Issue 13

THE CHANGING NATURE OF RESIDENTIAL INVESTMENT IN SCOTLAND

By Dr John Boyle, Director - Research and Strategy, Rettie & Co

There seems to be a blithe assumption by Government that ‘markets will adjust’, forgetting that they can adjust very badly or very well to this sort of political change, and the wider societal impacts that adjusting very badly can entail.

The Scottish buy-to-let (BTL) sector can be forgiven for feeling a bit battered after 2015. The vast majority of this sector is made up of small investors with one or two properties, often making a modest yield and intending to use the expected capital appreciation as part of a ‘pension pot’ in later life.

But any investor cosiness about such arrangements was given a thorough shaking over the last year.

First came the changes to reliefs and allowances in the Chancellor of the Exchequer’s Summer Budget statement, particularly the phased reduction of the top rate of mortgage interest relief to a maximum rate of 20%, but also the ending of the automatic 10% Wear & Tear Allowance.

Then, in October, the Scottish Government announced its new Private Tenancies (Housing) Bill. Many of the changes proposed in the Bill, such as longer notice to quit periods and attempts to create a longer term tenancy regime, are concepts that many in the industry support. However, there are major concerns about the removal of ‘no fault’ possession at the end of leases, which will make it more difficult for the landlord to get their property back; the standard tenancy framework proposed not being flexible enough to deal with certain groups, especially the likes of students, many of whom only want 9-10 month leases; and the prospect of rent controls in ‘rent pressured areas’.

Finally, in December, the Deputy First Minister in Scotland announced that there would be a 3% Land & Buildings Transaction Tax (LBTT) supplement for the purchasing of buy-to-let and second homes, so again following the changes that the Chancellor announced down south a few weeks before.

These changes will have forced buy-to-let investors to consider their assets and investment strategies closely over the festive break.
The implications of the tax changes will likely be to increase costs (or reduce revenue) for landlords, meaning tenants may face higher rents and/or properties may be less well maintained to make up any shortfall. If the prospect of higher rents are blocked by rent controls, landlords may simply opt to leave the sector, which will have marked consequences for renters in terms of finding a suitable place to live. The consequences for the wider housing market could be falling prices, negative equity and drying up of transactions as people chose to ‘sit tight’ rather than move (as happened in the last recession). This could have economic impacts through adversely affecting the new homes and construction sectors, but also in reducing the Government’s tax take.

The challenge for Government should be to design a framework for the private rented sector (PRS) that has a proper evidence base and makes it attractive as a long-term housing solution for tenants as well as an investable commodity

There may also be more worrying consequences of BTL investors no longer being able to afford mortgages in the new environment, especially if interest rates start rising, causing a financial ‘time bomb’ that would have wider economic consequences.
Of course, stronger economic recovery, continuing low interest rates and a less restrictive lending environment could allow the housing market to adapt more readily to these changes, but such conditions are by no means certain.

At a time when the fundamental problem in the housing market is lack of supply across all tenures (Scotland is only building at around 60% of pre-recession levels), it is perhaps surprising that so much of the politicians’ attention has been on the buy-to-let sector. Bringing in more institutional funds to provide rented housing (so called ‘Build to Rent’) is a political objective north and south of the border and perhaps the changes are designed to provide a greater incentive for such funds to enter the market and ‘professionalise’ the sector. However, such funds are not yet investing significantly outside London and aspects of the new rental system in Scotland, especially rent controls and standard tenancy frameworks, will be off-putting to many of them.

What probably is most concerning about this raft of legislative change is that it appears to have little research evidence to support its measures or impact analysis to examine its consequences. Plans for tenancy reform and the LBTT supplement to be passed by Scottish Parliament in the next couple of months (before the current Parliament breaks up) is also unlikely to allow sufficient time to analyse the effects of these changes properly.

There seems to be a blithe assumption by Government that ‘markets will adjust’, forgetting that they can adjust very badly or very well to this sort of political change, and the wider societal impacts that adjusting very badly can entail.

The challenge for Government should be to design a framework for the private rented sector (PRS) that has a proper evidence base and makes it attractive as a long-term housing solution for tenants as well as an investable commodity that incentivises investors to bring on more supply and to keep properties of a good standard. With its current direction of travel, the Government risks doing more harm than good to the sector. That will have an impact on the very people that it is claiming to want to help.

Dr John Boyle, Director of Research & Strategy, Rettie & Co 

By Dr John Boyle, Director - Research and Strategy, Rettie & Co

Issue 13

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