The shouting’s over now and the people of Britain have voted by referendum to cut the country’s ties with – and membership of – the European Union.
The dust has by no means settled yet – the formal Brexit process will take two years even after the UK has formally applied to leave the EU – but this has not stopped many groups and business people from, quite rightly, asking just what Brexit might mean for them.
Of course it is early days yet – the referendum itself was only held on the 23rd of June and the new Prime Minister Theresa May has said that the formal machinery to begin the UK’s exit from the EU is not expected to start until the New Year (according to a report by the BBC on the 20th of July 2016).
Given the overall uncertainty, however, it might be helpful to consider some of the factors which might affect the fortunes of buy to let landlords and the commentary that is already circulating.
The housing market
Even before the Brexit vote was known, the Association of Residential Letting Agents (ARLA) and the National Association of Estate Agents (NAEA) both predicted a fall in demand for accommodation in the private rented sector and a general fall in house prices following a decision to leave the EU, according to a report in the Guardian newspaper on the 19th of May 2016.
The reasons given was the likely reduction in demand at lower ends of the housing market as fewer immigrants were present and in need of housing. These effects are most likely to be felt in the Greater London area, according to most reports.
The impact on landlords
This view was echoed after the event by a report on the Mortgage Strategy website dated the 15th of July 2016, which suggested that some 40% of landlords were worried about the negative impact on their buy to let businesses, following the vote to leave the EU.
Fewer migrants from the EU means a smaller pool of prospective tenants, according to one respondent, so more properties were likely to be empty and landlords might struggle for longer to find tenants. A period of general uncertainty about the availability and cost of buy to let mortgages, taxation and the performance of the construction industry were also mentioned as areas of particular concern.
But the picture is by no means clear, with landlords as apparently divided as the electorate as a whole about the pros and cons of remaining in or leaving the EU. Some 43% of landlords maintained a positive outlook, in the belief that the decision to leave the EU would have little or no effect on their buy to let businesses.
Buy to let mortgages
The availability and cost of buy to let mortgages is, of course, a major concern for prospective and existing landlords – especially after the announcement last year that tax relief on the interest paid for such mortgages is to be phased out by 2017.
In terms of the market’s response to Brexit, however, it might be helpful to look to Specialist Lending Solutions for some of the more immediate consequences. In a report dated the 4th of July 2016, for instance, these specialist lenders referred to recent movements in the interest rate coverage (IRC).
The IRC combines both debt ratios and profitability ratios of lending on buy to let mortgages. It is used to assess how easily an applicant landlord is able to pay the interest on an outstanding buy to let mortgage. The IRC is calculated by dividing total rental income (before interest and taxes) during a specified period by the amount the landlord needs to pay in interest over the same period.
According to Specialist Lending Solutions, this IRC may be moving towards a percentage of 145%. The effect of this is likely to be that buy to let landlords in future may need to put down an average of 40% by way of deposit when purchasing buy to let properties in major cities across the country.
In some cities the size of the required deposit may be even higher. Worcester, Cambridge and Chichester received particular mentions with likely requirements for deposits of 61%, 60% and 59% respectively.
If the move towards 145% IRCs is confirmed, this is likely to lead to considerable difficulties for many individuals to enter the buy to let market and may even force some existing landlords to sell up.
Finally, however, it must be repeated that the eventual, lasting impact of Brexit on buy to let landlords, at the moment remains unknown. Some of the indicators may be pessimistic, yet there might still be room for optimism. Time will tell.