If there were any lingering doubts that 2016 is a year buy-to-let investors will want to forget, this week’s clampdown on landlords using Airbnb was the gloomy finale.
London landlords have been able to achieve superb yields by offering ultra short-term lettings to tourists through the website. Rents on “Airbnb buy-to-let” properties are often cheaper than a hotel room, but much higher than the equivalent daily rent landlords could charge a longer term tenant.
But this door to higher returns is about to close. The hosting site, under pressure from local authorities worried about the loss of housing for permanent residents, said it would automatically block users from renting out properties for more than 90 days a year. From next year, landlords using Airbnb to solve the problem of falling London rental yields while capitalising on the capital’s booming tourist trade will only be able to break the 90-day limit (already enshrined in law in London) by obtaining a licence from their local council giving them permission to do so. And since many boroughs have been battling the rise of investment properties that are let throughout the year on hosting sites, this is a loophole that will offer little respite to owners.
The move comes barely a week after a ban on letting agents charging fees to tenants was announced by Philip Hammond in his Autumn Statement. Hardly intended as another stick with which to beat Britain’s amateur landlords, the government’s crowd-pleasing move for millions of private renters is an attempt to quell the insidious rise of fees and proliferating charges for simple administrative tasks.
Tenants, finding themselves saddled with bills of hundreds of pounds, often revealed at the eleventh hour before the signing of a contract, united Conservatives, Lib Dems and Labour politicians in anger.
But if letting agents have been cast in the role of chief pantomime villain in this festive property industry tale, landlords cannot themselves be sure of a happy ending. Many will now be asked to bear the burden of fees previously passed to tenants, and will face a choice as to whether to take the hit in their profits, pass the charges on to tenants in the form of higher rents, or insist their agent tempers their demands.
Some may wish to placate an agent they have come to trust and rely on; others will have cause to doubt that local rents are elastic enough to tolerate further rises. Either way, the result of this looming competitive clash is unlikely to be predictable: there will be winners and losers on both sides.
The Treasury has been deaf to landlords’ pleas over the April rise in stamp duty hit on buy-to-let and second homes. Landlords also face the loss of a valuable tax relief on mortgage interest, to be phased in from next year; and in March they were pointedly excluded from a cut in capital gains tax. The Bank of England has also been scrutinising the sector, introducing affordability tests for buy-to-let mortgages.
If business models are now creaking under the weight of regulatory oversight, will landlords respond by selling up?
Evidently not. In its report on financial stability this week, the BoE said buy-to-let transactions had slowed in recent months, but there was “no evidence of a widespread sell-off by investors associated with a softening of the market”. The number of buy-to-let homes listed for sale since the June referendum was on a par with levels seen last year, it added.
This may just be a matter of time. For mortgaged landlords, the biggest blow will be the loss of higher rate tax relief on mortgage interest, which is set to be phased out from next year and expunged by 2020, when relief will be capped at 20 per cent.
David Lawrenson, a buy-to-let owner and landlord adviser at LettingFocus.com, believes some landlords are perilously unaware of the impact the change is likely to have on profits and tax. Others may simply be biding their time, knowing they have a few years yet before they are forced into a decision.
Many are taking evasive action: figures from lender Kent Reliance show a sharp rise in purchases via limited companies, which allow landlords to continue to claim high rates of relief. More than 100,000 limited company loans had been issued in the first nine months of 2016 — more than in the whole of 2015. Six in ten applications in the past three months were for incorporated purchases, up from four in ten in the first quarter.
That is fine for those looking to buy new homes, but for owners with existing properties held as individuals, moving to incorporation will be regarded by the taxman as a sale and purchase event, and thereby liable for capital gains tax and stamp duty. For those owners, it may be less costly to put extra capital into the property, reducing the interest payments that will cut more heavily into profits.
There is yet another reason for landlords to think twice before opting for the company route. If the authorities see a flood of owners turn to incorporated holdings to retain reliefs, what is to stop them looking for fresh ways to call a halt to those reliefs? If the experience of the past two years tells us anything, it is that when it comes to buy to let, politicians and regulators are all too happy to move the goalposts — and to keep on moving them.
James Pickford is deputy editor of FT Money. Email: james.pickford@ft.com; Twitter: @jamespickford2