Build to Sell VS Rent

Click here for your Free Report on Building a Property Deal Pipeline

A three per cent stamp duty surcharge and a change in tax regulation are factors future landlords will have to consider.

Talk to a seasoned landlord and the chances are that they will moan about the good old days before George Osborne added higher stamp duty on second homes and withdrew higher rate tax relief on mortgage and finance interest.

Few experts are predicting a buy-to-let bonanza in 2018. “The changes in taxation and other rising costs of home ownership are not making it easy to be a landlord,” admits Kate Eales, Head of Lettings at Strutt & Parker. But where Eales does expect to see growth is in so-called build to rent (BTR) properties. This is an emerging sub-market within private residential rented stock, designed specifically for renting rather than for sale and typically owned by investors. In fact, Strutt & Parker’s analysts believe that the UK is ‘on the brink of a large-scale commercially developed, owned and operated BTR sector’.

For more traditional landlords, with a portfolio of older properties, this year has been frustrating following recent tax changes. But if profit margins are tight, that does not necessarily mean that the buy-to-let game is not worth considering.

The great thing about the buy-to-let sector is its adaptability. If some landlords fall by the wayside, others learn how to weather the bad times and cash in during the good times. And if the 2016 tax changes were a jolt to the system, there is evidence that the buy-to-let sector has absorbed the shock and is starting, albeit slowly, to bounce back.

“Rental values in prime central London fell by 2.5 per cent in the year to October,” says Tom Bill, Head of London Residential at Knight Frank. “We now expect rental values in London as a whole to move from broadly negative to flat in the near term. It looks as if the large spike in new stock that followed the additional rates of stamp duty introduced in April 2016 has been largely absorbed by the market.”

Another factor keeping rents high enough to attract would-be landlords, is the shortage of supply. Paradoxically, because some landlords were discouraged by the 2016 tax changes and slimmed down their portfolios, the ones who have held their nerve have realised that their properties can still command decent rents with demand remaining strong.

The key thing, as always, in the buy-to-let sector is to research the market properly. Asking rents in the capital fell by 3.2 per cent in the year to June 2017, but rose by 1.7 per cent in England and Wales as a whole, according to Savills figures. ‘‘The rental outlook is strongest in regional cities that attract investors from high value sectors such as professional services, technology and finance,” says Lawrence Bowles, Research Associate at Savills. Cities such as Edinburgh, Bristol, Oxford and Cambridge all seem to tick the right boxes.

You would have to be very clever, or very lucky, to make a killing in the UK buy-to-let sector in the near future. However, property has always been a long game for those prepared to do their research, budget carefully and become hands-on landlords. There are still interesting times ahead for savvy investors.

Keep it simple:how to do your own fire safety assessment online if you're a landlord

Like most landlords, I would do everything possible to keep my tenants safe. However, I can’t say hand on heart that I have complied with all the fire safety regulations that apply to one of my properties — because the regulations themselves are so darned confusing.

The property causing me concern is a four-bedroom duplex that was previously let to a group of friends on a single tenancy agreement and is now let to four sharers on individual contracts. It is, therefore, labelled as a house in multiple occupation — an HMO — and as such requires me to take greater fire precautions than if it were let as a single unit.

But what extra fire precautions do I need to take? Obviously I have smoke alarms on both floors, which has been a requirement in all rental properties since October 2015, but I am not sure these are enough both to comply with the law regarding non-licensed HMOs and to give my tenants enough warning in the event of a fire.

I have spent hours trawling the internet for information and poring over official fire safety guidance, but I still can’t work out whether these alarms should be replaced with more expensive mains-operated ones, which avoids the risk of tenants removing or forgetting to replace the batteries.


READ MORE
Complacent landlords risk getting caught out by the latest regulations
Also, do I need special fire doors, fire alarms and special fire-fighting equipment such as sprinklers, or at the very least fire extinguishers on both floors?

Thinking the local authority would be able to help I gave them a call but they referred me to the local fire service, who told me I’d need to pay for a private company to carry out a fire risk assessment. However, all the firms I contacted told me this was neither a necessity nor a legal requirement for my type of property.

