Buy-to-let surcharge presents opportunities and challenges in the PRS market

One of the headline-grabbing changes announced in the Autumn Statement was a new 3% surcharge for buy-to-let properties and second homes. The surcharge comes on the back of recent legislative changes that have particularly impacted on private landlords. For property developers, commercial landlords and institutional investors, the landscape is becoming more challenging in some respects. Yet, as we explore in our Future Living report, changing market and legal conditions present significant opportunities for growth within the private rental sector (PRS).

How will the surcharge work?

For properties purchased on or after 1 April 2016, the surcharge will add 3% to the rate of stamp duty land tax (SDLT) on purchases of additional residential properties over £40,000. For a house bought for £200,000 as a buy-to-let, for example, SDLT would rise from 2% to 5%. The surcharge is not expected to apply to corporates or funds that own more than 15 properties (subject to a government consultation).

Increasing the burden on landlords

As we explained in previous articles, residential/mixed use landlords are finding themselves operating in an increasingly challenging regulatory landscape. To take two standout examples:

• Assured shorthold tenancies granted on or after 1 October 2015 are subject to new rules, which impose additional restrictions and formalities on landlords wishing to terminate them – see here for more detail.
• From 1 February 2016 the Right to Rent scheme is being rolled out nationwide. The scheme imposes obligations on landlords to check that all adults living in their properties are legally entitled to reside in the UK, and is expected to impose criminal sanctions on those who fail to comply – see here for more detail.

These changes apply equally to private and commercial landlords of residential premises. Nevertheless, commercial landlords should be better placed to comply with the requirements and survive in an increasingly regulated environment, as investment in systems, procedures and compliance programmes are becoming increasingly important to keep up with the pace of change in the PRS sector.

Impact on the market

The new surcharge is likely to have a significant impact on the PRS market:

• In the short-term, there is expected to be a rush by private landlords to purchase buy-to-let or additional homes before 1 April 2016, when the surcharge applies. This presents an opportunity for developers to sell both ready-stock and off-plan residential properties.
• In the medium-term, developers are likely to see an impact on current and planned developments that have a percentage of the development allocated in their plan for buy-to-let. This will present an opportunity for commercial developers and institutional investors to acquire assets in a more favourable market (temporarily, at least). Increased purchase costs for private landlords may also be passed on to tenants, potentially generating more evictions or disputes with tenants.
• In the longer-term, the anticipated drop-off in private landlords is just one of a number of changes in the PRS market. As we explain in our Future Living report, changing consumer preferences and circumstances are presenting a number of opportunities, including the entry into the market of lifestyle brands.

With governmental support for institutional investment likely to continue, it is no surprise that business leaders see PRS as the accommodation asset class with the strongest growth prospects over the next 10 years. The challenge for commercial landlords and investors is to deliver on those prospects, whilst negotiating ever expanding regulation that is required, to meet a demand that is only set to grow.