Created in association with. Buying to let. A guide to the UK market. What expats need to know.

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1 Created in association with Buying to let. A guide to the UK market. What expats need to know.

2 Contents. The UK rental market: The UK market has seen a growing number of people renting their homes in recent years. Find out why and what it involves Good rental locations: Different locations have seen growth in the number of households renting across the UK, with a range of factors potentially affecting the decisions of prospective tenants Landlords & tenants: Landlords have certain roles and responsibilities. Finding good tenants and making sure they uphold their side of the rental agreement is also a key aspect of buying to let. For expats, using a letting agent to act on your behalf can be a good idea as they are local and familiar with the requirements Finances: Being clear about the potential returns and costs of buying to let is essential in order for it to make financial sense Next steps: Our checklist of what to do next and where to find more information about buying to let 02

3 Introduction. At some stage in their life, an expat may think about buying to let in the UK for a range of reasons. Some might be aiming to live in the property at a later date, while others are simply choosing to gain a foothold in the UK s housing market. Buying to let is a big financial commitment. There are many factors to carefully evaluate to ensure it is the right option, and also to work out which route to take. HSBC Expat has worked with the UK National Landlords Association (NLA) to produce this guide, providing you with some of the key things to consider: What aspects of the UK rental market might interest landlords? Which locations are attractive for renting a home? What does it take to be a landlord, what should be expected from tenants and what is the role of a letting agent? The possible returns (negative or positive) and potential costs of buying to let There is not space in this guide to cover every aspect of buy-to-let property. Inside we have signposted where you can find out more, with a useful checklist on page 14 of the next steps you could take. Contributors We teamed up with the UK s National Landlords Association to produce this guide, along with a team of writers. Holly Thomas Former deputy personal finance editor at The Sunday Times. Holly asks why people might consider a UK buy-to-let property Lauren Thompson Freelance finance and property writer. Lauren provides the overview of location considerations Graham Norwood Buy-to-let landlord and property writer. Graham considers the roles of tenants and landlords David Prosser Former business editor at The Independent. David looks at the finance of buying to let Your property may be repossessed if you do not keep up repayments on your mortgage. Created in association with 03

4 The UK rental market. The private rented sector has grown dramatically in recent years, and buying to let has become an increasingly popular option. There are over three million households renting in Britain, according to the UK Office for National Statistics (ONS) and many expect that number to continue climbing. For example, by 2018, estate agency Savills estimates that one in five households, that s 5.7 million, in England will be renting in the private sector. Knight Frank, another UK estate agency, also forecasts a similar increase, with five million homes privately rented by Why are more people in the UK renting? There have been different factors affecting this, including: House prices have risen relatively quickly, particularly compared to wages, making owning less affordable. ONS house price data shows that the average UK house was worth 179,000 in December 2004, and climbed to 272,000 a decade later at the end of 2014 (a 52% change). While average house prices have fluctuated in more recent years, at the beginning of 2015 the average price, on ONS data, reached a new high of 273,000 (see the chart on page 11 for more information on house price changes). Wage growth has been lower, particularly in recent years, affecting affordability. A large deposit is often required to secure an affordable mortgage. The amount of housing being rented out by local authorities has decreased. 04

