London Property Investment Guide 2019Combatting government intervention and economic uncertainty

Canary Wharf office 92 Cannon Workshops, E14 4AS T 020 3006 5006 E canarywharf@harrisons.co.uk harrisons.co.uk

Investing in London property in 2019

This year presents some of the biggest challenges, and yet the greatest opportunities,that London’s property market has experienced in decades. Investor confidence sincethe country voted to leave the European Union has been incredibly volatile, as theworld watches Brexit and the resulting impact on Britain’s economy play out.

The resale market, particularly in Canary Wharf which has historically been dominatedby investor buyers, is suffering from tremendous inactivity. The majority seems notready to buy until our political direction is more assured. Meanwhile, residentialdevelopments continue to rise at a rate few other areas of London come close to, bothhere and further east in Docklands, E16. Sellers are holding off because demand isn’tthere to achieve the price levels they expect. The little volume of properties on thesales market are priced to sell, or simply not moving.

In lettings, the picture is more positive, with demand from tenants growing rapidly,and as a result of investor inactivity, certain elements of rental property supply beingreduced. For those landlords who remain, the economics behind the market meanthat rents are rising, and in some areas making up for the reduced margins as a resultof tax reforms. A continuation of the banks’ low borrowing rates means that investorsare still enjoying a period of inexpensive borrowing, and many are restructuring thefinance across their portfolios to take advantage for years to come.

At Harrisons we remain confident in the long-term sustainability of London propertyinvestment, and we have investment positions in the market ourselves which equip uswith the knowledge to help you make a better return on your investment.

Andrew Matin Managing Director

020 3006 5006andrew.matin@harrisons.co.uk

Legislative reform

Minimum energy performance requirements… House of Multiple Occupationlicensing… Company tenancies and Airbnb… There are now an estimated 175 separaterules and regulations that a landlord must adhere to, and this market intervention bythe government is growing in scale on a daily basis.

Many headleases now include clauses preventing serviced apartment companies orAirbnb hosts from operating in the development. More and more boroughs in Londonare clamping down similarly on short-term letting. It’s more difficult (and in someplaces impossible) to capitalise on short-term rental premiums and the flexibility andsecurity these structures afford.

Mandatory HMO licenses for properties leased to sharers are commonplace in mostparts of London now, and the costs of applying for a license and doing any necessaryworks can mount up.

In short, your flexibility to maximise your income with minimal risk and exposure isreduced.

Reduced profit margins

Landlords have been progressively losing valuable tax relief on their buy-to-letmortgage costs, and from April 2020, you will not be entitled to claim any relief onmortgage interest payments. This means that net rental income from a typicalproperty may be more than halved, as per the example below…

To further add to borrowing pressures, most investors’ loan-to-value ratios haveincreased as resale values have fallen.

For instance, a landlord with a 75% LTV (minimum typical equity being 25%) on a£400,000 property, which has now fallen to a value of £350,000, now have a LTV of86% and just 14% equity.

They cannot therefore remortgage for a better rate, and are in danger of encroachinginto negative equity – owing more than the value of the property.

Mortgage tax relief for property with £950 rent and £600 mortgage per month

Tax year

Proportion of mortgage interest deductible under previous system

Proportion of mortgage interest qualifying for 20% tax credit under

new system Tax bill

Post-tax and mortgage rental

income

Prior to April 2017 100% 0% £1,680 £2,520

2017-18 75% 25% £2,040 £2,160

2018-19 50% 50% £2,400 £1,800

2019-20 25% 75% £2,760 £1,440

From April 2020 0% 100% £3,120 £1,080

Resale supply vs investor demand

Canary Wharf and London’s Docklands are areas that are rife with new residentialdevelopment. Meanwhile, unmotivated landlords are attempting to dispose of assetswhose returns have diminished. Further adding to the strain on the market is a slumpin buyer demand, once again as a result of reduced buy-to-let margins.

Consequently, there is a rising discrepancy in the true value of a buy-to-let propertyhere vs what someone is actually willing to pay for it. If you’re considering selling, canyou afford a minimum 10% hit to attract a motivated buyer? Does your property havetenants in situ for the foreseeable future, likely reducing its upfront value further?

Most vendors currently on the market are distressed and in need of a quick sale, soare more willing to consider very low prices in order to achieve their exit. Do you wantto be competing against those and potentially suffering a loss? Even in 2018’s peaksummer market, only 2% of Rightmove’s E14 sales listings actually exchanged (againstLand Registry records, June 2018) – proving that vendor expectations remain far toohigh in a marketplace where demand barely exists and supply is at a huge surplus.

If you are not under any pressure to sell immediately, your best option may be to holdonto your asset until demand from buyers is reestablished. Anything priced in linewith the lettings market remains in high demand from good quality tenants, and wecan guarantee an appropriate return. However, no one can guarantee a sale at themoment, and we advise highly against disposing of an asset unless absolutelynecessary.

