Rental property values are still holding up well

Beyond the expectations of almost everyone, the market is doing rather nicely just now. Not only in the usual hotspots either (eg central Edinburgh or Glasgow’s more affluent satellite suburbs) but in the more humdrum locations which have seen a rash of closing dates set for offers and prices substantially over the “upset price” achieved.

David Alexander is managing director of DJ Alexander

So where does that lead investment buyers, for some of whom the world has been turned upside down by the effect of covid?

Until the pandemic struck, the usual complaint was that investment buyers were pricing out owner-occupiers especially in locations where there was strong rental demand. Now, while not exactly, “priced out”, investors are, nevertheless, facing stiffer competition from would-be owners more prepared to bid higher than they would have done a year or so ago.

In reality, however, the pandemic has simply accelerated a trend which had been developing some time before most people in this country thought Wuhan must be the name of a Chinese restaurant or takeaway.

Dedicated investors were, in many instances, still prepared to bid for properties but there were less of them than before, the two main reasons being that landlords had been subjected to a double-pincer movement – on one side from Westminster and the other from Holyrood The former has made buy to let less tax-efficient while the latter has increased the add-on costs with the regulation of privately-let property.

This has led to some landlords – admittedly many of them in the older age group – to sell up and take profit from capital appreciation before, as they feared, “things get any worse”.

Encouragingly, however, there are no signs of a panicked retreat – i.e. a property version of the great stockmarket crash of 1929. The majority are sticking in there while there are still newcomers hovering on the wings.

The financial burdens mentioned above have been a difficult pill to swallow but residential property is still performing remarkably well compared to the alternatives (e.g. most conventional building societies are offering no more than 1.5 per cent per annum fixed for five years while the stock market seems to be best for those who enjoy rollercoaster rides).

Yes, a typical residential rental property is currently not producing as good a return as it was ten – or even five – years ago but it still holds up well against “the competition”.

The one downside is, of course, how much less simple ownership of an investment property has become. And if you make a wrong move at the beginning, the less chance there is of the level of anticipated returns.

Consequently it is more important than ever for potential landlords to thoroughly investigate a local market before handing over a penny. We have a number of “distressed” clients who have come to us after buying properties which have turned out not to be the rental goldmines the vendor (or his/her agent) claimed they would be. It always amazes me how people will spend several days visiting various showrooms before buying a car but adopt a “one-stop” policy when it comes to a six-figure rental flat.

And just as it is wise to show healthy scepticism when searching for property the same should apply to choosing tenants. Adding to the complexities facing the contemporary landlord is the way the law has swung in favour of tenants – some of it fairly but not always so. Therefore the landlord unlucky enough to choose a bad egg – especially the barrack room lawyer type who’s an expert in obfuscation and delay - might find himself going a whole year without rental income plus the added costs of securing an eviction notice.

There are some plausible people who aren’t all they seem and who on occasions even manage to fool an agency’s otherwise successful tenant vetting process. Having said that, statistics consistently show that agency-produced tenants are much less likely to default than those who’ve been taken on by landlords.

Just one more consideration for landlords in 2021 for whom property can still be a good investment but for whom diligence before and after purchase has never been more important.

David Alexander is managing director of DJ Alexander