With the Chancellor seemingly gunning for the buy-to-let sector and the pound relatively strong against the euro, will UK property investors switch their focus to foreign markets instead?
Investors wanting to sink their cash into property may turn to buying abroad this year in the face of the almighty shake-up in April when the UK buy-to-let market is expected to contract due to huge tax rises.
That is the prediction of many commentators whom Mortgage Strategy spoke to, albeit not held universally. Some believe investors could be attracted to the stabilisation of a number of major housing markets that are only now recovering from huge property crashes.
This leaves buyers with the opportunity to purchase at close to rock-bottom prices but with the hope that properties will, at worst, hold their value.
The relative strength of the pound is another attraction although, while sterling is strong against the euro in particular, some of the gloss has come off it in recent weeks as the UK currency has suffered a slump.
On the UK buy-to-let front, the Council of Mortgage Lenders predicts the number of homes bought each year with the intention of renting them out will drop by more than 20 per cent between 2015 and 2017 (see below) due to the huge tax rises planned for the sector from April.
So could all of this push investors towards buying abroad instead? Overseas property and finance specialist Simon Conn says: “With costs increasing in the UK for buy-to-let, this type of client may become attracted to new markets.
“The most popular European markets have always attracted UK purchasers, for either holidays, retirement or possible investment. They are all recovering from their own recession and offer potential bargains, with the added benefit of rental income if required – subject to local licensing rules in some areas.
“These countries welcome investment and try their best to accommodate overseas purchasers. While the UK government seems to be anti-second home, this does not currently apply on investments in overseas properties.”
SPF Private Clients international manager Miranda John adds: “Buy-to-let investors who are put off buying in the UK due to the increase in costs could cast a wider net and look overseas.”
Others in the overseas mortgage world agree with this sentiment, such as Clare Nessling, director at broker Conti. She points to the UK’s pension freedoms available since last year that make it far more cost-effective to release cash from a pension as another source of revenue for investors wanting to purchase extra property.
Nessling says: “There are a growing number of British buyers who are more willing to explore overseas opportunities, especially when you compare the cost with overheated parts of the UK market and its now stricter lending criteria.”
Asked whether the CML foresees an increase in demand for overseas property, spokesman Bernard Clarke casts some doubt on these statements. He says: “There are two sides to this question: will there be demand from investors, and will there be a supply of funding from lenders?
“Although we have forecast a decline in new buy-to-let purchases over the next two years, it’s far from clear what would-be landlords may do as an alternative.
“Higher taxes in the UK may deter buy-to-let investors but transaction costs can be much higher in some overseas markets, including many in Europe.”
One threat to the growth of the overseas mortgage market is Europe’s impending Mortgage Credit Directive, which firms must implement by next month. Part of the regulations covers mortgages in a different currency from that used where the customer is resident.
The rules state that all firms must disclose the potential impact of exchange rate fluctuations and notify customers if there is an adverse 20 per cent movement. They must also take extra steps to protect customers from exchange rate risks, such as bestowing the right to revert to another currency.
The extra bureaucracy has seen a number of lenders pull out of this sector. However, Investec Private Banking business development manager Peter Izard told Mortgage Strategy last month that “several lenders will continue to offer foreign currency mortgages post-MCD, so you should not think that this is a sector that will wither and die”.
Another factor that could hinder demand abroad is the recent slump in the value of the pound, which makes buying foreign currency more expensive. At the time of writing, £1 bought €1.32, compared to €1.42 in November. Against the US dollar, the pound has had a similar fate. While last June £1 bought $1.58, it now buys just $1.44.
Nevertheless, some experts point out that the pound is still relatively strong compared to previous slumps. In late 2008, for example, sterling dipped to just over €1 to the pound.
Nessling says: “Investment has been buoyed by the growing strength of the pound against the euro and, even though that’s taken a dip in recent weeks, it’s still a lot better than it was just a few years ago.
“A €200,000 holiday home, for example, still costs around £21,000 less than it did in the summer of 2013, based on currency rates alone. Affordability is also boosted by historically low interest rates and bargain property prices, and these ideal buying conditions are pulling buyers back to the overseas market.”
John adds that investors should not take short-term fluctuations into account. She says: “UK buyers can be motivated or discouraged by exchange rates but generally when buying overseas it is a long-term investment so buyers should factor in some flexibility.”
What appears beyond doubt is that the buy-to-let market in the UK is set for a slump, leaving investors who shy away looking for an alternative base for their cash.
