5 changes you need to know about the UK residential property investment landscape

7 min readMar 30, 2020

For more than 20 years, UK residential property has been seen as one of the best investments available. But the market has changed. Approaches which worked before are now less profitable, if profitable at all. 5 key areas of change are affecting returns, and risks and effort associated, in particular for smaller, sideline buy to let investors. This is significant for the housing market because the market is dominated by smaller investors. Most residential investors are ‘small’ landlords, with 4 or fewer properties (93% in 2016). Most residential property investors are individuals (94% in 2018). The vast majority of these are unaware of some or all of the changes that are affecting them.

The 5 most important areas of change, affecting outcomes and decisions, are Political, Economic, Social, Technological and Legal/Regulatory circumstances.

1. Political changes: exaggerating, but not causing a slowdown

For the last few years, the impact of Brexit, and the uncertainty associated, has been the first question investors ask about. Newspaper headlines suggest that current political uncertainty is the cause of housing market doom. Contrary to popular opinion, the evidence suggests otherwise. Uncertainty is compounding existing issues, not causing them.

Political uncertainties, particularly around Brexit, have resulted in a less confident environment, delayed decisions, less supply of new housing stock, lower valuations and slower sales cycles. The volume control on demand and supply has been turned down, but the same tracks are playing in the background.

On a fundamental level, demand for housing is ‘essential’ in nature. Supply is relatively fixed. Research suggests we need 340,000 new homes needed to be built annually up to 2031. We remain well below this target, a trend that started well before our current political uncertainties. Affordability constraints, new regulations and financing constraints are affecting the fundamentals of supply and demand. Uncertainty is not the underlying cause of structural housing market changes.

2. Economic changes: guiding long term demand increases

The economy has a big impact on investment. Yet demand for housing has a relatively low correlation to economic demand, as we all need a roof over our heads. This is one of the most attractive things about investing in residential property.

Important trends relating to our economy include long term low interest rate. This continues to stimulate property demand. Capital is easily available. And investors have a strong demand for yield-focused investments.

Thanks to globalisation, strong rewards, and low risks, capital continues to be attracted into the UK property market. UK property assets are currently discounted internationally, thanks to the weak value of the pound, itself a factor of confidence and interest rates. Consequently, international demand, and therefore property values, remain relatively stable. Property is still a great asset for investors seeking returns, with relatively low risk.

3. Social changes: Growing demand for affordable, quality housing and yield-focused investment

Population growth and demographics mean more, smaller households, and higher demand for housing. The number of families in the UK increased by 8% in the 10 years to 2018. Millenials are settling down later, household sizes are shrinking, compounded by a higher divorce rate, and healthcare improvements mean people are living longer overall.

There is growing demand for rental housing, which improves the potential returns to long term property investments. Affordability is constraining home ownership and investment, in particular for the younger generation. ‘Generation Rent’ struggle to ‘get on the housing ladder’. In 2018, the average single first time buyer would need 10 years to save a 15% deposit for a property. Significantly longer in London. It’s no surprise that in the 20 years to 2018, the proportion of younger people (25–34) owning their own home fell from 48% to 28%. Further, ‘millennials’ increasingly favour flexible access to premium features, such as a concierge or gym, over the less affordable, less flexible responsibility and burden of property ownership. The trend of ‘access over ownership’ encompasses transport, for example using Uber rather than owning a car, through to housing. Younger people are less likely to buy, as homeowners or investors, and more likely to rent.

Our aging population creates more competition for yield-focused investments. Pension funds are becoming the most powerful investors globally in absolute and relative terms, and have a growing appetite for UK property. The requirement for yield from these powerful, sophisticated investors has been exaggerated thanks to compulsory pension contributions.

4. Technological changes: making investing more accessible

Technology is opening up access in the property market, as well as increasing efficiency and quality for cost. ‘Proptech’ has grown exponentially in its impact, often at little or no cost to the user. Online listing portals such as Zoopla and Rightmove have opened up access to opportunities, and data. More digitised processes, such as Customer Relationship Management software, are making management easier, cheaper and faster. Digital and online booking capabilities, for example through Air BnB, enable homeowners to flexibly rent out space and mean people can move around more easily. The growing impact of online and hybrid estate agencies and lettings services, data platforms and the tokenisation of real estate through alternative finance are improving accessibility, to specific opportunities and information.

We are moving into an age where data-driven decisions can be made, often without human interference. Further, investors can find, research and manage opportunities, and implement decisions from anywhere in the world. Investing can be as easy as shopping on Ebay, via crowd-funding or peer to peer loan platforms.

5. Legal and regulatory change: shifting the balance of power from smaller investors

Legal and regulatory factors are perhaps the most important cause of change in the UK property market. There’s cross-party political will to solve the housing crisis, and professionalise the sector. The increased cost and administrative burden of staying on top of more regulations discourages small investors with a few buy to lets. Armchair investment is less profitable, and more challenging and time-consuming.

For example:

Changes to Mortgage Interest Relief via ‘Section 24’ make ownership by individuals of buy to let property less attractive. Holding a property with a mortgage for a higher, or nearly higher rate taxpayer has shifted from being a profitable side-line business to a real loss. If mortgage interest was 75%+ of rental income on a property before, the investor owning this property in their personal name will in the new regime will now begin making a loss.
The Stamp Duty Land Tax surcharge (an additional 3% on top of this transaction tax) makes buying more residential properties to hold or develop less attractive. With the surcharge, SDLT would be £9,000 rather than £2,100 on a purchase price at about the average of UK properties, £230,000.
New lending standards from the Prudential Regulation Authority have caused friction on the financing side. For landlords with 4+ properties, borrowing is harder.
Greater scope of licensing means strong and specialist local and national market knowledge is required by active parties.This includes more, and more stringent local and national regulations, from national House in Multiple Occupancy (HMO) licensing, to selective licensing of private rental properties in specific geographies.
The Tenant Fees Act of 2019 shifts costs from the tenant to investors, meaning lower returns to traditional buy to let investments.
Other taxes such as the Annual Tax on Enveloped Dwellings add to the cost base and administrative burden of property investment in company structures.
Meanwhile, tax reliefs such as for Build to Rent (scaled development then holding), or REITs (funds which focus on holding property) make institutional investment easier, and make it harder for smaller investors to complete.

So, professional, institutional investment is being encouraged, and individuals are encouraged to focus on the increasing array of truly passive options.

Conclusion

The fundamental forces of supply and demand have not changed. We all still need to live somewhere, and housing supply is inevitably restricted. What investors want and need has not changed, either. Investors still love the idea of stability, ongoing profits, and a way to grow wealth safely, without too much effort.

The 5 themes highlighted have fundamentally altered the market, making traditional approaches to UK residential property such as sideline buy to let investment more costly and complicated for the type of investor that has come to dominate the private rental sector.

So what should investors do? They must navigate a complicated market. And they must be more strategic, value-focused, and professional in their approach. For many would be armchair investors, this means taking a step back, focusing on the fundamentals of demand and supply, and targeting truly passive options led by professional operators, rather than taking a hands on role.

ENDS

About the Author:

Anna Clare Harper is a Property Investment Strategist and CoFounder of Anglo Residential, a UK residential fund that has secured seed funding to build a £100m+ portfolio of high yielding housing. She also heads up Strategic Property Investing, a boutique consultancy. She is soon to publish a book with the same name, focused on supporting private clients seeking a clear approach, in this complex environment. She hosts one of the highest-rated podcasts in the UK ‘property investment’ space on iTunes. Previously, she led her own investment businesses, studied the property market academically at Cambridge, and been a professional consultant in Strategy and Private Equity, at Deloitte.