above inflation. Annual rental growth in London came in at 2.5 %.
Rental growth in the London mainstream market should remain positive, driven by demand. Affordability issues within the sector will act as a partial brake on rental growth.
From April 2017, landlords will begin to see a gradual reduction in how much mortgage interest they can deduct in their UK tax returns. For some landlords, this will increase their tax bill and therefore reduce their after tax cash flow from their flats. This may deter some investors, especially those with large UK incomes, in the higher UK tax brackets. However, this tax change will have minimal effect on offshore investors who only own one or two average London flats or those offshore investors who own their property through companies. A likely knock-on effect is that rents will be increased by landlords, in an attempt to offset some of their lost after tax cash flow.
Brexit uncertainty, the weaker pound and higher inflation will put pressure on how much tenants can spend on rent. However the barriers to home ownership remain high and therefore demand for rental properties will remain high. The outlook for rents is positive over the next five years. We expect London rents to grow around 20 % over the next five years. Annual UK inflation over the same period is expected to be around 2 %.
How best to take advantage of this market There are still great investment opportunities to be had in London. It remains an excellent ZAR hedge. My advice remains the same: look at one-bedroom flats with high rental demand, close to good rail links into London. Target property which is best in class, as this is the most resilient and where rental demand will stay strong in the long run. Gear sensibly, so your operating cash flow can handle interest rate hikes. Look in the vicinity of significant infrastructure developments, such as the Crossrail project, as these projects often offer higher than average capital growth opportunities. Finally, seek advice from someone who specialises in the London market.
www. reimag. co. za FEBRUARY 2017 SA Real Estate Investor 47