Green Deal warning for buy-to-let landlords
Buy-to-let investors will be forced to make their properties more energy-efficient or stop renting them out.
One in 10 buy-to-let homes will be unlettable in five years’ time unless landlords take steps to improve their properties’ energy efficiency.
New laws that take effect in 2018 will make it an offence to let out properties with the worst energy efficiency ratings. Such properties are much more common in the private rented sector than among owner-occupied homes or those rented out by councils or housing associations.
Tenants will also be able to demand improvements to insulation from 2016, when landlords will not be able to refuse tenants’ “reasonable” requests for energy efficiency measures.
The legislation states that landlords must not let out properties with the two lowest energy efficiency ratings, F and G, after April 2018 at the latest. According to the English Housing Survey, published earlier this month, 11.4pc of homes in the private rented sector were rated F or G in 2011. By contrast, only 2pc of local authority homes and 1.6pc of housing association properties had the lowest ratings. Among owner-occupied homes, the figure was 8.2pc.
The poor energy efficiency scores of privately let homes reflect a relative lack of basic insulation. Fifty-seven per cent of owner-occupied homes had cavity wall insulation where a cavity existed, whereas the figure for privately rented properties was 38pc, the English Housing Survey found. Among social housing the figure was 63pc.
More than 12pc of homes in the privately rented sector had no double glazing, compared with just 5.3pc among those occupied by their owners.
The Government is consulting on whether the ban on letting poorly insulated homes will take effect on a set date or whether properties with an F or G rating can continue to be let until the end of an existing tenancy.
The National Landlords’ Association has launched a scheme to help investors to make energy efficiency improvements to their properties. It is based on the Government’s new Green Deal, under which energy efficiency measures are paid for by a loan that is repaid via a supplement on the property’s electricity bill. The idea is that the loan repayments are cancelled out by the reduction in energy bills, so there is no net cost to either landlord or tenant.
“The Government has made it clear that there will be consequences for those who do not voluntarily improve the energy efficiency of their properties by a specific time, so there is no excuse not to comply with the cost-neutral scheme,” the association said.
None the less, the requirement to make sure their properties are well insulated could come as an unwelcome surprise to Britain’s growing army of buy-to-let investors. Last week it emerged that they borrowed £16.4bn in total last year, 19pc more than the previous year and the highest level for four years. The total number of buy-to-let mortgages outstanding at the end of 2012 stood at 1.45 million. Buy-to-let investors can keep abreast of all the latest developments by joining The Telegraph‘s new property club (telegraph.co.uk/propertyclub).
Investors are attracted to buy-to-let by the promise of rental incomes that exceed the poor returns offered on cash deposits – rental yields average about 6pc, according to Savills, the estate agent.
If you are considering buying a property to rent it out, how should you go about it?
The first step is to look at your investments as a whole. Make sure that you have enough money to avoid excessive borrowing or too much concentration in property assets.
“I wouldn’t advise putting more than 10pc-15pc of your assets in an investment property,” said Stephen Rees, the head of real estate advisory at Coutts, the private bank. “It is an illiquid and specialist market. So if you have only £100,000 to invest, I would think very hard about it. If, on the other hand, you have £1m in assets, buy-to-let is worthy of serious consideration for a part of that money.
“Equally, be sure that you don’t over-borrow. If you put up 20pc of the purchase price and borrow the rest, events beyond your control could get you into trouble. Instead, we would recommend at least 50pc equity, and even then you should have a plan for cutting the debt if your lender gets cold feet.”
Mr Rees added that small investors such as those with a single property could see 30pc-40pc of their gross incomes swallowed by costs. “You are completely exposed to one tenant, so if he leaves, refuses to pay or vandalises your property, your income disappears,” he said. “You also have no economies of scale when it comes to maintenance and little bargaining power with tradesmen and estate agents. Successful investors have usually built up a portfolio of a few properties over time.”
When it comes to choosing the property to buy, it’s vital to research the market rigorously. You need to ensure that both the area and the property itself are attractive to renters. This means looking at properties through new eyes, as the features you want in your own home may be irrelevant to renters.
You may want plenty of bedrooms and good schools locally, and not want your family to live above a shop; a tenant may be indifferent to those factors but want to be near a station.
“Imagine that you are moving to Tokyo or Adelaide and looking for a place to rent. What would you look for? That’s what tenants here will want too,” said Jeremy Leaf, a north London estate agent and spokesman for the Royal Institution of Chartered Surveyors.
“Do a huge amount of research – make a nuisance of yourself,” he said. “Call up estate agents posing as both buyer and tenant to get a feel for levels of supply and demand. Walk the streets at different times of the day to get to know an area. Find out about flood risks and crime levels, and if any new facilities are planned.”
While newbuild developments offer low maintenance costs and possibly guaranteed rents for the first few years, remember that other investors are likely to be attracted too, so you may face fierce competition for tenants in future, driving rents down, Mr Leaf said.
Adrian Anderson, a director of Anderson Harris, the mortgage broker, said smart two-bedroom properties rented out to young professionals could generate a good yield. “Commuter towns to London are always good,” he added.
Mark Harris, chief executive of SPF Private Clients, another broker, said: “The outlook for buy-to-let is bright. As first-time buyers struggle to get on the housing ladder, rental demand continues to climb. Yields are improving while the rates on buy-to-let mortgages are looking increasingly attractive.”
Rob Currie of Nedbank Private Wealth said borrowers should consider the private banks, which could offer preferential interest rates equivalent to those on normal residential mortgages.
Article courtesy of The Telegraph