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BTL investment case remains compelling for those ‘who adapt’ to market changes

Having long provided mega double-digit returns for investors, investment in buy-to-let has outperformed all major asset classes in recent years. But the government’s decision to introduce a number of measures, such as tax rises, to curb the growth of private landlords means that those investing in the sector face a period of adjustment, new research shows.

A report from Shawbrook Bank, undertaken by the Centre for Economics and Business Research (CEBR), acknowledges the fact that tax changes mean buy-to-let will no longer deliver the returns it did, but it predicts that professional landlords will continue to enjoy good investment opportunities despite an anticipated decline in yields from an average of 5% in 2016 to around 3.5% by 2027.

Landlords stand to benefit from a rise in demand from tenants, with the bank anticipating that the share of privately rented dwellings will increase from 21% in 2016 to 28% in 2027, but the most profitable element of investing in buy-to-let property will almost certainly come from capital growth, with Shawbrook Bank projecting that the average price of a UK home will rise to £336,845 by 2027 – an increase of 59.7% compared with 2016.

A major cloud on the horizon however is the dominance of the London and South East market where the combined share of the buy-to-let investment market is almost 40%.

With demand from the international migrant community helping to support the rental market in the city, the report questions whether continued rises in prices and rents are sustainable, especially with Brexit on the horizon.

Commenting on the CEBR findings, Stephen Johnson, deputy CEO and managing director for commercial mortgages at Shawbrook Bank, said: “As the spotlight continues to shine on buy-to-let, the landlord community will need to adjust to lower levels of available debt and will therefore require more equity, or have to grow at a slower pace than was previously possible.

“This will mean a period of adjustment for landlords who will have to consider how the changed environment affects them individually.

“As with all market shifts there will be winners and losers, but it is most likely that professional landlords with equity and scale from larger portfolios will be better positioned to weather the changes.

“Buy-to-let has produced excellent total returns for property investors in the past, and notwithstanding some of the new challenges, the fundamentals still remain compelling for those who adapt to the new environment.”

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