Why the 2016 Autumn Statement is good news for property investment.
I slept on it before taking this first considered look at what the Autumn Statement really means for UK property investment. In addition to the shock headline, there was also a lot in the Autumn Statement that bodes well for property investment. And as for the abolition of letting fees to tenants – I’ll review what difference that could really make to you, and how to mitigate that cost.
Great news – Infrastructure spending is to be increased
Infrastructure is one of the key property fundamentals that drive capital gain and rental income potential on property investment. It was great news to hear that the government is committing billions to spending in this area. In fact, it was one of the Chancellor’s first announcements that directly impacts the property market.
The commitment to spend £2.3 billion on infrastructure to support the building of 100,000 new-build homes is really welcome news. This spending will be concentrated on areas of high demand.
For those considering off-plan property
investment in inner cities, commuter towns, and university towns, you should be extremely happy with this news. The idea is that the infrastructure that today’s tenants and homeowners rely on will be in place where new-build properties are being developed.
Good news – Tackling the housing crisis with affordable homes
The Chancellor also announced £1.4 billion of new money to be spent on creating affordable homes, and a relaxation of restrictions that should allow a greater range of affordable homes to be built.
Now, while this sounds a huge amount of money – and it is – the aim is for just 40,000 affordable homes to be financed by this cash injection. The ‘Building More Homes’ report in July concluded that 300,000 new homes need to be built each year in the UK to help solve the housing crisis. The government is struggling to meet its target of 200,000 each year. The one-off addition of 40,000 new homes is not likely to make a big dent in rental demand in the private sector.
These new funds – along with the announcement that London will be allocated £3.15 billion of existing funding for new affordable housing – could give as boost to schemes like that recently signed off by Barking & Dagenham Council – it is setting up a regeneration company to build 42,500 new homes over the next 15 years.
Is the extra supply of affordable housing bad news of property investors? Definitely not. It’s good news. It removes a slug of low quality tenants from applicants to vet. Many of these would be subsiding rent by benefits payments – and successful landlords never let to tenants on benefits.
There was also the announcement of a regional pilot scheme to extend the right-to-buy scheme for housing association tenants – a small announcement that has very little (if any) effect on property investment in the UK.
No news – Stamp duty and mortgage interest relief
Many property investors had hoped that the Chancellor would announce a U-turn or some relaxation on the imposition of higher Stamp Duty Land Tax and the phasing in of the new rules on mortgage interest tax relief. We didn’t think this was likely to happen, and we've have been proved right. The squeeze on profits (especially for higher rate taxpayers) continues but there is still plenty of opportunity and ways to mitigate the pressure.
- All the tax changes affecting your portfolio but more importantly what you can do about it
- Strategies you can use to minimise your tax liability
- What deductions you can still make to reduce your tax bill
- Tax mistakes and how to avoid them
Bad news – The abolition of letting agent’s fees to tenants
Letting agents will no longer be able to charge upfront fees to tenants. The chancellor explained this would positively impact 4.3 million households. It’s estimated that these fees – to help cover the cost of reference checking, administration, inventory management, and credit checks – range between £202 and £337.
This news is being applauded by tenants’ associations. Shares in letting agents fell sharply on the announcement – Foxtons value dropped by 10%, for example. We think that these falls are overdone – at the end of the day, the fees that letting agents charge tenants are an integral part of their finances. They will be replaced – unfortunately, that appears to be likely by bumping the fees onto the landlord. The landlord, of course, is you, the property investor.
However, before you throw your head back in disbelief and mutter a few obscenities under your breath aimed at the government, we should analyse the effect the extra cost may have on your cash flow and property investment along with what you can do about any shortfall this additional expense will cause you.
The cost is less than you think
Let’s say that your letting agent charges a fee of £240 to your tenant. Under the new rules, the agent is going to charge you. As it a fee, you’re allowed to claim it against your rental income and get tax relief on it. If you’re a basic rate taxpayer, the real cost to you will be £192 (£240 – 20%). That’s still a dent in your net income, but not as much as it could be.
Mitigating the extra letting agent fee
You might decide to eat this cost, but assuming you don’t want to then the easiest thing to do is to add the cost to the rent that you charge to your tenant. Most buy-to-let landlords are likely to take this route. Recouping the £240 over the course of a year is £20 per month.
The advantage for your tenant is that they don’t have to stump up the £240 in one hit. The advantage for you, is that you recoup the fee. Then you benefit from the higher rent in the long-term (and any further rental increases based on this new rent).
Has the chancellor got it right?
Rents are increasing in the UK, and the government is under a lot of pressure to make the private rented sector more affordable. This isn’t a problem caused by unscrupulous landlords charging extortionate rents. Landlords always try and charge the right rent to maximise profits. The issue is that demand in the property market massively outweighs supply. Consequently, investment property prices are rising at a pace that outstrips inflation.
Buy-to-let landlords have to charge a reasonable rent to make their investment property make sense. If they aren’t able to do so, then property investment would stop, and if this happens the housing crisis will be made worse, not better.
Landlords will have no alternative other than to recoup their higher costs by increasing the rents they charge their tenants. All this new rule really does is move the cost full circle and put it back on tenants – who, over the long-term could find themselves worse off: the agent’s fee is a one off, while rent continues every month (with inflation increases based on current rent).
Autumn Statement in summary
The Autumn Statement’s good news is good news for property investment, and what bad news there is can be easily mitigated by property investors. Don’t forget, the Chancellor also announced that your personal allowance will increase to £12,500 by the end of this parliament – and that will take more of your income out of tax.
While I think that the chancellor has got this one wrong, to me this Autumn Statement marks a turning point for property investment in the UK: the good news for property investors outweighs the bad. That hasn’t happened for the last couple of Autumn Statements. Perhaps the tide is turning?
Finally, you should remember that the good news is a certainty. It’s going to happen. On the other hand, the abolition of letting agent fees to tenants will come into effect ‘as soon as possible’. No date has been set. It’s a crowd pleaser that might yet be abandoned after a period of consultation.
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