Are you being advised correctly? Do

you feel looked after?

In such an uncertain market, it is more important than ever that you are givenaccurate, impartial advice with regard to your property investment decisions.

Your agent should have a thorough understanding of the stakeholders in your localmarketplace and the motivation behind these market players. Rather than stalling byusing the excuse of “It’s just Brexit!”, they should help you identify the opportunitiesthat Brexit presents for your investments.

There are many more factors than EU uncertainty affecting the resale market, and anumber of important considerations you need to make rather than just waiting andseeing.

Using our own investment experience and decades of market understanding, weprovide ongoing opinion and advice to our clients so that you can stay on top ofpolitical and economic developments and their implications on your capital and returnon investment.

Finally, the impact on the traditional estate agency model, by both the rise of onlineservice offerings as well as the impending tenant fee ban, should not be undermined.It’s possible that a large proportion of lettings agents may cease to exist in 12 months’time – those that remain will lose an average of 30% of their revenues as a directresult of the tenant fee ban, and it will become impossible for many to provide thelevel of service and expert direction that investors depend on in this climate.

What’s new in Canary Wharf?

Once the busiest shipping port on the globe, in the late 20th century the area wastransformed into a modern phenomenon. Canary Wharf was granted ‘enterprise zone’status in 1983, giving rise to a global financial district, scores of skyscrapers and fiveshopping malls.

Crossrail, which will bring an additional 1.5 million people to within a 45 minutecommute of Canary Wharf, will also offer rapid links to the West End, Heathrow,Paddington and Reading, as well as a plethora of business and residential centres inbetween.

The City, with its historic financial heritage as well as fine dining offerings, is just 11minutes away at Bank.

Southbank provides world-renowned art and culture, 9 minutes away at Waterloo.

London’s West End, famed for its high end fashion and theatre, is 15 minutes away atBond Street.

Canary Wharf has the biggest population of bankers and executives of anywhere inEurope, and is also attracting new growth from law firms, media agencies and the techindustry. Employment has quadrupled in a decade, bringing massive tenant demand tothe buy-to-let sector from a high calibre of tenants, making E14 London’s highestsalary postcode with average earnings per capita of well over £100,000.

As the area expands into Docklands E16 and continues to mature into a thrivingresidential and business centre, it’s certain that Canary Wharf and the surroundingdistrict will further prosper from extraordinary growth in tenant demand over the nextdecade. Buy-to-let investors are capitalising on low resale prices while their peers exitin the wake of legislative and taxation reform, and those who remain can expect astrong income as well as capital appreciation in the future.

Rental market outlook

Competition among mortgage providers, assisted by an ever-low base interest rate ofjust 0.75%, means that borrowing remains incredibly cheap. Many lenders arelaunching extraordinary offers to gain the custom of those landlords who remain inthe market - cutting rates, easing terms and even offering interest-free periods.

2018 saw an exodus of landlords - those leaving the market reached a three-year peakin April/May, and the exit rate remained high throughout the summer and autumnmonths. Because there are far fewer entrants, the mortgage market is competingalmost entirely over remortgaging products. As a result, there has never been a bettertime for investors to consider restructuring the finance on their portfolios and makenew investments.

Of course, the biggest opportunity is that with fewer landlords in the market meaningfewer properties, combined with rapidly increasing demand from tenants, particularlyin London, there is huge upward pressure on rent prices. 23% more households areforecast to be renting in 2022 compared to today.

Research from HomeLet shows rental prices in London grew 4% year-on-year, inOctober '18 vs '17. Average rents have increased above both inflation and averagewage growth, and activity levels in the private rented sector remain resilient.Meanwhile, research from Savills forecasts a 15.9% rise in London rents over the nextfive years, with an average £1,750 per month two-bedroom flat inflating to £2,028 by2023.

In other words, landlords can expect their incomes to rise steadily in the short tomedium term - just as their assets should appreciate come long-term certainty.

Acting on it

Your portfolio may be feeling the pinch right now, but where will your investmentsstand in 12 months’ time? Are you protecting your equity, future capital value andreturn so that your property positions remain viable in the long term?

We can provide you with the knowledge to make decisions that will align yourinvestments to provide the best possible future return, in line with immediate marketreactions to developments in politics and the economy.

Your immediate steps should be to ensure there is sufficient equity in each of yourassets, and then seek to secure a rental income from a reliable tenant to service yourongoing costs.

Please get in touch for a more detailed consultation regarding your individualinvestment motives and the course of action best suited to you.

Andrew Matin Managing Director

020 3006 5006andrew.matin@harrisons.co.uk

Tom Crowe Residential Sales and Lettings Manager

020 3006 5006tom.crowe@harrisons.co.uk