Delivering your property investment strategy whether your business is in the buy to sell, buy to let market, or you own commercial property, HMOs, single or multiple properties, without doubt, has been challenging during 2022. The war in Ukraine has caused sharp rises in fuel and food prices, which has put pressure on the economy and households.
This has knocked on to rental values, with rents rising to take into account rising costs including the cost of borrowing.
Property investors have also seen costs increase including maintenance costs. The much-vaunted Stamp Duty reduction designed to keep the housing market afloat didn’t extend to the 3% levy on buy to let properties either. Property prices have continued to rise until the last few months of 2022 too so the cost of buying a property has been steadily increasing.
The question is, how well do you understand your business? The answer to that question lies in whether you have a property investment strategy in place, and how well developed it is. Is it SMART? Is it flexible enough and is your forecasting accurate to take into account changing scenarios in the market? A sound property investment strategy will not only ensure that your business gets through the tough times, it will provide you with the information that you need to identify new opportunities in even the most difficult of conditions.
The question is, what’s in store for 2023? Will there be opportunities for property investors, and will people actually be able to afford to rent a property from a landlord?
Buy to Let 2023 Values & the Housing Market
The housing market is currently going through a rebalancing. While the cost of borrowing is rising, property market prices have begun to fall. During 2023 Savills forecasts that house prices will fall by 10% on average. That reduces the value of investments over the short term but balances the increased cost of borrowing somewhat.
Moving into 2024, Savills forecasts that house prices will increase by 1%, and continue growth in subsequent years.
For those investors with a long term property investment strategy in place, a short term reduction shouldn’t present a problem. But for those investors looking to make a “quick buck”, they may see reduced profits. Falling values could impact the buy to flip and buy to sell markets for investors not taking care of their financials.
Rental incomes will increase during 2023 impacting tenants, but this rise in costs will be absorbed by the increasing costs of property management. Repairs due to wear and tear energy, and materials have all risen in cost and these cannot be absorbed indefinitely by landlords, they must be passed on.
There are two key pieces of legislation of note that will begin to impact property investors during 2023. While other legislation is being introduced like the Renters’ Reform Bill, these two are of greatest concern.
Reform to Capital Gains Tax
In the Autumn Statement Chancellor Jeremy Hunt announced that the Capital Gains Tax Allowance would reduce from £12,300 to £6,000 in April 2023. It would then reduce further from £6,000 to £3,000 in April 2024. Landlords pay Capital Gains Tax on the profit they make from the sale of a property.
Research published by estate agent Hamptons shows that landlords will typically pay an additional £2,610 or 12% on the profit from the sale of property.
Energy Performance Certificates (EPC)
Changes being made to EPCs will take effect from January 2025. Landlords will be required to improve the energy rating of their properties from an ‘E’ rating to a ‘C’ rating. Whilst the immediate effect won’t be felt in 2023, any upgrades to properties including boilers, insulation, and so on will need to be completed so considerations for financing will need to be made.
Considering the rising cost of borrowing and costs, and the time consuming nature of some renovations, 2023 is likely to be the year that landlords make their decisions.
Opportunities: accidental landlords sell
For those property investors with a property investment strategy in place, navigating the troubled waters of the property market, whilst challenging, is unlikely to be a disaster.
It is those landlords who are less organised that are likely to struggle. Accidental landlords, and those landlords who have not developed a suitable business model that will struggle.
We anticipate that there will be buy to let properties coming onto the market for quick sales where some landlords will be unwilling or unable to afford to make the necessary investment in compliance with new EPC regulations. Not only that, but they will look to mitigate the rises in Capital Gains Tax in 2023 before the second increase in 2024.
For those landlords who have their investment portfolio set up as a limited company, Capital Gains Tax doesn’t apply, so the changes will have no impact. Limited companies will continue to pay Corporation Tax on profits.
So professional landlords will have opportunities to acquire properties in a subdued market. And those prices could become more competitive depending on how quickly a seller is looking to dispose of their properties.
The cost of renovations can be assessed during the sale process, so as properties change hands buyers can calculate costs accurately and arrange finance accordingly. Tie this in with rising rental values and the Bank of England Base Rate of Interest still lower than the historic average of 5.75% until the financial crisis of 2008. Experienced investors will see how the balance of costs will work in the 2023 financial environment and identify opportunities in their property investment strategy.
Property Business Strategy
The winners and losers in the property investment sector are clear to see for 2023. Those landlords who may have acquired property through a will, or moved in with a partner and let their second property will face challenges. They are unlikely to have a clear property investment strategy. Those landlords who do not treat their property portfolio with respect, whether one or multiple properties, will face challenges too.
The best property investment strategy will be delivered by those investors who have put in place a tax efficient business structure that allows them to grow their business while mitigating their tax liability and reducing risks. They will be in a strong position to take advantage of the opportunities that 2023 will bring.
If you want to know more about developing a deliverable property investment strategy for your property investment portfolio, contact us today