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Buy To Let still viable 'but may suffer because of Brexit'

A new report says buy to let will continue to provide good investment opportunities but requires an increasingly professional approach.

The report, by the Centre for Economics and Business Research for the Shawbrook Bank, indicates that while recent tax changes have had some effect on investor behaviour, the market remains a viable one. 

The report indicates that yields for landlords are set to decrease over the next 10 years, declining from an average of 5.0 per cent in 2016 to around 3.5 per cent by 2027, but house price growth remains robust.

However the report warns that a major cloud on the horizon is the dominance of London and the south east where the combined share of the BTL market is nearly 40 per cent. A significant proportion of these are rental units, with demand from the international migrant community a large reason for the popularity of renting in the capital. 

If residential prices continue to rise in the capital, CEBR says, and rents correspondingly increase, there is concern as to the sustainability of this market, especially with Brexit providing some uncertainty for the future of UK migration.

The key findings of the report include:

1. Transaction levels yet to recover - the stamp duty surcharge has had a lasting effect on transaction numbers, which haven’t recovered to levels seen in the months before April 2016. The report shows the total number of transactions in 2016 stood at 1,231,120 – taking into account the numbers seen in the months before April and the months after, this number could have been 100,000 higher. 

2. Higher costs are forcing landlords to adapt - indications suggest professional landlords are still buying but starting to look at different locations and different types of property. Commercial and semi-commercial units have risen in popularity as have HMOs. 

3. Commercially-focussed landlords are set to gain market share - since the tax changes for mortgage interest payments only affects private landlords, commercial landlords and those who register their business as a private limited company enjoy a cost advantage. 

4. Demand for private rental accommodation will remain strong - the report forecasts the sector will increase from 21 per cent in 2016 to 28 per cent in 2027. This is driven in part by issues of affordability and raising a deposit; however there is a growing sense that the affordability crisis is something which doesn’t exist outside the capital. Instead, the appeal of home ownership for many may be diminishing.

5. Buy-to-let remains a viable investment - with demand for rental properties set to continue the report forecasts a 21 per cent increase in average rents in Great Britain by 2027. However the analysis estimates a decline in rental yields from 5.0 per cent in 2016 to 3.5 per cent by 2027 as house price growth outstrips rental growth. Keeping in mind capital gains, BTL will become a more attractive investment in the coming decade as property owners benefit from the increase in the value of the property they own with the average cost of a UK home reaching £336,845 by 2027, some 59.7 per cent more than in 2016.

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