Back in 2016, George Osborne identified landlords as a soft target, and over the next four years, landlords’ buy-to-let mortgage interest and fees ceased to be tax-deductible. This made a significant number of portfolios unprofitable and forced thousands of landlords to leave the market altogether.
And then there was the introduction of a 3% additional stamp duty penalty for all second home purchases, including landlords purchasing buy-to-let properties. This significantly increased the cost of entry into property investment and dissuaded many people from entering the fray.
But not all of the bad news came from the taxman. The rental sector has seen a significant increase in the amount of regulation directed at landlords. While rogue landlords—those failing to provide decent and safe accommodation for their tenants—have been rightly criticized in the media, the regulatory requirements now imposed on landlords has stepped up significantly, and this has added substantially to the cost of maintaining a rental portfolio.
So, where does this leave existing and prospective landlords today? Many are questioning if property investment is still a good long-term strategy. But in take with one hand, give with the other fashion, the government has recently gone out of its way to create some significant property-related opportunities.
The new opportunities lie not in acquiring buy-to-let properties but in building the new homes that will help the government reach its 300,000-a-year target. A raft of permitted development rights that allow non-residential buildings to be converted into residential homes without the need for planning permission, with a view to converting the ever-increasing number of brownfield sites that are well-suited to redevelopment as housing instead of building on our highly prized green belt.
But surely Messrs Barrett, Persimmon, and Taylor Wimpey have got this market sewn up?
As it turns out, they haven’t. The significant majority of brownfield opportunities sit way below the scale necessary to interest the major homebuilders. The government has recognised this and is instead targeting small-scale developers, many of whom will be undertaking development projects for the first time.
This repository of buildings that are ripe for residential conversion has been increasing of late – look at the number of redundant stores in the wake of the recent collapse of Arcadia,
Debenhams, et al. As our shopping habits have changed, so many High Streets have become ghettos. As these primary brands depart our town centres, the secondary retail around them is also affected. There is likely more to follow; when the furlough scheme ends, we will see a significant number of businesses collapse, and their properties, whether retail, commercial or industrial, will become vacant. One struggles to envisage there will be a sea of buyers waiting to snap them up.
So what’s the government’s plan?
Well, they would like to convert many of the empty properties in our town centres into residential homes. And with people living once more in the centre of our towns, this will fuel demand for the ancillary services and facilities that the local population will require. This will include entertainment, dining venues, and boutique-style shops, where town centres once more become a destination for shopping and entertainment.
Where does this leave the humble landlord?
Surely property development is more complex than snapping up a couple of buy-to-lets? Interestingly, the strategies are not as diverse as you might think. Some landlords undertake a renovation or a conversion of their buy-to-let properties before they rent them out, and many small-scale development projects are not much more complex than that. It is a highly leveraged business. The small-scale property developer has an army of professionals on their team, including a project manager, all of whom have a significant amount of experience in development. The developer’s key actions are identifying the opportunity, appointing the team, and ensuring the finance is obtained.
Ah yes, the finance. Don’t property developers need to have a small fortune in the bank to develop their projects? The answer in most cases is ‘no’. Whereas landlords typically fund their buy-to-let deposits personally, developers often secure a significant part of their deposits from private investors. The remainder of the asset capital and the development funding is obtained from a single commercial lender.
What are the skills that this new small-scale developer might need? Interestingly, very similar skills to those of a landlord, senior manager, or business owner. There has to be an overarching understanding of what’s involved in development, but most of the heavy lifting and technical issues are delegated to the professional team.
So, what are the advantages of development over buy-to-let investments? Well, one major difference is the speed with which capital is created. You can expect a small-scale development project that would typically return a six-figure profit to be completed within 12 to 24 months. For a buy to let investment, the pay-back period is usually a lot longer.
Let’s go back to your £50k. If you are a traditional sort, you may use your £50k as a deposit on a £200k three-bed semi and then rent it out to a nice family, clearing around £300 per month in profit. But it will be several years before your equity growth enables you to remortgage and raise a deposit for buy-to-let number two.
On the other hand, you could use your £50k as the deposit on a small development project, a retail building that can be converted into flats using permitted development rights. You obtain the remainder of the financing you need through a commercial lender, and you
expect to receive a profit of £150k within 18-24 months. You can also make up any deposit shortfall by tapping into private investment.
Project things forward and, given that it’s possible to run multiple development projects at once, you can see how the buy-to-convert portfolio growth could be stratospheric compared to buy-to-let.
Not surprisingly, this hybrid landlord-developer role is starting to become popular, as existing landlords discover that small-scale development is well within their capabilities. Plus, many are currently more than a little frustrated with their lot as a landlord.
And with the government bending over backwards to give opportunities to new small-scale developers, plus a glut of convertible buildings coming onto the market in 2021, now could be the perfect time to try something different.