Instead, I downloaded my own fire risk assessment form from the internet and, using the accompanying guide, did it myself.

As a result, I’ve decided to err on the side of caution and install interconnected mains-operated alarms. I am also going to install a mains-operated heat alarm in the kitchen, which will be connected to the smoke alarms. In total, this will cost about £600.

I probably ought to provide a fire blanket for the kitchen, which I can get for less than £5 from my local hardware store. I’d been wondering if I should get a fire extinguisher, too, but after reading the official guidance I think this might do more harm than good.

READ MORE
Is it right to force landlords to accept tenants with pets?
Why it always pays for landlords to do a credit check on tenants
Accidental landlord: this frosty tenant just won't thaw
Far better, I think, to tell tenants to evacuate rather than try to fight a fire. I certainly wouldn’t trust any of those ditsy students to use an extinguisher effectively.

I had also considered fitting a self-closing arm to the kitchen door to try to prevent a fire spreading to the rest of the flat, but apparently these can make a door hard to open, trapping someone inside a blazing room.

During my assessment I spotted that a couple of the tenants had extension leads plugged into other extension leads, which they had loaded with multiple plugs for things such as hairdryers, curling tongs and laptops, all of which they had left on standby.

I emailed them all warning this was a hazard and asked them only to use one extension lead at a time and to turn off appliances when not in use. They will ignore me, but I can only do my best.

I just hope that all this is enough and that at least now I am complying with all the law

Has the Government made Peace with the CIL Review?

For those of you eagerly awaiting an update to our previous Community Infrastructure Levy (CIL) blog, SIT and LIsTen, the Government has - as previously promised - provided its initial recommendations in response to the CIL review in the Autumn Budget. For those not in the above category (CIL anoraks are apparently a niche group), planning obligations and CIL remain a significant consideration in the viability and deliverability of development, and therefore the Government’s stated first Budget objective of supporting more housebuilding.

The independent CIL Group, led by Liz Peace, prepared their report ‘A New Approach to Developer Contributions’ in October 2016 and this was released in February 2017 alongside the Housing White Paper. The Group’s report provided a number of recommendations, with the overarching objective of simplifying the levy, a laudable and welcome aim, but not an easy proposition.

We identified five headlines from the Review report in our February 2017 blog. So to what extent does the Government propose to take these on board?

A ‘new approach’ of ‘Local Infrastructure Tariff’ (LIT), ‘Strategic Infrastructure Tariff’ (SIT) and s106

LIT is not mentioned but the ‘3 tier’ CIL and planning obligation regime is been pursued through the introduction of SIT.

LIT rates linked to house sale prices

CIL indexation is to be linked to house price inflation, rather than CIL rates themselves. Whilst indexation is important – as highlighted by the Wandsworth/ Peabody case – this proposal does not get to the nub of the issue.

The CIL Group’s report recommendation to simplify CIL rates themselves has seemingly not been progressed. In fact the Government appears to want to do the opposite, proposing to consult on charging authorities having greater opportunities to vary CIL rates based on land use changes, so as to ‘better reflect the uplift in value’ - for example, higher CIL rates could be charged for the development of agricultural land for new homes, than say the residential development of industrial land.

Mandatory LIT charged on new development with no reliefs and exemptions

Silence on this proposal, as it currently stands.

Small developments only pay LIT and larger/strategic development would be able to negotiate s106 obligations, s106 pooling restrictions removed and potential offset LIT against s106 obligations

Pooling restrictions are to be removed… but only in ‘certain circumstances’ such as in low viability areas, or where significant development is planned on several large sites. The Government claims this will avoid ‘unnecessary complexity’.

However, the absence of the potential to offset LIT against s106 obligation contributions is a major omission. The current disconnect between strategic developments and associated infrastructure delivery seems likely to continue. In recommending offsetting, the CIL Group noted:


A further benefit of the combined LIT/Section 106 approach will be that large developments will be able to address, through the Section 106, not only the funding of the infrastructure but also the delivery of the infrastructure, which has been one of the failings of CIL.

