Whether in Glasgow,Edinburgh or Dundee recent media reports about a lack of affordable accommodation in Scotland’s university cities and towns have been well documented. Commercial Build-to-Rent (BTR) programmes aim in part to help address this shortfall, while for many years low mortgage interest rates and high demand from among workers and students alike have enticed many investors into Scotland’s buy-to-let sector.
However, from an investor (landlord) perspective, several factors may increasingly be influencing the future of this market and in turn, arguably presenting an opportunity for first-time buyers and other ‘flat hunters’ to get on the property ladder. To explain, let’s briefly consider flats within the national picture.
Statistics can be fickle but according to recent data from the Land Registry, average annual flat prices across Scotland to December 2022 fell by 0.7%. While that’s a notable and unwelcome (from the investors’ perspective) drop, it should be taken in context. For even accounting for this downturn, Edinburgh (3.6%), Dundee ((1.3%), and Glasgow (3.4%) all still recorded an average flat price higher than the start of 2022! So, you could say there has simply been a slight correction in the market.
Invariably, various factors will always see flat prices fluctuate within geographical areas and indeed parts of a city. However, I believe one trend that will always continue is for young professional families to tend to migrate towards ownership of a larger property – therefore, opening the door – so to speak – for a buyer keen to gain a foothold on the property ladder.
However, moving up the property chain isn’t necessarily the key driver for investors in the buy-to-let market. Rather location, consistent yields, return on investment and the reassurance of making a profit after paying the mortgage and for a professionally prepared Home Report are often key determinants of whether or not to invest in a particular property. And let’s be clear. I am writing about smaller landlords – not the large commercial projects supported by major investors.
For some in the buy-to-let sector, it would appear the sands are shifting – and not necessarily in a favourable direction. Here are just a few reasons why the market is changing – and why despite an ongoing lack of quality and affordable housing stock in university cities and towns – there may be an opportunity for an aspiring flat owner.
Cost of Living (Tenant Protection) Act
Embraced by some, and loathed by others the Cost of Living (Tenant Protection) Act is scheduled to come into force on 1 April 2023. It has significant implications for the landlord, namely that through this legislation Scottish ministers may enforce a 3% private rent increase cap aimed at protecting tenants. If this legislation is approved in parliament, private landlords will only be able to raise private rents by 3%.
This means that though the landlord may be paying more for their mortgage(s), the landlord will have a legally enforced ceiling by which the rent of the tenant(s) can be increased.
As a result, some landlords may believe it’s better to sell up – in turn potentially making more flats available to buy on the open market.
Changes to tax for the landlord?
Tax is another area of change for the landlord in Scotland. On 15 Dec 2022 in the Scottish Government budget, ministers introduced changes to the land and building transaction tax (LBTT). This is the tax paid when buying a property in Scotland that costs more than £145,000.
Specifically, the Scottish Government increased the tax charge on second home purchases, rising from its previous 4% to 6%.
In simple terms, this means that a potential buy-to-let investor who wishes to buy an additional property may face paying an extra 6% on the total purchase price of the flat or house. That’s in addition to the standard rates (a sliding scale) of LBTT that may apply. Clearly, while this may bring welcome funds to government coffers, for the landlord it could potentially add significant sums to a property purchase.
Short-term lets licensing scheme
If the above factors already give potential buy-to-let investors pause for thought, the introduction of the controversial short-term lets licensing scheme in local authorities across Scotland is another development that cannot be ignored.
By 1 October 2023, operators of a short-term let – including B&Bs, rooms within a home and even unconventional accommodation such as pods must apply to their local authority for permission to operate their rental property. A failure to comply with the new regulations – the rather wordy Civic Government (Scotland) Act 1982 (Licensing of Short-term Lets) Order 2022 (“Licensing Order”) – can incur fines of up to £2,500.
Notably, this licensing order in the likes of the City of Edinburgh local authority area also works in tandem with the Town and Country Planning (Short-term Let Control Areas) (Scotland) Regulations 2021. This legislation enables Councils to have short-term control areas – so effectively managing the number of short-term lets in a particular area.
While the roll-out of this licensing scheme has been welcomed in particular by some residents in Edinburgh, this sweeping legislation may well deter some within the buy-to-let sector from continuing to operate. Again, this may see more flatted properties come on the market.
As a result of the above new legislative and tax changes and the additional administrative (and cost) burden for landlords (including higher mortgage rates), I believe some in the buy-to-let sector may choose to offload their property(ies). As a result, we may see more flats come on the market in major event and festival cities like Edinburgh and Glasgow.
Of course, only time will tell and there remains the volatility of mortgage rates and a cost-of-living crisis. What’s more, purchasing a one or two bedroom flat in many attractive parts of Scotland’s towns and cities still requires a significant investment.
If the investor appetite for buy-to-let property cools, this may present opportunities to secure a flat in the likes of Edinburgh, Glasgow, Dundee and Aberdeen.
It will be very interesting to see how the buy-to-let market responds to the various legislative changes in the months ahead.
I should add, that should you be a buyer on the hunt for a property, be sure to engage a trusted, independent chartered surveyor like at Home Report Company to prepare your legally required Home Report.
Andrew MacKenzie is a qualified Chartered Surveyor with over 20 years’ experience within the Scottish Property market. He specialises in all types of residential valuations including Home Reports, Private Valuation reports and Development Appraisals.
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