What will become of the UK's buy-to-let property market?
That is the question that property investors are asking themselves this morning, following the announcement of an unexpected increase in stamp duty for buy-to-let property purchasers in yesterday’s Autumn Statement.
Chancellor George Osborne surprised the market yesterday by targeting buy-to-let investors and second home purchasers with a 3% increase on stamp duty for property purchases above £40,000. Coming into effect from April 2016, the purpose of the increased duty is to help the Government to generate £1bn which will be allocated to the national housing budget, allowing the Government to implement a number of schemes to help first-time buyers get onto the housing ladder.
Whilst this is an unwelcome additional tax for buy-to-let property investors, it is important to ask: What the Stamp Duty changes mean for those looking to invest in a buy-to-let property?
As the centre of financial, political and business power in the UK, London property investments have been a target for domestic and international investors alike in recent years.
Predominantly, London has been viewed by buy-to-let investors as being suited to a strategy of capital growth. The high property prices of London and the surrounding commuter belt has seen investors forego higher rental returns, instead choosing to spend a higher amount of money on an asset that they believe will increase in value.
With the introduction of the Stamp Duty increases next April, the already high prices of property in the capital are set to increase drastically. For example, the purchase of a £275,000 property will currently incur a Stamp Duty of £3,750. From next April, this will nearly treble to £10,800.
The dramatic increase in applicable Stamp Duty charges will see all but the wealthiest property investors forced to assess their own investment strategy, looking away from capital appreciation as their main source of return and instead focusing on a yielding asset such as Studio 8 at Regent House in Barnsley, which sits in the lowest bracket for Stamp Duty, but offers a NET rental return of 9% less ground rent.
The market has already seen this trend happening over the past year, as an increasing number of property investors turn their attention away from the capital and towards other growth areas throughout the UK. Most notably, the North of England.
The spiralling costs of property in London has already seen a large proportion of investors priced out of the market, with the Stamp Duty increase set to make this a less viable investment option for even more.
Unlike the market in London and the South East, the North of England has seen a far more sustainable period of growth over the past decade.
Earlier this week, the chief executive of Nationwide building society, Graham Beale, highlighted that: “Nationally house prices have been rising by between 3% and 4% for a number of months and that is sustainable with wages going up by around 3%. But in London we continue to see low double-digit rises, which does not look sustainable.”
The lower property purchase prices and the higher rental returns in the North has already seen a large number of investors turn their attentions to leading Northern cities such as Manchester, Leeds and Sheffield, as their continued development sees further positive changes to their growing housing market.
With property prices in the North now, on average, £150,000 lower than those in the South, investors will face a lower Stamp Duty charge, whilst still allowing them to benefit from higher rental returns than those available in the capital.
Government investment in the North, exemplified by the overarching plans to create a Northern Powerhouse region, is also set to see the region transformed in the coming years with more than £7 billion pledged to build infrastructure and business in the North.
The growth of the region, combined with the structure of the UK’s Northern property market is likely to become a natural choice for property investors looking to limit the impact that the Stamp Duty increases will have on their investments.
Whilst changes to the Stamp Duty system are likely to drive many investors towards the North of the UK, the South is expected to see an increase in the number of institutional purchasers and corporate funds who invest in residential property.
One important note highlighted in Mr Osborne’s announcement of the Stamp Duty increases was the exemption of large institutional purchasers from the tax increase. In his announcement, the Chancellor explained that the increase will not apply to “corporates or funds making significant investments in residential property, given the role of this investment in supporting the government’s housing agenda.”
By allowing institutions to operate exempt from the taxation, the Government believe that they can combat the trend of individual property investors encroaching on owner-occupied properties, limiting the number available to first-time buyers.
This caveat to the wider policy will allow larger investment funds to capitalise on the greater availability in the South, particularly in London, as investors with a smaller amount of funds look elsewhere for investment opportunities.
This shift in the market will help the Government to sustain a more stable private rented sector (PRS) throughout the UK. Developments funded by institutions are predominantly designed for the specific purpose of becoming PRS assets, providing supply for an increasingly large population who are electing to live in privately rented accommodation as opposed to purchasing their own property.
The announcement of Stamp Duty increases is likely to be a catalyst for a large shift in market trends and attitudes in the coming months, with the possibility of a last minute rush to purchase ahead of the changes coming into effect highly likely.
With such a large amount of change coming, it will force many property investors to reassess the market and to explore their options in other asset classes with lower purchase prices such as student accommodation or alternative investments, as well as exploring new regions of the UK that are ripe with opportunities and deliver attractive rental returns.