When Ayesha Ofori began buying homes to rent out in 2012, London was at the front and centre of her portfolio. With a lump sum to invest, the former City professional bought half a dozen properties in the capital. Nine years on, she is still investing — but with a very different target in mind.
“When it comes to buy-to-let, the numbers in London and the South East just aren’t compelling. If you go further north you get more bang for your buck,” she says. “Prices are lower and you can get decent rental yields as well.”
With about 20 properties in a portfolio managed with her husband, Ofori has bought homes in Birmingham and Dudley, and is completing new purchases in Walsall and Wolverhampton.
In the years following the financial crisis, London and the South East was a hotbed for buy-to-let landlords, as the economy staged a strong recovery, tenant demand soared and buyers looked to sweeten rental returns with house price rises: in London, prices rose by 78 per cent in the 10 years from 2007, compared with a fall of 9 per cent in north-east England, according to research by property agent Savills.
That picture is now in flux, as London’s performance has stagnated while the gains elsewhere in prices and rents have accelerated. Ofori, founder of PropElle, a network for women property investors, is unusual among landlords in being willing to invest far beyond her home territory. But there are signs that investors across the UK are looking at improving prospects for the private rented sector outside the capital and the Southeast.
FT Money explores how demand among landlord-investors is changing with shifts in the UK residential property outlook, the impact of policy changes and the risks of failing to understand what drives a local market.
Our analysis comes as this week’s local elections have focused attention on local politics across the UK, especially in districts in the Midlands and the North, where Boris Johnson’s government has pledged to level up living standards, including in housing.
The buy-to-let market has been put through the wringer since 2016 after a succession of regulatory and tax changes complicated the business for landlords and whittled down their profits.
A stamp duty surcharge was introduced in April 2016, adding an extra 3 per cent on to the cost of a purchase for buy-to-let and second home buyers in England and Northern Ireland (now 4 per cent in Wales and Scotland). The following year, the government began to withdraw mortgage tax relief for landlords in the higher rate tax bracket, a process completed in 2020. Brexit also put many investors on a more cautious footing.
All told, buy-to-let home purchases fell by about 40 per cent between 2015 and 2019, according to a report by finance industry body UK Finance and Zoopla. But there were big geographical variations. In places where housing was expensive and rental yields low, the market retreat was much deeper than in northern England, Scotland, Wales and Northern Ireland. There, buyers required less equity to purchase and could access mortgages at higher loan-to-value ratios.
Has the pandemic affected this trend? Not according to the data, which suggest a remarkable stability in the investment market in the face of lockdowns and economic uncertainty. Around 37,000 buy-to-let mortgages were completed in the second half of 2020, similar to the same period in 2019, according to a report this week on the rental outlook by The Mortgage Works, Nationwide’s buy-to-let arm.
Investors take their place in a broader market that has been running at full throttle since the announcement of a stamp duty holiday in England and Northern Ireland in July 2020. Mortgage borrowing in March hit the highest level since the Bank of England began collecting the data in 1993, while average house prices in the Office for National Statistics index jumped 8.6 per cent over the year to February 2021, the highest annual growth rate since October 2014. The so-called “mini-boom” first identified last summer has long since lost its prefix.
Buy-to-let landlords must still pay the additional stamp duty charge when buying a home for rent, but they qualify for relief on the main stamp duty charge. Leona Leung, a part-time landlord in Birmingham who works as a letting agent in her main job, says the measure has brought an influx of buyers looking to save on a purchase, but also sellers seeing a chance to take profits in a buoyant market. “Both sides are busy at the moment — and we are seeing more people looking to become landlords.”
Prices are rising fastest in the most affordable areas. In the ONS data, the Northwest clocked the highest rise among English regions at 11.9 per cent in the year to February 2021, versus London, the lowest at 4.6 per cent.
Industry professionals warn landlord buyers not to be seduced by short-term house price speculation, since most will be committing for ten years or more, over which prices will ebb and flow with the market cycle: in this view, the fundamentals of earnings and tenant demand remain the key indicators for serious long term investors.
But even those indicators are looking stronger outside the capital. TwentyCi, a consultancy, compared new instructions at letting agents with lets agreed. It found that the ratio of demand to supply so far in 2021 was 48 per cent in London, compared with 81 per cent across the rest of the UK (up from 71 per cent in 2019). London has stagnated as a landlords’ market, while demand for rented property is pulling away elsewhere.
Richard Rowntree, director of mortgages at Paragon, a buy-to-let lender, says investor interest in these areas has been on the rise since the tax changes of 2016. “Landlords have been searching for yield, driving the popularity of towns in the Midlands and the North.” In the past 12 months, he adds, the North East and West Midlands have been “particularly buoyant”.
The great majority of buy-to-let investors stay relatively close to home, relying on their knowledge of local conditions to select and manage properties, Rowntree says. Over four-fifths of landlord borrowers on Paragon’s books buy within 30 miles of their home.
