Prime Rental Market

Prime Rental Market
 
The Implications of Tax Policy

26 January 2016, by Lucian Cook

What impact are these changes likely to have on the prime London rental market?

 

These changes are likely to limit the ability of debt backed investors to add to their portfolio of residential investment property, particularly in the relatively low yielding prime markets. This may temper the demand for investment stock in prime locations and consequently the level of prime supply brought to the rental market, particularly given that it comes after successive increases to the underlying rate of stamp duty for high value property.

It may also continue to push investor demand towards smaller, less expensive units in locations that deliver higher yields, so that investors who need a mortgage to fund their purchase rely less on debt and are better able to cover the mortgage costs which they do take on.

It will require others to look at ways to improve the performance of their existing stock rather than expanding their portfolios.

Though some prime landlords will undoubtedly reorganise their finances, we do not believe we will see significant levels of prime investment stock brought to the second hand sales market given the predominance of cash investment and the largely discretionary use of mortgage debt for many purchases. For many investors in prime London markets, income returns remain a secondary objective behind the overriding desire to find a relatively safe store of housing wealth.

As we have explored in our recent Policy Response document regarding “additional homes”, some of the technical provisions concerning the owner’s ability to recover 3% stamp duty on a home they fail to sell before buying new main residence may deter people from becoming accidental landlords and add to short-term tenant demand if they sell and then rent as they search for their next home.

Together we expect these impacts to underpin our existing rental growth forecasts, even if opportunities for investors may be more limited.

FIGURE 6

Prime rental markets: Five-year forecast values

 
Figure 6

NB: These forecasts apply to average rents in the second hand market. New build rental values may not move at the same rate
Source: Savills Research

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