From buy-to-let to hotels: why now is the time to make the big switch (Part 1)

By March 31, 2017 No Comments

Being a landlord was always pretty tough, but it’s getting tougher, and tougher. Running the gauntlet of swingeing cuts and rising taxes means profits are being stealthily eaten from both ends until they are…well…not profits any more. Sitting on assets with no effective yield because of what mortgaged landlords believe to be the cruel whims of a populist government hurts, and is why many are looking around for alternatives (more on those alternatives further down).

Fiscal physics in play

But adding to the woes of an orchestrated pummelling from on high, landlords are now faced with a market-related downer, which is that, quite literally, rents are heading south. In February 2017, figures showed that average UK rents were down year on year, with the weight of London and the Southeast the rope and stone around the ankles of continuing prosperity. If ever an indication was needed that the light-headed, bubble blowing south was getting heavy, this is it.

Unless you reside in outer space, the old adage that what goes up must come down rings true. Right now there is a strong reminder that the world of economics also adheres to the rule of gravity, and we are witnessing a type of fiscal physics in play.

Why so significant? Because it’s been seven years since rents came down. According to the UK’s largest estate agency, Countrywide, rents were down by an average of 0.6% year on year to £921. While that might not sound like a huge amount, it’s significant. A truck takes a long time to turn, but once the turn is complete, it’s easy to gather momentum in the opposite direction.

All of this hints that the cracks in the shell of Britain brought about by Brexit are starting to spread and widen. What type of ‘new Britain’ emerges from the fallout, it’s difficult to say, but the robust, arguably overly robust, arguably insanely over-hyped domestic property market looks set for a pullback meaning that landlords will have to have the quick tricks and fast manoeuvres of a sprightly young Jedi to duck the horizontal guillotines, jump the rolling logs and otherwise navigate and avoid all of the approaching pitfalls.

Supply and demand flipped on its head

But why is this happening? Why are rents going down? On this occasion it’s an issue of supply and demand. You heard right. What was once cited as the reason for the property bubble inflating is now being cited as the reason for it’s shrinking. There are 10% more properties being let in the UK than this time last year, with 18% more in London. Which means for the first time in a decade there is real dissonance between housing sales on the one hand and properties being made available for rent on the other. In addition, prime central London property prices have fallen by more than 10% in the last year. Most of this is down to government meddling.

Due to the crazy rush of amateur investors looking for a simple alternative to pensions, and the belief that a housing underclass unable to afford that first step onto the property ladder would prop up their otherwise uncertain future, the rental market has now started to unravel as a victim of its own success, with the solution is fast becoming the problem.

What was a sure thing seems not so sure anymore. Now that a full year has passed since the additional stamp duty deadline was introduced, many of those houses that dodged the bullet of the duty hike are now on the market for rent. Just to put that into some sort of perspective, in the stampede that took place prior to April 1 2016, the Office of National Statistics (ONS) stated that:

  • The number of residential property sales increased by 71% between February and March 2016
  • The number of sales of flats and maisonettes in March 2016 was more than double the average for March in the previous 5 years.
  • The number of property sales in April 2016 was 19.6% below the 5-year average for April.
  • The increased number of property sales in March 2016 was driven by an increase in the number of buy-to-let mortgage completions.

In other words, as people fought hard to complete, and thus avoid the whopping new fee, the market went from reasonably frothy to white-water crazy. Are we now experiencing the hangover of that mad rush?

For more information on moving your capital from buy-to-let property into hotels, with a guaranteed return on 8% or more, call us today.