When the pandemic struck, some predicted big changes to the demand structure of the private rented market. Rowntree says this has not come to pass, giving the example of HMOs (houses of multiple occupancy), a niche some thought would suffer amid Covid fears around communal living. But HMOs are now delivering the highest yields of all property types, he says.
“At the beginning of the pandemic, there was this view that everyone would want their own front door and private space. That’s not been the case. Isolation and loneliness has played a part, as has affordability. It’s what you can afford,” he says.
Others have detected a change in demand linked to homeworking. John Andrews, partner at the Kidderminster-based estate agent Doolittle and Dalley, says the pandemic has brought more buyers to his door from Birmingham, 20 miles east. “People are tending to move out of the Birmingham conurbation because Kidderminster is that bit nicer. If people haven’t got to go into the office every day they’re thinking we’d rather live round here and not have the same costs as we’d have with properties close to Birmingham.”
Among the mainly local buy-to-let investors on his books, he has seen varied reactions to current conditions from different types of landlord. Some of those with a small number of properties are looking to cash in, as the more stringent tax and regulatory changes begin to tell. Some are selling up, post-pandemic, to enjoy their lives in retirement. But there are still those thinking of investing “because they’ve nothing else to put their money into”, as well as interest from larger professional operators, he says.
“The whole market round here is in quite high demand. Prices are still reasonable and affordable, and both small and large investors as well as developers are looking to buy. Those selling are in the minority,” he says.
Leung has noticed more London investors buying in and around Birmingham in recent years. “Ten years ago it used to be all local buyers. We didn’t see London buyers at all.” Local investors now account for about 50 per cent of landlord purchases through her agency, with about 35 per cent coming from the capital and the rest from overseas.
Politics has provided another motive for investors to reconsider the prospects for regional growth. As part of plans to help communities the government considers “left behind”, Darlington in County Durham is to become a new hub for Whitehall departments, including 750 officials from the Treasury, business, transport and local government. Overall, some 22,000 Whitehall jobs are expected to move out of the capital to other parts of the UK by the end of the decade.
The private sector is also expanding its UK horizons outside the capital. Goldman Sachs last month announced it would open a technology outpost in Birmingham, employing hundreds of people in digital jobs. Amazon is creating three distribution centres in Doncaster, Daventry and Tilbury, and the BBC is moving departments to locations across the UK.
Richard Donnell, research director at property site Zoopla, cautions that market fundamentals, such as earnings and prices — not government policies — are the main drivers in the property market. But he adds: “Investors need to invest in areas where the outlook for the economy is positive and there is a connection to major employment centres.”
Dangers lurk for those unfamiliar with market conditions in their chosen investment location, particularly where the economic outlook remains clouded. Kate Faulkner, founder of Designs on Property, a Nottingham-based research company for residential property professionals, points to the fundamental disparity in rental affordability for tenants in many parts of the country. “You just have to accept that house prices and rents are driven by earnings. In the Midlands and the North we just do not have the level of earnings as in the East, South and London.”
Faulkner warns that the most successful investors will have a granular knowledge of their target city or town, down to the level of individual streets and their appeal to different types of tenant. Those who get it wrong can face difficulties letting, higher voids and lower scope for rental growth.
Others warn that the biggest cities — Birmingham and Manchester — have suffered from an oversupply of apartments of a sort that the trend to homeworking has made unfashionable. House price growth in Manchester is running at over 6 per cent a year, but rental growth there and in Birmingham and Manchester is down by 2 to 3 per cent, says Donnell of Zoopla. “Investors buying flats in city centres need to think about how much supply is being developed and whether this will impact on rents and voids.”
Ofori, the landlord buying in the Midlands, has deliberately avoided Manchester and parts of Liverpool, which she says look “frothy”. “My rule of thumb is that when family members start to mention things, that’s when I know it’s a bubble.”
Today’s optimism in the property market is based partly on expectations of a rapid recovery in the economy following the vaccine rollout — and the better than expected experience of landlords and tenants last year. “Landlords are a gloomy bunch at the best of times but this is probably the most positive I’ve ever known them,” says Rowntree of Paragon.
Nonetheless, some landlords have seen a big loss of income. The National Residential Landlords Association says 14 per cent of landlords have lost more than 20 per cent of their income as a result of the pandemic — and rents are likely to come under renewed pressure when the furlough scheme ends at the end of September.
A report this week by the London School of Economics and Politics found 400,000 tenants may be in significant rent arrears by the end of 2021, based on government estimates of the unemployment rate rising to 6.5 per cent. Tax changes to repair the public finances are also on the agenda, and could cut into landlords’ financial returns.
At a time when the property market is booming, the economy is coming back to life and rental demand is rising outside London, investors may feel conditions augur well for a new purchase. But it would be premature to assume the pandemic will fade away without further ramifications for the UK’s private rented sector.