5 Things to consider As well as demand for rental properties, there are several other things to consider when thinking about buying to let. You can find out more about some of the financial aspects on pages Mortgages Borrowing rates in the UK have been competitive in recent years, with interest rates at or near historic lows. A rise in the Bank of England base interest rate, if and when this happens, could mean an increase in payments for buy-to-let borrowers. returns While house price growth can provide capital returns on a buy-to-let property, this is not guaranteed and prices may fall. HSBC research shows gross returns from rental payments in 2014 ranged from around 3% to more than 8% across the UK. The actual return, or net yield, on a property will be lower due to costs of owning and managing a property, and tax. Landlords Make allowances for troublesome tenants and changing rental markets when deciding to become a landlord. Being far away from a buy-to-let property comes with additional risks and considerations. Find out more on pages 8 and 9. Renting on the increase The UK government is working to improve the private rental sector and encourage more supply of rented accommodation. It believes the sector meets housing needs for many people, is often the housing route of choice for younger people and helps support the economy by providing the flexibility to move for work. Lucian Cook at Savills commented: Many expats want to buy a UK property to ensure they are not left behind if house prices rise. They might also want somewhere to live if and when they return home. Britain has a well-established rental sector that currently is in high demand because many people cannot afford to buy themselves. Find out more There is more information on landlord commitments, mortgages and other aspects of buy-to-let property throughout this guide National Landlords Association 1.7m Households renting from private landlords increased by 1.7 million between 2001 and 2011 (Source: ONS, 2011 census data) 10m One estimate suggests that there are currently up to 10 million people renting (Source: Knight Frank, Rental Revolution report, 2014) Please note that HSBC is not responsible for maintaining or updating third-party websites and other external sources 05

6 What makes a good rental location. Choosing the right property for buying to let is often the key to success. Most landlords will look for somewhere that could generate both a good rental income, as well as good capital appreciation, if house prices increase. This means choosing a property that will stay in demand from tenants, and hopefully be easy to sell when the time comes. Deciding what type of tenants you want will help you choose the right property in the right location. The capital In London, there is big demand from young professionals for quality rented accommodation, since many are increasingly unable to afford to buy in the capital. Proximity to a Tube station or a good bus route is crucial, since most tenants will use public transport to get to work. A survey published by the estate agency Savills in early 2014 found that wealthier tenants in London are prepared to pay more to live in modern apartment blocks with private balconies, en suite bathrooms, on site gyms, off-street parking and scenic views. In some London boroughs, almost 40% of households rent privately, according to Savills. 06

7 You may already have an idea about where you want to buy, but it s important to research specific areas thoroughly. Rental centres in England and Wales Percentage of households renting from a private landlord or letting agency in cities in England and Wales, by local authority area (Source: ONS, 2011 census data) Well-connected cities Of course, there is also demand from professionals in other economic centres such as Edinburgh, Birmingham and Manchester, Leeds 16.7 % York 16.4 % for example. Property in these cities may also have the advantage of being cheaper to buy than in London. Contemporary two-bedroom, two-bathroom apartments in the city centre not far from workplaces and amenities or a train station should attract couples or two friends Manchester 26.9 % Cambridge 23.9 % looking for a flat-share. Lucian Cook, from Savills, said: The imbalance between supply and demand has pushed up rents in well-connected city centres. A 2014 review of the rental market by Knight Frank identified Birmingham 16.7 % Inner London 29.2 % London, Birmingham, Manchester, Bristol, Leeds and Glasgow as having high levels of households privately renting or where growth in renting is expected. Know your location You may already have an idea about where you want to buy, but it s important to research specific areas thoroughly. Talk to local letting agents to find out where tenants want to live and the amount of rent Cardiff 20.3 % Bristol 22.1 % Southampton 23.4 % Brighton & Hove 28 % you could charge. 07

8 Roles and responsibilities. Before committing to buying to let, it s important to acknowledge the various responsibilities of becoming a landlord. According to the National Landlords Association (NLA), landlord responsibilities include providing and maintaining accommodation in good condition and exercising a common duty of care to all tenants and visitors. Landlord duties and responsibilities include: Finding and vetting new tenants Handling deposits Collecting rent Ensuring tax obligations are met and paid Abiding by regulations and inspections for electricity, gas and fire safety Adhering to guidelines on issues including water supply, drainage, glazing, energy efficiency and general repairs. For many expat landlords, the day-to-day duties of managing a buyto-let property can be carried out by a professional letting agent. Working with an agent Landlord responsibilities can be made more demanding should there be legal and fiscal changes affecting property owners. These may be best managed by instructing a professional letting agent to handle the majority of matters. Property and letting agent finder Primelocation.com states that letting agent fees usually range from 10% to 15% of rental income. The exact fee will depend on the service provided, the location and the agent used. It is important to discuss fees with an agent to ensure all of the potential charges for carrying out dayto-day management are clear, for example arranging any one-off repairs or maintenance. Landlords should always look for an agent which belongs to 08

