Buy to Let Mortgage Rates, Institutions and the PRS and a Word On CGT

A few months ago there was a ray of hope that the historically high margins that mortgage companies want to charge buy to let mortgage borrowers could be coming down.

Readers of this column will know that back in November last year, for a 75% loan to value buy to let mortgage, you could get a reversionary (or “go to” rate) of 2% over Bank of England Base rate.

But the best you could have got any time in 2010 (on 75% LTV deals) was about 4% over base, which made me question whether these resolutely high buy to let mortgage rates were perhaps a product of less than competitive conditions in this sub market (i.e. too few competitors running a cosy oligopoly).

So we were encouraged to see that in early May, talk of renewed competition from money market dependent lenders like Paragon was perhaps a signal that the high margins and high fees lenders were demanding were about to come down.

Alas, in recent weeks, inter bank lending rates have hardened again, (blame the Eurozone crisis and North Korea) and so more competitive buy to let mortgage rates are as far off as ever.

This all means that lots of potential property investments that landlords will be eyeing still do not stack up in the short or medium term.

Build to Let

I love the National Landlords Association (and I think they love me too) but I recently reminded an exec at the NLA that when I joined, many moons ago, it was known as the Small Landlords Association – the accent being on the word SMALL.

This is relevant in the context of institutional investment in the private rented sector (a thing that all governments seem to want to encourage).

The point was that landlord’s representatives at the NLA and the Residential Landlords Association (RLA) will have to tread carefully on this topic because I guess most of their members will be small landlords.

Perhaps it is time they checked their constitutions and decided if they want big landlords to me members at all, if indeed they are not already precluded?

Institutions Have Clout

Sure the big boys have clout – and I know this because I work as a consultant with some funds who want to invest in the PRS – but the landlords associations could easily be compromised by the big investors because they don’t share the objectives of the small landlords and indeed, will compete against them in the hunt for tenants.

The problem that the landlords associations have, of course, is that they cannot be seen by government to be against the expansion of the private rented sector. After all, they must join in with the message that we need more housing – whether rented or social.

But they must ensure that the tax system is not so stacked in favour of the institutional investors that the small landlord is crowded out.

That would not be right.

I’m pleased to see a statement to that effect in the latest journal of the NLA.

PPR Relief

Speaking about tax, I think one likely casualty of the changes to capital gain tax (CGT) relief could be the existing system whereby second home owners and buy to let investors can nominate a property as their main residence for a short time and claim the last 3 years of ownership as their principle private residence.

This 3 year rule was one attribute of MPs expenses fiddles. If this was to be stopped, landlords will have the activities of our “Flipping MPs” to thank for the change.

Bit of Politics – Time to Cut Off Old Friends?

Sometimes the actions of friends go too far and you have to cut off your support for the good of everyone else around.

So, I suggest it is time China cuts off North Korea, the US reviews its support for Israel and maybe the EU takes a good look at Greece. (It may be for Greece’s own good that they go outside the Euro.)

All these changes would make the world a better, more prosperous and more peaceful place.

MORE ABOUT LETTINGFOCUS AND WHAT WE DO is the home of Landlord Information.

I’m David Lawrenson, a landlord and property investor myself for over 25 years and author of “Successful Property Letting” – the UK’s top selling commercially published property book for the last 3 years.

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  • Complements on a very interesting article – of course we love you too David.

    Institutional investment is indeed a very interesting, and potentially contentious issue, at the moment as a result of the HCA’s Private Rented Sector Initiative and suspicions that the new government will favour the big business approach to increasing housing supply at the expense of the ‘small landlord’.

    Obviously, the NLA’s primary concern must always be the interests and well being of its membership but this does not mean that we are precluded from taking a pragmatic view of investment in the private-rented sector as a whole. Like any other industry, housing can benefit from diversity and we have always supported the ideal of mixed communities where social housing, private-rented accommodation and owner-occupied homes can co-exist in local communities. Likewise we see no particular reason why large scale investors (some of whom are already members of the NLA) can operate side by side with portfolio landlords – provided that there is a level playing field.

    However, as you rightly point out the NLA (or formerly the Small Landlords Association) has been around for a long time now and over the years we have seen a great deal of speculation about the arrival of the ‘big boys’ – yet three quarters of private-rented property is still owned and operated (very successfully) by privateers. As any landlord will tell you, managing a property portfolio is not easy, and the returns are not always as high as we would like. The challenges facing large investors are immense and it remains to be seen to what extent ‘interest’ will become investment.

    Sure there are likely to be areas where the institutions will make life more difficult for small landlords, these challenges already exist in the student market. But such investors are only likely to find adequate returns in niche markets and pockets of very high tenant demand. Across the rest of the country where housing is in short supply but returns are modest and there is little need for scale development – I doubt that institutional investors will have the appetite, or flexibility to compete.

    Whatever happens in respect of institutional investors the NLA believes that there will always be a place for the private landlord and whatever our differences I look forward to working with all landlords big and small.

  • David Lawrenson

    Thanks Simon Gordon (Head of Communications at the National Landlords Association) for your considered reply.
    What will be really interesting will be the extent to which the tax system is tilted in favour of the city to encourage institutions to invest in the private rented sector.
    Will small private landlords get tax breaks too, I wonder?
    Reading some blog posts on the more socially minded housing websites such as Inside Housing there is a lot of opposition to getting the institutions involved in the private rented sector initiative and the government should also be minded of Julie Rugg’s finding that, on the whole, the bigger landlords currently do less well with respect to tenant satisfaction measures than the small operators.
    If the big investors do enter the PRS, I hope the institutions do a good job.
    I have just had the annual statement on my two endowment policies (Yes I was dumb enough to be mugged into buying one of these useless and opaque policies 20 plus years ago along with tens of thousands of others.) The statement makes grim reading.
    I hope the institutional investors can do a better job of managing let property than they did on my endowments and that the funds will perform for investors.
    A major weakness they will have to get right will be how to manage the properties they buy and let. I don’t think RSLs are the right people to do this and neither are most letting agencies.
    They private rented housing investment funds (PRSI) will need a professional class of property manager and property management in place.
    We continue to work as a consultant with a few funds interested in private rented housing investment and the private rented sector initiative to facilitate this.

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