Chancellor George Osborne revealed in November’s Autumn Statement that the price of stamp duty for anyone buying a second home in the UK would soar from April. Purchasers will pay 3 percentage points more than people buying a first or only home. The exception is for homes costing up to £40,000, which will continue to be stamp duty-free.
The majority of investors face huge additional costs. Someone purchasing a £275,000 buy-to-let property will see their stamp duty bill almost quadruple, from £3,750 to £12,000.
KPMG tax partner Jo Bateson says: “Investors may decide to re-evaluate the attractiveness of the UK residential market.”
The change to buy-to-let stamp duty came hot on the heels of measures outlined in last year’s Summer Budget, which will see a cap on mortgage interest tax breaks starting from April. Landlords can currently claim tax relief at their marginal rate but this will be restricted to the basic-rate amount of 20 per cent.
The CML says: “Inevitably, these changes will adversely impact the rate of growth in the sector and even cause lending volumes to ease back.”
It predicts the number of buy-to-let home purchases will fall from 116,000 in 2015 to 105,000 in 2016 and 90,000 in 2017, although it expects buy-to-let remortgage activity to grow.
Destinations of choice
So if more investors are indeed attracted to buying property abroad, where are they likely to head to? A look at the most popular countries among UK buyers provides some clues.
Figures from Conti show Spain as the top choice for Britons in 2015, accounting for just under half – 46 per cent – of enquiries it received, despite losing the lead to France towards the end of the year. France’s annual share was 34 per cent but in the fourth quarter of 2015 it accounted for 44 per cent of Conti’s enquiries, beating Spain on 42 per cent.
Research by property search website Rightmove (see below) backs up Spain’s popularity among UK buyers. It found that, in December 2015, almost 29 per cent of overseas property searches were for Spanish homes, with 17 per cent for French homes.
Some brokers have observed the greatest demand for French homes, with John reporting this for SPF clients. She says this is partly because French legal fees and taxes are 3 to 4 per cent for new-builds and 7 to 8 per cent for older properties, compared to 11 per cent-plus in Spain.
Portugal and the US vie as the next most popular destinations for UK buyers, according to several sources. Conti figures put Portugal third in popularity, accounting for 15 per cent of enquiries received in 2015, up from 11 per cent in 2014. Conn, meanwhile, ranks the US in third place, as does Rightmove, with just under 9 per cent of searches in December.
Other popular destinations include Australia, Cyprus, Germany, Greece, Ireland, Italy, South Africa and Turkey.
Focus of attraction
Looking more closely at the data on the top-ranking destinations, the good news for potential investors in Spanish property is that house prices have been falling for years, stretching back to the start of the global financial crisis in 2007 as the country suffered a deep recession.
Data from property portal Fotocasa.es shows prices dipping slightly during 2015, by just 0.8 per cent, but preceded by eight successive years of dives, the biggest of which was by 10.5 per cent in 2009.
These figures may encourage new potential investors but the slump could be over, making existing investments safer.
Estate agent Knight Frank reported a rise of 1.2 per cent in Spanish property prices between Q3 2014 and Q3 2015, suggesting the market has indeed turned. The same data from a year earlier revealed a 2.7 per cent decline. In France, property prices fell steadily for four years until Q3 2015, according to figures from INSEE Notaires de France, the country’s national statistics bureau. That quarter experienced a 0.5 per cent increase on the same period in 2014, although annual prices fell for the year to September 2015.
The Knight Frank data shows French house prices falling by 2.9 per cent in that period. It also shows Portugal’s prices picking up, with a 1 per cent rise from Q3 2014 to Q3 2015, compared to a 1.5 per cent fall a year earlier. The figures do not paint Europe as a safe haven for property investment because the most popular countries are still recovering from deep economic problems, with house price gains both fledgling and small. Yet if these are sufficient to encourage greater appetite, is it a sector in which more brokers should get involved?
Nessling thinks it is. She says: “It’s a great time. Property prices are starting to rise again modestly in the most popular European markets; lending conditions are generally improving; and rates are still very low. So many buyers are making their move now.
“A lot of brokers have avoided this market because they’ve been unsure about how to tap into it. But although it can appear daunting, it’s a simple case of passing [buyers] over to the experts, which means you can earn valuable commission while getting on with the day job.”
While this sounds encouraging, nevertheless brokers face many added complexities compared to arranging home loans in the UK, such as language barriers. Nessling acknowledges this, while John says: “International mortgages are generally straightforward in terms of product. But the choice of lender is key and a broker needs a thorough understanding of the country’s legal and tax systems to ensure the borrower has the most-rounded advice.
