Brexit: Three things landlords need to know
On the 23rd June 2016, in a result that surprised most of the UK, we voted to leave the European Union.
Eleven months later, although all we have actually done is send a letter confirming this decision to the European Union, much has already happened and all sorts of predictions are being made. As such, landlords need to be aware of the potential impact exiting the EU could have on both the Private Rented Sector in the UK and property ownership abroad.
1. The impact of a fall in sterling
One of the biggest consequences of the Brexit vote so far has been the fall in the value of the pound. The day after the result, the pound fell to $1.33 versus the dollar, a low not seen since 1985, according to the Independent (http://www.independent.co.uk/news/business/news/pound-sterling-slump-drop-key-moments-four-charts-graphics-how-low-could-it-go-a7529136.html). It then hit a record low of $1.1841 at one point in October, before recovering to $1.24 shortly after. Although there have been some fluctuations in the last six months, as it stood in early April, the pound remains at this level.
If you are a landlord with property only in the UK, you might think this drop in the value of our currency won’t affect you, but it does, for several reasons.
Firstly, it affects how our economy performs and this has an influence on people’s jobs and wages, all of which drives both tenant demand and how much rent they can afford. Some of you will already be seeing good news stories as a result economically, as it means in areas where there are a lot of companies that export goods and services, these are now cheaper and therefore the area continues to do well. This is particularly the case for many of our city locations which have a good mix of international and domestic demand. Only areas which are reliant on overseas products and services will see their economies potentially flatlining. But, again, if this happens, landlords usually benefit from uncertainty as more people tend to rent than buy.
One effect that, if you are aware of it in advance, you can mitigate the impact of, is the fall in the pound, which has caused the cost of living to rise. The Consumer Price Index produced by the government shows that “including owner occupiers’ housing costs (CPIH, not a National Statistic), the 12-month inflation rate was 2.3% in February 2017”. This time last year it was just 0.5% in the year to March 2016.
This affects you as a landlord because, year on year, your general cost of living has risen by 2.3%, as has your tenants’. The way to make sure this doesn’t impact on you is to check your contract to see if you could increase rents in line with inflation sooner rather than later and your local Reeds Rains experts will be happy to help check what options you have.
Landlords don’t always consider how important it is to review rents on a regular basis and, in our experience, often prefer to keep a good tenant than increase rents. To help illustrate why it’s important to review rents versus inflationary increases: if you charged £750 a month rent in 2012, to keep rents at a level where they still cover increased costs from inflation, you would now need to be charging just over £800.
2. Is tenant demand likely to rise or fall?
On the one hand, tenant demand may fall in the coming years if fewer foreign workers come to the UK, as many of them rent rather than buy. On the other hand, with Brexit comes uncertainty and in uncertain times more people tend to rent, as it gives flexibility of tenure - just in case things don’t go according to plan and their circumstances suddenly change.
Currently, it’s expected that tenant demand will continue to steadily rise in the UK. The English Housing Survey for 2015/6 showed that most tenures remained at the same level, with 4.5 million or an average of 20% of households renting privately, as opposed to buying or living in the social rented sector.
However, the one thing we need to be aware of, which is something that probably won’t be settled until a Brexit deal is made, is whether any of the 2.9 million European migrants currently in the UK will remain here or start heading home (source: http://www.bbc.co.uk/news/uk-politics-uk-leaves-the-eu-36745584). Although this may not have much of an impact in major cities and towns where demand tends to be higher than supply, in the few rural areas that have seen particularly high levels of immigration, the departure of migrants could certainly impact adversely on the rental market. If this applies to the area where you let property to ensure you are not impacted, it would be worth working with your local Reeds Rains impact to discuss strategies which ensure you continue to secure tenants into the future.
3. Impact on finance
With a lot of doom and gloom following the vote to leave, there was a view that mortgage rates would rise, as it was believed Brexit would drive up the cost of borrowing. However, months later, this rise hasn’t materialised and in actual fact, we’ve seen more record-breaking, low-rate mortgage deals, which is good news for landlords as the cost of borrowing is potentially reduced.
John Hargreaves, National Financial Services Director for Reeds Rains Estate Agents explains: “At times of uncertainty, landlords can either hope that rates stay the same or even fall further - although this would be difficult when we are seeing rates as low as 1.64% for a two year fixed deal - or consider fixing to secure costs during a potentially turbulent time.”
If you haven’t done so already, it’s worth checking that you have secured the best rate and the right mortgage for you and your particular circumstances. Visit https://www.reedsrains.co.uk/emails/email-mortgage-appointment for more information and to book a free initial mortgage consultation.
What should landlords do about Brexit?
In reality, although international and national factors such as Brexit do affect the property market, as well as general confidence and the availability of finance, what happens to your rental property investment returns is much more likely to be affected by the local economy: how successful it is and the resulting effect on supply and demand.
As such, rather than focus too much on what’s happening because of Brexit on a national basis, the key moving forward to understanding the likely future of the rental market in your area, is to focus on local changes to the economy and its effect on supply and demand and impact on rent levels. To help with this, do talk to your local agent because they will be the first to notice new trends or any worries and fears creeping in from tenants.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Our initial mortgage consultation is free. We will charge a fee between £399 and £999 that is payable on application. The amount we will charge is dependent on the amount of research and administration required. We reserve the right to charge a subsequent fee of £99 for each further application that may be required.