9 Tenants & agents In short, an ideal tenant is likely to be one who respects the terms of the tenancy agreement; pays rent on time; treats the property, landlord and neighbours with respect; and ends the tenancy with due notice and propriety. To find that quality of tenant and subsequently keep them in the property will normally be the letting agent s responsibility. An agent can organise appropriate checks ahead of signing any tenancy agreement, including the credit, employment and character references of a prospective tenant, and should liaise with past landlords and agents. With the implementation of the Immigration Act 2014 it is now necessary to verify whether a prospective tenant has the right to live in the UK. An agent should check the property has an Energy Performance Certificate and a complete inventory is in place. An agent will also ensure the accommodation complies with lettings and health and safety legislation, as well as any repair obligations, throughout the tenancy. Tenancy agreements and deposits The classic Assured Shorthold Tenancy contract can be drawn up by the agent, who will register the tenant s deposit as required by law with a custodial or insurance-based scheme. The agent will also be responsible for: collecting rent periodically inspecting the property acting as a communication point between tenant and landlord. In the event of a problem the Housing Act 1988, amended in 1996, gives 17 grounds on which a tenant may be evicted. If a tenancy continues to the end of its term, the agent either negotiates a renewal or settles outstanding deposits against checks of the property s condition and inventory. a body providing client money protection insurance, such as the Association of Residential Letting Agents (ARLA), UK Association of Letting Agents (UKALA), National Approved Letting Scheme (NALS) or Royal Institution of Chartered Surveyors (RICS). As of this year, all letting agents are also legally required to provide redress, should a complaint arise. The NLA suggests looking for an agent that has clients with properties similar to the one being rented out, as this may make it easier to find tenants, as well as checking that the agent is part of a recognised national organisation and has relevant insurance in place. Changes to the sector The UK government has introduced a new how to rent guide to help tenants understand what to expect from their rental deal, and a new code to set standards for the management of properties in the private rented sector. While the UK government believes the private rented sector is governed by a well-established legal framework, it is worth keeping up to date with the requirements for landlords in the UK. See the Find out more box for sources of up-to-date information on any changes. Find out more UK government landlord guide National Landlords Association UK Association of Letting Agents Association of Residential Letting Agents Online news and community for landlords and agents UK government how to rent guide Please note that HSBC is not responsible for maintaining or updating third-party websites and other external sources 09

10 The potential returns and costs of buying to let. When looking at owning a buy-to-let property it is important to be realistic about the returns on offer and the costs that may be involved. The potential for both income and capital gains can look attractive; however, outgoings, ranging from the cost of managing a property to tax bills, will reduce any financial returns made. This means the headline numbers can be misleading. There are also financial risks from void periods (where a property is not let) and from falling house prices. Rental returns During the last quarter of 2014, the average buy-to-let investment in the UK provided a return, before costs, worth 6.3% a year, according to market research company BDRC. But that average hides wide variations around the country. In central London, where house prices are higher, yields averaged 5.4%. In the North West, the equivalent figure was 7.1%. Cost impacts 10% - 15% Potential range of letting agent fees, as a percentage of rental income. The higher fee, around 15% is for ongoing management, such as overseeing maintenance work (Source: Primelocation.com property finder) 6% > 1.7% The theoretical difference that could arise between the gross income on a rental property and the net, or actual, income received (after costs & tax) (Source: see working example) 10