“Unlike in the UK, it is very difficult to remortgage post-completion; and to release any funds on a property a few years later is virtually impossible in most of Europe unless the client is high-net-worth. This means the advice on completion is critical, because buyers need to be sure they have the best product as they will be tied in.”
John adds that, similar to the UK, lending criteria in many countries have tightened since the financial crisis. She says: “The key criterion is affordability based on taxed income, so the client must be able to service the new loan easily as well as all their current debt.
“European lenders are extremely rigid in terms of only accepting income showing on tax returns or P60s. And they like to see continuity, so three years or so of regular income is usually required, which does not suit everyone.”
There is also less product choice in foreign markets. John notes that many offer no buy-to-let, offset or interest-only mortgages.
Many borrowers raise cash to buy foreign property not by taking out a specific overseas mortgage but by releasing funds from UK property, often by remortgaging.
If brokers decide not to refer to an expert, they must not only get up to speed with local rules and customs around the foreign property but may also be called on to help their clients jump over any extra hurdles.
Nessling explains: “The overseas mortgage market is totally different from the UK market, with each country presenting a myriad of national and local laws, customs, foreign exchange requirements and language barriers.
“It may be a great time to buy overseas property but, as always, it’s imperative to do things right. Bitter experience has taught many investors that scrimping on independent legal advice can effectively cost them their home.
“They should always go through the same process that they would follow if they were buying a property in the UK. This means taking independent advice from an English-speaking lawyer who is not connected to their seller, estate agent or property developer.”
Clarke adds: “Investors face challenges in researching overseas property and rental markets, managing properties in another country and understanding and fulfilling their requirements as landlords in a private rental market that may be unfamiliar to them. So investment in overseas property is not a straightforward substitution for the UK buy-to-let market.”
Speaking from experience, Conn warns of another potential menace facing buyers and their brokers, namely unscrupulous local operators.
He says: “It is not just about arranging a loan but also assisting with the problems that can occur and working alongside other professionals, such as surveyors and lawyers, to solve these where possible.
“Unfortunately, as markets get busier a number of rogue agents and developers will appear. And because many clients purchase abroad with their heart and not their head, it can be difficult to recommend or advise a client not to purchase a certain property because of legal or title issues.
“Mortgages can also take months, and sometimes years, to complete,” says Conn.
It may also be months, or even years, before we find out if the predictions of a rise in overseas property investment are correct. But many ingredients are undoubtedly in place for that to happen.
Top tips and developments in popular countries from overseas property expert Simon Conn
Spain: It is a popular holiday destination and, when people stay there, they often think about purchasing. LTVs are now up to 70 per cent. Be careful what you buy as the number of agents/developers has increased. So ensure you carry out due diligence, including looking into their experience and recent sales such as build quality and delivery times.
France: It is still buoyant. Buyers are taking advantage of very low interest rates and mortgages are still available up to 80-85 per cent LTV. Before the recession, only the more expensive areas were popular, but now all regions are of interest.
US: Enquiries for higher-priced properties continue, usually for $500,000 and above. New York, Florida and California are still the most popular places.
Portugal: It has seen an increase in the number of agents operating. There are higher-LTV mortgages available, up to 80 per cent. People have recognised the quality of the build, the lower density of properties in the surrounding area and the potential value for money.
Italy: Still busy, with interest rates staying low. However, the maximum LTV is now 60 per cent, having been at 60-70 per cent last year.
Australia and New Zealand: Both are popular for retirement and long-term investment.
Greece: There is still no lending available in Greece unless the property is valued at €1m or above.
Cyprus: Lending has returned, with LTVs of 60-70 per cent and a minimum loan of €50,000. Be careful about local legal and title issues.
South Africa: Popular, despite economic and civil unrest. Lending is still restrictive, with only 50 per cent LTV for non-nationals or 70 per cent for South African expats. Interest rates are around 9.5-9.75 per cent and mortgages are still only available in rand.
Turkey: With its low-priced properties, Turkey continues to get enquiries from buyers. Interest has waned in the past year, probably due to the troubles nearby in Syria.
Germany: Conn’s top tip for 2016. Interest is increasing, particularly for investment in large cities. There are signs of more lenders coming to the market for foreign investment, although most do not take account of rental income.
Dubai: There is still a glut of rental properties, leading to lower rental returns. Purchasers are buying mainly for holidays, retirement or work. Lending is restrictive and buyers may have trouble financing some developments as banks may not lend on those properties.