Could BTL be on its way out?

Warren Lewis
24th March 2017
"The question that emerges then, is: can the North-West match London for stability and growth?"

Buy-to-let has long provided bumper returns for investors, but a number of clouds on the horizon have prompted some concern as to the sector's future.

According to Paul Mahoney, managing director at Nova Financial, the landlords' landscape might be changing but property can still be a valuable investment.

Paul said: "When considering the tax changes and higher rental coverage rates for lending, there are certainly some areas where buy-to-let property investment is becoming less viable. London and the South-East represent standouts, given lower rental yields that average around 3.5 per cent that restrict the maximum borrowings in most cases to less than 60 per cent, so a lot more cash needs to be applied. Given that the average property price in the capital is now in excess of £500,000 the average cash investment is well over £200,000 including costs.

Due to the low yields available in these parts of the country, properties that are leveraged at 60 per cent, loan to value, are barely breaking even. Thus, landlords are exposed to interest rates and the potential negative cash flow situations. Add to this tax changes which will reduce the tax efficiency of an investment for anyone earning more than £50,000 per annum if the investment is in their name, and you have quite a few reasons to avoid investing now.

Within the context of the capital, then, investment appears laced with risk. Many of our clients, however, have been investing in other major UK cities like Birmingham, Manchester and Liverpool. The most interesting trend affecting the property market currently is 'North Shoring' which is the movement of employment from London to the North-West. Net migration is strongly positive from London to the Midlands and the North-West which is being driven by strong growth in employment. Manchester alone has benefitted from over 60,000 new jobs since 2011 and major companies such as Ernst & Young, PWC and Deutsche Bank, to name but a few, are contributing.

The question that emerges then, is: can the North-West match London for stability and growth? If we look at the changes that have occurred in Liverpool over the past 12 months, there is certainly a case. Job growth year-on-year to June 2016 was 38.1 per cent and the economy grew by 15 per cent. Each of the North-West cities on average have outperformed London over the past year for capital growth and are providing roughly double the yields.

So, how do the tax and lending changes affect cities like Birmingham, Manchester and Liverpool? Given that yields generally range from 6-8 per cent or more, there is no issue with rental coverage at all, and although the tax changes may slightly impact upon some investors' cash flow, there is a stronger buffer given the difference between interest rates and the yield is greater.

The majority of our clients have been investing in the Liverpool and Manchester city centres renting to young professionals. With the ability to borrow up to a 75 per cent loan to value at interest rates of circa 2.5 per cent and generate yields of 7 per cent or more, the net return on investment is mostly 10 per cent or more excluding growth. A fairly average growth rate of 5 per cent per annum offers a 20 per cent return on your deposit as you've leveraged four times, so when you add that to cash flow that is 30 per cent per annum. This may seem too high to be true but it is due to the borrowings which accelerate returns on your cash deposit four times.

Buy-to-let isn't dead, but it's changing. A London location has become less of a necessity and the fault lines of the UK property market have been redrawn."

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