According to Zoopla, last year the average price for a student property in Leicester was £206,115, whilst that average rose to £215,257 for August 2017, a growth of 1.11% on the year before. According to Rightmove’s Rental Trends Tracker for the East Midlands, asking rent saw an annual change of 2.7% and a quarterly change of 2.0%, suggesting Leicester’s rental market picked up in the last six months, no doubt aided by strong demand from student accommodation. This more or less reflects the wider picture. The national average of asking rent (outside of London) is up 1.9% on last year and up 2.8% over the last six months, which is roughly in line with the 2.7% average of the last five years
Stamp Duty Land Tax (SDLT) (1st April 2016)
More than a year has passed since the new SDLT was introduced to limit the rise of house prices and halt the decrease in the numbers of homeowners nationally, by creating a surcharge on Buy-To-Let purchases by 3% (see graph). So far there have been 60,000 transactions of these additional properties, accounting for £1.8bn in stamp duty. £1bn alone was raised by the new 3% tax. It's difficult to say how many of these transactions account for student accomodation transactions, however the figures also include property owners buying before selling. HMRC have refunded 10,700 of this type of SDLT taxpayer to the tune of £126m.
- £0* - £125k: Previously 0%, now 3%
- £125k - £250k: Previously 2%, now 5%
- £250k - £925k: Previously 5%, now 8%
- £925k - £1.5m: Previously 10%, now 13%
- £1.5m+: Previously 12%, now 15%
*Transactions under £40,000 do not require a tax return and are exempt from the higher rates.
What does the new 3% tax mean for Leicester’s student landlords? Well, as a student letting agent in Leicester, we're in the thick of it. We've seen an increase in landlords asking us to try and push the rents up in their new student accomodation because the new 3% tax has left them looking to make up losses. A £200,000 property would now cost £6,000 more with the additional 3% tax,. From an investment persepctive, that needs to be clawed back somewhere.
In the wider picture of the economy, the levy has certainly raised extra cash for the coffers, but hindsight reveals it has had a negative effect on the housing market with slower sales and rising rents.
New Buy-To-Let Mortgage Lending Regulation (1st January 2017 and 30th September 2017)
The Bank of England’s Prudential Regulation Authority (PRA) sought to tighten up affordability criteria earlier this year as well as mortgage stress tests at 5.5%. The end of September, sees the implementation of regulatory burdens on portfolio landlords; that is, lenders will now have to take into account income and mortgage details on all properties before refinancing landlords with four or more properties. These restrictions underline the Bank of England and the Financial Policy Committee’s fear that Buy-To-Let investors are more likely to cut losses and sell up than homeowners in the event of a poorly performing market. The logic behind the stricter rules is to avoid a property dump, price drop and a 1988 style bust.
Scrapping BTL mortgage interest rate relief (6th April 2017)
The new tax year heralded another blow to Buy-To-Let landlords by scrapping tax relief on mortgage interest payments. The new restrictions will be phased in over the coming years and eventually replaced with a 20% tax credit in 2020. Overall, this could be bad news for Leicester’s HMO landlords as they’ll likely face lower profits and look to consolidate investments. As a premium student property manager in Leicester, we're expecting to see a squeeze on rents and stock, but ultimately this could further drive up the standards of student accommodation in Leicester.
Tax will now be due on turnover as opposed to profits after deducting mortgage costs. This means that if mortgage rates rise, and rents do not rise proportionally, landlords will be out of pocket. At particular risk of seeing their returns wiped out are higher-rate taxpayer landlords whose mortgage interest makes up 75% or more of their rental income.
What It All Means For The Future
By scrapping tax relief, higher rate taxpayers will be badly hit, particularly if they have high levels of mortgage debt and a large portfolio. Some basic-rate taxpayers could see themselves pushed into the higher tax bracket. The added cost and the thinning margins of profit may mean landlords will be forced to up rent, particularly as housing supply is stifled and demand remains high. That, coupled with Leicester’s high rental yield and relatively low prices, means the city is as good a place as any to batten down the hatches and weather the coming storm. Ultimately, student property invetsments still look like a good bet.
The new stamp duty hike will also make Buy-To-Let investors think twice before purchasing. Having said that, commercial ‘mixed use’ investments valued under £150,000 are exempt from stamp duty. Similarly, limited companies, are exempt from the new mortgage interest tax rules. Leicester student landlords looking to explore the option of setting themselves up as a limited company should be aware of the drawbacks and seek professional advice. Limited companies elicit higher interest rates, different tax restrictions and any transfer of properties may be liable to a capital gains tax and stamp duty. If you're looking at different rental markets as a result of the changes, take a look at the state of the Sheffield student property market here.
Smart property are a student property management and investment company in Leicester, Manchester, Salford, Sheffield and Nottingham. As well as our standard property management services, we offer a long term rent guarantee programme that Property118 founder Mark Alexander found ‘so impressive’ he decided to invest himself.