11 UK house price rise and fall The chart shows the 12-month percentage change in the average house price of a UK home in January of each year. (Source: ONS, House Price Index, March 2015) The market rate for rents in different areas can fluctuate. Office for National Statistics (ONS) data on private rent prices shows that, across England, rents increased by almost 1% between 2007 and 2008, before falling dramatically from the end of 2008 through to the middle of 2010 (the height of the financial crisis). Since then, UK rents have grown again led by increases in London and the South East, almost reaching pre-crisis levels. Rent prices continued to grow throughout 2014, but at a slower rate % 10.8% 7.9 % 6.2 % 6.8 % 8.4 % Capital gains The capital value of homes also varies across the regions. As an example, in the 12 months to January 2015, the average house price in the UK increased by 8.4%, according to the ONS. Behind that average, returns ranged from a 13.0% gain in London to 6.6% in North East England, and 7.0% in the East Midlands. Past performance is no accurate guide to the future and house prices may also fall. Calculating the costs The headline figures for property, such as gross yield or monthly rent amounts, don t reflect what a buy-to-let property owner would receive. To work out what you would actually earn, outgoings must be deducted. There are several costs to take into account, from fees to arrange a mortgage, through to agency charges and tax. You would need to set all these costs against the rent in order to work out the actual financial return (known as the net yield) that could be received. % % 0.1 % 0.6 % 2.1 % % JAN JAN JAN JAN JAN JAN 2010 JAN 2011 JAN 2012 JAN 2013 JAN 2014 JAN

12 Costs and tax A number of one-off fees or ongoing costs may be payable as a landlord. Some of these can be offset against tax payable on the money made from buying to let. Mortgage: An arrangement and/or a booking fee will normally be charged when a mortgage is taken out. For example, an arrangement fee could be around 1-3% of the loan amount. The costs of paying a mortgage (repayment and interest) should also be considered. When securing a mortgage, a valuation of the property will need to be carried out, with an associated fee for this. tax: A number of taxes may apply when buying a property and renting it out: Stamp Duty This is payable when a property is purchased and is a percentage rate that varies depending on the value of a property. ATED The Annual Tax on Enveloped Dwellings (ATED) only applies to high-value properties owned by companies, partnerships where one partner is a company, or a collective investment vehicle. Income Tax Property owners not resident in the UK are generally required to pay UK income tax. Under the Non- Resident Landlord Scheme, letting agents must subtract basic rate tax currently at 20% from rental income before it is passed on to the property owner. However, some costs buy-to-let mortgage interest and letting agents fees, for example are tax deductible and will reduce the amount of tax that must be paid. If a non-resident landlord doesn t have a letting agent acting for them then tenants are responsible for deducting tax, in either case deductible expenses can be taken off before tax is paid. Non-resident landlords can also apply to receive rental income with no tax deducted. The rent still remains liable to tax and must be included in a tax return. Capital Gains Tax Capital Gains Tax (CGT) is a tax on the profit made when you sell or dispose of an asset that has increased in value. Only the profit you make is taxed, not the amount of money you receive, and you only have to pay CGT on the gains above your tax-free allowance (called the Annual Exempt Amount), which is 11,100 in Letting Agent fees: Fees for letting services are normally a percentage of the rental income, usually starting from 10% of the rent achieved. This covers costs such as finding and vetting a tenant, and preparing an inventory. For a full management service, fees may be around 15%. other costs: These will include landlord s insurance, legal fees and also potential costs for maintaining the property. Insurance premiums and maintenance costs may be offset against tax. There may also be other costs, such as on leasehold properties where service charges or ground rents may be payable. HSBC cannot provide tax advice and it is recommended that you speak to a tax expert. 12

