We don’t usually like to predict what the market is going to do over the coming months – we generally prefer to make notes, take things calmly and find opportunities, whatever the situation. In 2017, though, there are so many financial and property-based changes about to take place that it might be interesting to look into our crystal ball and anticipate what the future holds.
At Progressive Property, we aim to stay on top of market trends and regulations so that we can help our fellow property investors – YOU – to understand both upcoming changes and the opportunities that may present themselves as a result. With this in mind, let’s delve into our top 10 predictions for the property market in 2017.
Strap in – it could be a bumpy ride…
1. Many landlords will move into LTD companies
In 2017, we are likely to see big changes in taxation for buy-to-let properties. Early last year we saw an extra 3% stamp duty added to purchasing buy-to-let properties or second homes, and any purchases of about £940,000 or more also saw stamp duty rise. This probably put a lot of landlords off buying new properties, but there are always methods of moving around stamp duty; for example, in section 13 of the 2003 Finance Act, there is a clause in paragraphs 18 and 20 that allows for certain investors to enjoy tax relief and dodge stamp duty.
One huge change will be the rise of Clause 24, which is due to begin phasing in this year before taking full effect by 2020. Clause 24 will stop landlords from being able to offset their mortgage interest against their rental income, before any tax is paid on their profits, and it will mean that landlords will pay full tax to the Basic rate of 20% on their rental income. Such a move will mean that if properties are owned personally then each buy-to-let property investor’s and landlord’s tax burden will increase.
To say that Clause 24 has been controversial in the property investment world is an understatement. With Clause 24, some people are going to be paying more in tax than they are in profit which is, quite frankly, appalling.
The simple solution for many will be to move their portfolio into a LTD company, as this arrangement will sidestep most of the new rules and allow property investors and landlords to maintain the same or at least a similar level of tax relief. For investors who have not yet decided whether this is the right course of action for them, it’s advisable to see a property accountant who is already well-versed in these tax changes. While many will still be finding their way around, seek out those who have already dug deep to find answers to the right questions, and have already incorporated quite a few landlords.
The big upside to becoming a LTD company will be paying 20% corporation tax – moving down to 17% soon – rather than 45% personal tax. When the money is personal you can draw the money out as you please, while taking money out of a LTD company will mean paying dividends, which are quite punitive. Being in a LTD company is awesome for reinvesting, because if you are saving money on tax each year then you are making more money from the tax you have saved, and this will build cumulatively.
There will of course also be downsides, one of which is added paperwork due to the extra reporting required when you own a LTD company.
In the short term, this new method of taxation is likely to see landlords raising rents, meaning that tenants will be negatively affected. While landlords and property owners who migrate to LTD companies are going to have to make changes to how they do business, they are unlikely to see dreadful financial repercussions, and in fact many property investors will probably see their profits rise as a result.
2. Prices in London will keep falling
Since 2015, London’s prime property spots such as Knightsbridge, Kensington, Chelsea, Mayfair etc – the most valuable properties in the country – have been falling in value. From 2010, the property cycle started in those areas and saw the highest values growing hundreds of percent, and it probably went too far.
This fall came about no doubt partly due to a lot of overseas finance being invested into these areas, as a lot of money had no doubt been waiting during the recession for values to stop falling. Buying in areas like this is often seen by investors from far away as a safe, stable investment, as well as a bit of a trophy purchase seeing as these areas are popular on TV, in films, in books and in the news.
Another trigger for the plummeting values includes the aforementioned changes to the stamp duty regime for buy-to-let and residential properties in general. Stamp duty on larger properties, particularly those over £1m, is now eye-watering, and you can expect to spend 10% or more just on tax when buying a new property. The over-supply of properties in these hotspot areas has also contributed to the fall.
People always talk about “the property cycle”, as if every area in the UK is the same, but that isn’t the case. The way that property prices are changing in areas such as London is not going to be reflected in the way that they change in areas such as Peterborough, where we live and work.
We predict that London property values will continue to drop in 2017, because stock will need to drop before such values rise again. However, the ripple effect will take a while longer to reach the north of England.
3. More property education will become available
We predict there will be more people training, property books, property education, and sharing of property knowledge in 2017. With the continuing surge in social media, content sharing and new technologies, far more people can now find a following and build their own brand than ever before, and we feel that many companies will take advantage of this. Like any trend, these new developments will have both up-sides and down-sides.
