The mere thought of purchasing a buy-to-let in London has caused many investors to run for the hills, and we all know the reasons why. The combination of increased stamp duty, tax relief cuts, raised interest rates and potentially lower yields than in other parts of the UK is making a lot of landlords nervous.
Meanwhile, there's uncertainty over what will happen to the housing market following Brexit.
But the fact remains that there are more people renting property in London than ever before, and demand continues to outstrip supply. As many landlords have upped sticks and left, others have adapted to the changes, and seen opportunity where others have seen setbacks.
Here's why now could be the best time to rent in London.
Brexit: a summary
Nobody knows what on earth will happen after Britain leaves the EU on 31 October. But it's a pretty safe bet that there isn't going to be a mass exodus from London. People are still going to need to live and work there, and most households are in no position to buy any time soon. This sprawling metropolitan mass is showing no signs of slowing down, and a report from Foxtons estate agent at the end of 2018 showed that for every rental property listed there were nine prospective tenants registered. And figures from the ONS show that rents in London are increasing at their fastest annual pace in two years.
But renter's rights under the post-Brexit regime are still unclear, and many landlords will prefer to wait until after 31st October for clarity. Under the 2014 Immigration Act all EU nationals have the right to rent property in the UK, but this law may change. Nevertheless there will still be a steady stream of prospective tenants looking to live in the capital.
Mark Carney told the Commons Treasury Committee in June that in the event of a no-deal Brexit, the Bank of England would likely cut interest rates. Investors with flexible-rate mortgages could benefit from the short-term deflation.
Tenant trends: Who are they and where do they want to live?
As young professionals are finding it increasingly difficult to save for deposits, strong growth in the rental market is predicted and rental prices are continuing to rise. Experts predict that most Londoners will never be able to buy a home in the capital, so this demand is not going to go away.
A sharp increase in tenants seeking rooms, rather than whole properties, has led many investors into the world of HMOs, which produce the highest yields in the capital.
Research from property website ideal flatmate shows the average price of a London room rose to £902 in 2019. Read our guide to purchasing an HMO here. It's a good way for young professionals to save money for a deposit, while students are drawn to rooms in the vicinity of their university.
There are over 40 higher education institutes and more than 400,000 students in London, boasting the highest concentration of anywhere in the UK (and this doesn't include foreign universities with branches in the capital).
But it's not just the younger generation that want to rent London homes. Take for instance the growing number of senior citizens renting in the UK.
The number of retirees renting in the UK has doubled in ten years and this percentage is set to grow as a growing number of over 60s a choosing to sell up and rent in retirement. Many want a long-term tenure in their home city, but can't afford or don't qualify for a mortgage.
Tenants of retirement age are less likely to want to live in pricey commuter areas, but rather stay in quieter, residential areas with access to shops and they're also more likely to have a stable stream of income. House prices tend to be lower when the property is more than a 20-minute walk from a train station.
What part of London to invest in?
Areas with higher-than-average rents generally show the lowest yields in the London. More investors are looking to areas further afield. To the east, areas such as Dagenham, Barkingside, Ilford and Stratford, which has seen an influx of professionals take up residency since the 2012 Olympics regeneration all produce rents of around 5% and higher. Flats in east London's Plaistow sold for an average of £359,000 last year, but monthly rents were not that much lower than more affluent areas such as Hackney. The area boasts good schools and commuter routes, good pubs and it's within walking distance to Stratford's Olympic Park, making it a popular choice with urban professionals.
Families will pay more to live in good school catchment areas. There are still grammar schools on the higher-yielding areas on the outskirts of Kent, like Bexley. To the west, areas around Heathrow, such as Uxbridge also produce some of the highest yields in the capital.
Getting a mortgage
Despite the obstacles facing landlords taking out mortgages - tougher regulations, increased rates, stamp duty, no tax relief - many shrewd investors are looking to buy houses through limited companies to get around these obstacles. Landlords are now required to ensure that the rent will cover 145% of the mortgage, although since these guidelines were introduced, many lenders are relaxing their criteria.
July's Quarterly Housing Market Report concludes that house prices have continued to fall in Outer London than at any point since 2009, yet rents have steadily risen. The report said that London has shown that London had the lowest annual growth compared to anywhere else in the country, in terms of sold prices.
By preparing a business plan in advance, and taking into stock potential void periods and overheads, you'll get a more realistic yield projection so you can make a more informed decision.
To sum up, buying property in London can be a valuable investment if you research and choose the right area, know your audience and set realistic expectations. It's also worth working out whether buying a property through a limited company could be the right thing to do.
No one knows what the future will bring after Brexit day, but there are many certainties - it won't be hard to find tenants in the long run and there are areas that offer better yields. There are ways to accommodate students and people seeking single rooms, leading to many investors considering HMOs. Increased demand leads to rental growth faster than anywhere in the country.
Study tenant trends and arm yourself with enough knowledge to make an informed decision - this needs to be long-term, not a trial run.
So perhaps that HMO in Barking bought through a limited company might not be such a bad idea.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.