SIT contributing to identified infrastructure projects similar to the current Mayoral CIL

SIT is to be taken forward with consultation on whether this should be used by Combined Authorities and planning point committees to fund both strategic infrastructure (as the Mayoral CIL does for Crossrail in London), and local infrastructure too.

So where does this leave us? Still facing uncertainty arising from ongoing issues with the detailed and technical workings of CIL; more clarity is certainly anticipated when DCLG launches the proposed consultation on taking these headline measures forward – and we hope, further CIL amendments that resolve day-to-day problems inherent in the current rules.

The Government’s measures are seeking to make the CIL regime encapsulate opportunities for land value capture, as evidenced by the proposal for more variance in CIL rates and the commitment to speed up the process of setting and revising CIL. The latter also recognises that the current two stage consultation process and evidence base requirements can present a time and cost barrier to charging authorities putting CIL in place. This particular proposal is to be commended and anything that can make the levy more responsive should be welcomed.

However, those dealing with CIL ‘on the ground’ will no doubt recognise the need for the CIL Regulations themselves to be more transparent, simplified and useable. Introducing greater ‘flexibility’ in terms of CIL rates (and the more extensive evidence base needed to support this) should be alongside streamlining the Regulations and simplifying how they are applied to development projects – a very difficult balance.

‘Fixing our broken housing market’: Housing White Paper

‘Fixing our broken housing market’, DCLG’s Housing White Paper, has been published; it includes a series of consultation questions, with a Build to Rent (BtR) consultation issued alongside (responses to both have to be submitted by 2 May).

Lichfields' review of the White Paper analyses what the Government expects of councils in terms of development management, local plans and neighbourhood plans, and what is expected of private developers.  The review also covers:

Build to Rent: longer tenancies and affordable private rental homes
Small sites, and more support for small and medium-size builders
Statutory plans to include design expectations
More affordable housing tenures and certainty for how starter homes will be taken forward
Continuing ‘defence’ of the Green Belt, with a clearer approach for considering land release
The Government defines its proposals as four steps to achieving the objective of boosting new housing supply, to deliver ‘between 225,000 and 275,000 homes every year’. The steps are:

Planning for the right homes in the right places (principally by using local and neighbourhood plan policies)
Building homes faster (mainly by better linking infrastructure with housing development, more efficient development management and addressing the construction skills shortages)
Diversifying the housing market (focussing on increasing the numbers of small and medium-size builders, promoting more varied forms of tenure and encouraging ‘modern methods of construction’)
Helping people now (by meeting all of the population’s diverse housing needs)
The White Paper broadly succeeds in bringing together all of the strands of England’s complex housing market, then connects them together so as to take a holistic approach to getting more homes built (and brought back into use). Most importantly, it is drafted in such a way that it reduces the risk of a hiatus in housebuilding – the Government should be praised for combining and putting forward its latest and extensive suggested measures in once place, for consultation over the next 3 months.

No new Planning Bill features and instead, the White Paper’s predominantly changed policy directions represent a sensible smoothing of the ‘rough edges’ of a planning system in England that saw nearly 200,000 net housing completions in the last year. This is despite only around one third of planning authorities having a post-National Planning Policy Framework (NPPF) adopted local plan. The planning regime is now seen by Government as being more or less fit for purpose - or at least it will be by the end of the year, once the Neighbourhood Planning Bill is enacted and all of the proposed changes to the NPPF and national Planning Practice Guidance are made.

Blogs analysing specific elements of ‘Fixing our broken housing market’ their implications will be uploaded to other pages of ‘Planning Matters’, so you may wish to consider subscribing.

Councils must meet house-building targets or lose planning powers, Government says

Councils that fail to build enough homes will lose their right to determine where new houses are placed, according to plans set to be revealed by Theresa May. 

So-called “nimby” councils have been warned that the Ministry of Housing Communities and Local Government will be “breathing down [their] neck” to ensure home-building targets are met.

An overhaul of planning laws will see the creation of new rules to give councils targets for how many homes they should build each year. 