The up-sides will be that property investors – both start-ups and experienced entrepreneurs – will have more access to information, prices will be competitive, there will be new people entering, and more choice.
The down-side is that there may be inexperienced people attempting to take advantage of the new knowledge-sharing trend, meaning that there may be a glut of less accurate, second-rate opinions to cut through to find the truly valuable information. Make sure that you put in your due diligence, and ensure that the trainers you choose to listen to (or even pay) have both experience and a property portfolio themselves.
4. Single-let investors will try new, different strategies
The housing crisis continues to grow. With each successive government, a new plan appears concerning how many houses are going to be built – but so far, little has been done to alter the situation. You would need 300,000 houses to be built per year just to keep up with demand, and the broken planning system is only deepening the crisis.
Something that could affect the housing crisis – though we aren’t holding our breath – is the new white paper on housing, which was supposed to be here by the end of 2016. If there were changes made to the planning laws due to this white paper, we could see a big house-building programme taking place, but only if the new laws stood up to the people who will inevitably complain about new-builds appearing in their back yards.
Due to this uncertainty, as well as the advent of Clause 24, we think that single-let investors will look more into new property investment opportunities. This will include HMOs, as well as possibly serviced accommodation, which is actually more like a business than straightforward property investment.
One thing we have always said in Progressive Property is to invest in properties close to home. At present, however, investors are showing more of a willingness to travel and move into remote investing, which is likely to continue throughout 2017.
The increased demand for rental property will continue, because there is less about right now. Rents are likely to rise and we predict that we will see people in London investing in places like the Midlands to chase the higher yields.
5. Property investment tech will GROW
The book “Vagabonding” is about getting rid of all your possessions and living in a very minimalist way, while not having a fixed abode. The popular podcaster James Altucher follows this model, as he has just a few possessions and moves between accommodation types such as Airbnb and other people’s homes. There seems to have developed a bit of a culture like this in parts of the USA, and with the increase in technology such as Airbnb and booking.com, we believe that this is something we will also see happening more often here in the UK.
Some of the most progressive people in our field are already showing potential renters around properties via technology such as Snapchat, and we predict that in 2017 virtual reality will play a larger part in the way that estate agents offer viewings to potential tenants. The convenience will be immeasurable: new headsets can provide VR through smartphones, and as the tech continues to develop, the footage will become even more realistic. There is even talk of having the smells coming through! If you are a deal packager, imagine how convenient it will be to film around a property and offer tours that way.
It is also becoming more common for property investors today to run their portfolio via their phones with the aid of little else. We predict that more apps and technology will become a regular part of the property investor’s everyday world, and we recommend that entrepreneurs become more comfortable running their business from a single device. There’s already technology available that lets you do just about everything you need to do in your property business remotely. You can use this to help shape your property investment into a lifestyle business in which you work fewer hours than was once necessary, rather than having to be a hands-on landlord working 40-50 hours every week.
6. Lending will be harder
It is looking as though lending standards are going to become more stringent in 2017, and banks will need to stress-test each property investor’s income/rent to a higher level.
Investors are going to be assessed by some lenders to require a rent of 145% (previously 125%) of the mortgage payment, but assume a mortgage payment of around 5.5% instead of the current 2.5%. On low end properties, this will mean a £20-30k decrease in the amount of mortgage that each lender will provide. This, of course, will be quite a jump, and mean that borrowing will be harder this year.
While the banks are likely to restrict lending in 2017, we predict that new lenders will start up business to relax the rent stress, as well as more private finance or perhaps crowdfunding coming more into play.
It’s often true that when lending is harder, prices are softer, but we don’t think that this will be reflected in buy-to-let property prices. If buy-to-let is 15-20% of the market, it is unlikely to have a huge effect on the overall property market. It will affect how many landlords buy properties, though, because investors will need larger deposits.
It is essential to remember that even during less lenient financial years, money doesn’t simply evaporate. The trick for us property investors is to remain persistent and find new lending avenues and methods of financing projects.
