The prospects for buy-to-let investors appear to be relatively downbeat at present. In fact, this year could prove to be a challenging period to be a landlord.
Political risk in the UK appears to be causing a reduction in demand among property buyers, and this could hold back the rate of capital growth which is on offer for landlords. Similarly, affordability issues and the increasing appeal of other assets may mean that the outlook for buy-to-let investors deteriorates during 2019.
Political risk
While Brexit negotiations have been ongoing for a number of months, a clear path towards the UK exiting the EU doesn’t seem to be any closer. At the present time, almost any conclusion to the Brexit process is feasible, with a new Prime Minister, a change in government, or even a reversal of the initial referendum result still all possibilities.
In response, it appears as though prospective home buyers are becoming increasingly cautious. Various house-builders have reported a softening of demand in parts of the UK, and this trend could continue over the course of 2019. Even after Brexit has taken place, there may still be caution due to its one-off nature, linked to the fact that it’s never been undertaken before. As a result, demand for homes could slow and capital growth prospects for landlords could decline to some degree.
Affordability
The affordability of property in the UK continues to be a potential risk facing buy-to-let investors. In 2018, the house-price-to-earnings ratio reached its highest level since records began in 2002, which shows that many people are finding it difficult to get onto the property ladder. The natural response of the market to this issue is likely to be a fall in demand, which could help to ease affordability issues over the medium term.
This situation would be bad news for landlords, since it could mean that the capital growth which has been experienced in previous years is somewhat lacking in 2019. And with yields on property already relatively low in a number of areas, the total return capacity of the industry could be limited.
Relative appeal
While buy-to-let may be unappealing this year, other asset classes could become increasingly attractive. Equities, for example, have experienced a severe pullback in the last six to eight months. This may continue in the short run, but history shows that corrections are always followed by recoveries. There could therefore be an influx of capital away from property and into the stock market as investors seek to capitalise on the undervaluation of the latter and the potential overvaluation of the former.
As such, 2019 could be a tough year for property investors. While in the long term there could be continued growth ahead, there may be better opportunities within the stock market for investors who are seeking to obtain a mix of income and capital growth in the coming months.