Higher targets will be set for areas with higher “unaffordability ratios” and any council that fails to deliver on the target will be stripped of planning powers.This will take into account house prices, wages and the number of “key workers” like nurses, teachers and police officers in a given area.

“We have a housing crisis in this country,” Communities Secretary Sajid Javid told the Sunday Times. 

“We need a housing revolution. The new rules will no longer allow nimby councils that don’t really want to build the homes that their local community needs to fudge the numbers.”

He said that were no sanctions or method of ensuring that councils were delivering at the moment, but that was “going to change”. 

“We are going to be breathing down your neck day and night to make sure you are actually delivering on those numbers”, he warned councils. 

The move comes after The Independent revealed that a flagship Government programme to deliver 200,000 discounted new homes to first-time buyers is yet to see a single one built.

The 2014 Starter Home initiative was described as being part of “a major push” to help people on the housing ladder and promised to “innovative changes to the planning system” to “allow house builders to develop under-used or unviable brownfield land and free them from planning costs”.

Officials, however, were forced to admit that more than three years later delivering any properties under the scheme remained an “ambition”.

Flexible funding to meet local needs

Grant funding of affordable housing could be considered an investment where it can deliver long term savings on the housing benefit bill. But in practice, affordable housing grant also fulfils many other roles, including bringing viability to development in lower value areas and improving housing quality.

A more flexible and holistic funding regime – directing funding at issues like stock renewal, infrastructure and unlocking difficult sites – could be a more effective way of solving local problems in the housing market.

Priced out

Our analysis in 'Doing more with less' identifies a large and growing problem: more and more emerging households priced out of the housing market due to low incomes and rising costs. If we assume that all these households will form, how would you go about housing them all, and what would it cost?

Two scenarios are shown below. The first assumes that all of the 100,000 households are housed in hypothetical market rented housing, supported by housing benefit. The second assumes that we build enough social rented housing to accommodate all 100,000 households.

FIGURE 3

Scenarios for housing the 100,000 households in need of sub-market homes

 

Source: EHS, CACI, Land Registry, Rightmove, HCA SDR, 2011 Census, CIH (note that totals may not sum due to rounding)

New generation of social housing

In her party conference speech the Prime Minister announced an extra £2bn of funding over four years, some of which would be available for social rent. But to house 100,000 emerging households in this tenure would need funds of a different magnitude: £7bn each year.

Adopting this scenario would reduce the hypothetical housing benefit for the 100,000 households by £430m per year, with rents more aligned to the low incomes of those excluded from the market. And you get something tangible for your upfront subsidy in the form of new housing assets.

The housing benefit savings generated are much greater in London and the South, where the difference between prevailing levels of social and market rents is largest.

Local solutions for local problems

Grant from affordable housing programmes also helps make development viable in markets where the balance between build costs and sales values would otherwise preclude it. Clearly there are benefits to using grant in this way too.

Major development programmes can often be a good way of boosting the local economy in deprived areas, providing jobs and training, and supporting local supply chains. But it’s hard to make the case for an affordable homes programme where market, Affordable, and social rents overlap.

The Homes and Communities Agency (HCA) is in the process of consolidating its various pots of funding and taking a more active role in delivery. In future, housing associations should have the opportunity to bid for a wider range of funding packages and move away from the current restrictions of grant funding. This could help the sector to address local housing issues more effectively.

Political will

More flexibility would allow funding to be targeted at specific housing problems, with less of a focus on delivering maximum numbers of affordable homes. The political will to move to a more targeted approach seems to be growing.

The Prime Minister’s party conference speech alluded to a shift in government thinking, saying: “In those parts of the country where the need is greatest [the government will] allow homes to be built for social rent”.

A flexible approach would complement wider economic rebalancing policies, helping to remove the perception of poor quality housing options that is often cited as a barrier to relocating workers outside the south east. Treating housing as infrastructure, alongside transport improvements and investment in employment space would mean measuring the overall economic impact of funding or policy interventions against a range of indicators.

Building more homes should be a priority, but so should improving the quality of existing homes. Money spent should be judged on whether it's delivering the right housing solutions in the right places.

Link