7. Despite Brexit, the UK economy will continue to grow
Following the vote in favour of the UK leaving the European Union, property investors are likely to see a change in the amount of Eastern European tenants renting properties. In the run-up to the Brexit vote there was a record number of Eastern European immigrants coming into the UK, but then a dip directly after. We personally are currently seeing a rise again in people from other European countries renting from us, most likely because people are trying to beat the Brexit deadline.
Theresa May is saying that there will be a points-based system for immigration, which would see far fewer immigrants coming into the UK. However, Brexit is a long-term play, and it is important to remember is that no one knows how it is going to work yet. The immediate economic effects have not been as severe as some were predicting, and while the sterling and stock market fell, they recovered quickly, and in fact the stock market is much higher now than it was before the vote. The long-term effects will not reveal themselves until after we actually leave the EU – which could take anything up to 10 years.
The UK economy is the fastest growing economy in the world today, it is in excellent health, and we think that it is a great place to invest. This is likely to mean that in 2017 will continue to see increased wages, unemployment reducing, more economic growth, and prices, rent and property values continuing to rise.
8. If tenancy fees end, the market will find workarounds
The government has claimed that they are going to ban letting agents from charging fees to tenants. This hasn’t taken effect yet and the devil is always in the detail, but the suggestion is that letting agents will no longer be able to charge for references, tenancy renewals and so on; they will solely be allowed to charge rent.
Even before the changes have come into play, some areas of the government seem to be suggesting that if letting agents’ charges reflect the costs incurred to them, they may continue to be allowed to charge them. Such changes will be difficult to police, but we believe that most agents will comply.
When it comes to regulation changes such as this, the market will always react, and in this case agents will probably make up the difference by raising rents. There is often a work-around, as these rules are already in place in Scotland and letting agents have other mechanisms to recover these fees.
9. Serviced accommodation could boom
Serviced accommodation – that is, accommodation with a nightly rental price plus hotel-like amenities such as room service, fitness centre, etc – will probably become more common throughout 2017. Airbnb and booking.com have areas in many countries they have not yet reached, and there is also talk of new features being introduced such as concierge service between the train station and the accommodation, as well as other technical additions.
Hotel prices have rocketed in the past few years, and a gradual rise in Airbnb-style accommodation has seen trend-setting property investors disrupting the current market and encouraging more active competition. There is certainly extra revenue to be gleaned from serviced accommodation, with the possibility for maybe £100-150 per night for a property that could have been making £500 per month, so it is very possible that active investors will take advantage of this in 2017.
Our advice to those who consider expanding into serviced accommodation is to put in your due diligence and test one or a small number of properties for 6 months first. Resist the urge to use the model for all your accommodation initially, because no matter how appealing an opportunity like this can seem, regulations and market trends often change. If you find that one serviced accommodation works well and you are confident that this will remain the case, then you can begin to move over more of your properties to do the same.
While we predict that there will be more offers of serviced accommodation in 2017, we also feel that most landlords will not find the time or have the inclination to do so. Many landlords are passive investors, and while Clause 24 will mean that there will be more tax for property investors to pay in 2017, many investors will not even notice the change until they see an accountant. It’s possible that we will see whole portfolios being put on the market, simply because property investors do not like being corralled into becoming limited companies to contend with Clause 24.
10. More opportunities for commercial conversions
There are fewer empty office buildings across the UK than there were in 2012 because many have already been converted, but there are still opportunities to convert pubs, nightclubs, care homes and other community buildings into residential accommodation. Generally residential prices rise in value over time while commercial buildings drop, so the change of use from commercial to residential gives investors great leverage.
We suspect that there will be more permitted development rights arriving over the coming years, many areas of which will probably be extended. An upcoming white paper on housing is going to look at planning as the central pillar of reform in the housing market, with the aim of “un-gumming” the way the housing market works to create more accommodation and go some way towards fixing the housing crisis.
Throughout 2017, we recommend that you try to focus on time management. It’s incredible how little attention most entrepreneurs pay to time investment in the property world, and you need to be looking at what you are spending your time doing every day in order to create the maximum income you can during your working hours. With so many upcoming changes on the horizon it is going to be essential to spend every moment in the most productive manner possible.
What predictions do you have for 2017? Do you agree with ours, or would you like to challenge or amend some? Comment below, or join the discussion at the Progressive Property Community!.