13 Working example Imagine a 150,000 property on which you can earn a rent of 750 a month (this is a gross yield of 6% a year). A 75%interest-only mortgage of 112,500 with a 4% annual interest rate would carry monthly interest charges of 375. Add in to that, a 10% letting agent s fee of 900 a year, and annual maintenance and insurance bills of, say, 1,000, which amounts to costs of about 158 a month. Your final monthly income would then be 217. The net annual yield, in this example, would be 1.7%. Mortgage finance Buy-to-let mortgage lenders typically look for a potential monthly rental income of around % of the monthly mortgage repayments; there will also be a range of other eligibility requirements in securing a loan, such as a minimum salary. Interest rates in the market for buy-to-let mortgages during early 2015 ranged from just under 4% up to more than 5%. The market can be volatile, with rates frequently changing, so this isn t an indication of what buy-to-let mortgage rates may be in the future. The type of mortgage capital repayment or interest only will also affect the fees chargeable and the interest rate. With interest only mortgages, borrowers need to consider having a suitable repayment strategy in place. The lending options for potential landlords living overseas can be limited, with fewer lenders making mortgages available to expats or other overseas residents looking to finance the purchase of a buy-to-let property. The overall costs of owning a buy-to-let property will affect any financial return. Weighing up When thinking about buying to let, it is important to fully consider the financial implications and take a longer-term view. Money invested in property is likely to be tied-up for a long time, and it may not be possible to sell a property quickly. The property market can fluctuate, whether thinking about the value of property or rental demand. A large deposit may be needed for a mortgage, and interest rates can also change, affecting the costs of paying a mortgage. The overall costs of owning a buy-to-let property will also affect any financial return. If all of these costs are known and considered, buying to let in the UK can work out to be a financially viable investment in a dynamic property market. Rents to mortgage ratio 125%-130% If you are paying a buy-to-let mortgage from the rental income, a mortgage provider is likely to expect rent to be around % of the mortgage payments (Source: Moneyfacts and HSBC) Market variations United Kingdom +8.4% London +13.0% Annual change in house prices, 12 months to January 2015 (Source: ONS, House Price Index, March 2015) 13

14 Our checklist and where to find more information. The market Understand the state of the UK rental and property market LOcation Find a location that is suitable for a rental property through local research Being a landlord Make sure you know the responsibilities of being a landlord in the UK Costs and returns Calculate what it might cost to buy and manage a buy-to-let property, and consider the impact of financial risks from void periods or market changes Mortgages Research your mortgage options Find an AGent Select a letting agent that s right for you You should always think carefully before purchasing a buy-to-let property. The value of a property is a matter of opinion and not a matter of fact, not all properties will grow in value or provide sufficient income to cover all your associated costs. You will be responsible for your costs even if you do not have a tenant. Property can also be difficult to sell and you may not be able to sell quickly if you need to do so. Your property may be repossessed if you do not keep up repayments on your mortgage. 14

15 Directory HSBC Expat HMRC non-resident landlord tax National Landlords Association UK Association of Letting Agents UK government landlord guide Association of Residential Letting Agents Online news and community for landlords and agents UK government guide to tenancy agreements Please note that HSBC is not responsible for maintaining or updating third-party websites and other external sources Important information Issued by HSBC Expat, a trading name of HSBC Bank International Limited, incorporated at HSBC House, Esplanade, St Helier, Jersey JE1 1HS. Approved for issue in the UK by HSBC Bank plc HSBC Bank International Limited is regulated by the Jersey Financial Services Commission for Banking General Insurance Mediation, Investment and Fund Services Business. Hong Kong Branch is licensed by the Hong Kong Monetary Authority as an Authorised Institution in Hong Kong and licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities under the Securities and Futures Ordinance (central entity number assigned by the Securities and Futures Commission: AGH398). Distributed by HSBC Bank International Limited representative office Dubai, regulated by the Central Bank of the United Arab Emirates. The views and opinions expressed by our writers are not necessarily those of HSBC Expat and are subject to change at any time. The material contained in this document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy or sell investments, mortgages, or to participate in any trading strategy. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Expat accepts no liability for any failure to meet such forecast, projection or target nor responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified. CP150424/CN/151 AC