twenty per cent in excess of their asking price.

Bargains can still be achieved at property auction during times of uncertainty. A short term drop in auctioneers success rates were registered during Covid-19 as fewer buyers attended.

Making alterations to your property

Refurbishing property

A lot of people choose to get into property though buying at auction and then refurbishing the property. An ideal refurbishment property project is a dilapidated property that is in desperate need of repair. From a convenience point of view it makes sense for aspiring landlords to target properties their own area. That way they can manage the property and keep costs under control.

Reconfiguring a property to increase rental income

Low wage growth and house price increases have made owning property increasingly unaffordable. Property ownership has continued to fall and the age of first time buyer increasing. That means in general that more people are living in rental investment properties.

The number of new homes being built is not keeping up with population growth and inward migration. For that reason, savvy landlords have been converting terraced houses from 2 bed homes into five bed houses of multiple occupation (HMO). Reconfiguring a property through innovative design can vastly increase the rental income. A modest amount spent on a conversion can amount to significant increase in rental income with gross yields in excess of ten per cent being achievable.

Taking on a conversion projects takes a large amount of trust in the professional team that will carry out HMO conversions. Be selective and try speak with previous buyers. Do not commit funds ahead of finding a specific project and agreed time frames for conversion.

If you like what you are reading and want to learn more, why not download our buy-to-let guide.

High income social housing as buy-to-let

We have some partners that source social housing in the North East of England and Scotland which have a low income demographic. Affordable properties circa £60,000 are often rented to social tenants. As the property is has alow entry point and rents are determined by the (LHA) local housing allowance, rents can be £500 per month. That equals makes and attractive 10% gross.

However, you can have problem tenants which may be difficult to evict if the local housing authority or council is still paying the rental income. The property values don’t tend to go up and the local housing authority sets the maximum LHA rental rates. With government cut backs it is unlikely that the rental yields for LHA property will increase.

Off-plan property developments

This means buying property off-plan from a property developer. The majority of the off-plan property projects that we source are in major UK cities and are typically 6 months to 18 months from completion.

An investor would usually make and exchange deposit of between 10% and 30% of the purchase price. The nationwide and listed property companies may keep the deposit with the solicitors. It is fairly common for the deposit to be used towards the construction costs in the case of small to medium-sized developers.

One Touch can help you as we source off-plan property and buy-to-let apartments in high growth areas, like Manchester which has experienced 35% capital growth over 5 years since 2015. Cities where there are good supply versus demand fundamentals. Manchester has highest population of young professionals under 30. You can read more about Manchester regeneration, London commuter towns article and Birmingham regeneration which outline the drivers for capital and rental growth.

Conclusion about investing in rental properties

When choosing to invest in rental properties one can add value through active management or take a more passive approach by focusing on capital growth.

For those who do not have the time and are still motivated to take advantage of the UK residential property market excellent fundamentals while benefitting from the stamp duty holiday -until March 2021- a vanilla investment approach may be more suitable.

Targeting off-plan buy to let developments could be the ideal solution.

With only 30% deposit with balance on completion, buy to let properties rented to tenants on an AST agreement. New build properties have build warrantees and property management in place. Typical net yields are 5.5% and the bank finance with low rates means that expenses will be covered. This buy to let strategy is best for those with the aim of growing their UK property portfolio by focusing on good capital growth. If this sounds like a suitable way forward, please do get in touch. We would be delighted to assist you!