Financial Reform

Financial Reform -

Renting Out a Property? The Financial Considerations

Although buy-to-let isn’t quite the “hot property” it was prior to the recent economic recession, there is still much interest in it. Indeed, with ever still property price rises combined with low interest rates on standard savings in the bank, many who have money to invest still see investment in property as the only way to go.

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The foremost calculation in determining the profitability of a rental investment is calculating its rental yield – the amount of money that is received in rent in relation to the amount of money paid for the property. There are however, many considerations that potential and existing landlords fail to undertake which leaves them a much less clearer picture of the exact profitability of such investment. Here are some to consider:

Insurance:

Landlords must ensure that the property is insured correctly. The exact insured required (whether buildings, contents or both) depends on the property and its tenancy terms. This insurance can cost a few hundred pounds.

Legal Compliance:

Some legal requirements for landlords are one-off for each tenancy – such as the Tenancy Deposit Scheme. Some of the deposit schemes are free of charge for protecting the tenant’s security deposit, though many charge the landlord. Other legal requirements are ongoing, and require yearly spends on the part of the landlord, e.g. the annual Gas Safety Certificate. This must be carried out by qualified gas safe engineers and often costs around the £100 mark each time.

Property Repair and Maintenance:

There is a legal obligation under the Landlord and Tenant Act 1985 for landlords to maintain properties to a certain standard. This includes ensuring heating and boiler installations are working properly, as well the washing facilities in the property. Damage done by the tenant is not in the remit though any general repairs to the property are required and the landlord foots the bill.

Agency fees:

For those landlords who choose not to rent out and manage the property themselves, there is also the cost of using a letting agent’s services. They often charge a percentage of your annual rental income to let the property or to also manage the property and tenancy on a long-term basis too – though this is a good option to take if you can’t or don’t want to deal with managing the property yourself.

Do be careful of some agents who can charge large mark ups on contractor costs when it comes to repair or maintenance work. Also, for tenants it is very off-putting being charged re-let fees by an agent at the end of a tenancy period if they choose to continue their tenancy. Be very selective when choosing who to let your property with – research will pay off.

Empty periods:

It is best to try to keep tenants happy as high turnover rates mean properties can be left empty and therefore a loss of rental income for the landlord. Any empty periods will need to be factored into costings.

Taxes due:

Landlords must declare the income they make to HMRC, and like all types of income it is subject to tax. Certain deductions can be made from the annual income received in rent.

 

These were some of the additional financial details that should be considered when investing in property for the rental market.

One very large consideration financially however, which has not been looked at yet, is the long-term consideration – capital growth on the value of the property. We all know the price of property has been going up over the years, and this trend, although slowing, is set to continue for the foreseeable future.

Growth is not the same in every part of the country and varies region to region and area to area, and this growth, long-term, is key to property investment being so in demand. Researching and choosing an area carefully will pay off in the long-run. Castle Estates (South London), have noted, for example, that although an area like Wandsworth now has a lower rental yield of around 5% compared to the 7-8% it was 5 years prior (steeply rising property prices do affect the rental yield calculation), the planned development around the Ram Brewery area of Wandsworth Center which includes improved transport links mean that not only is there likely to be long-term tenant demand, but also continued capital gain on property value for that area.

Research and knowledge will ensure better informed choices, though it cannot be denied that for all the costs, property generally is still a lucrative business for landlords, and will probably continue to be so.

Mortgage Lending Slow in Early 2015

According to trade body the Council of Mortgage Lenders (CML), mortgage lending has been slow through the first quarter of the year. The CML described the sector as suffering from a “sluggish start” to 2015, but says that things have picked up over the last few weeks.

Gross figures for mortgage lending in Q1 2015 were down 12% compared to the previous quarter. Lending in the first quarter of this year was also down compared to the same three months in 2014, showing a 3% decrease year-on-year. Overall, the first three months of the year saw a total of £44.9 billion lent to home buyers, according to the CML’s figures.

This could be partly down to the introduction of stricter affordability checks, to which would-be borrowers are subject before qualifying for a mortgage. These rules have now been in force for a year and more recently have also been applied to buy-to-let mortgage. They require mortgage lenders to make a close, highly-detailed study of the income and outgoings of potential borrowers before granting credit, and according to the National Association of Estate Agents (NAEA), this is slowing down the process of buying a home significantly.

Mark Hayward, NAEA managing director, said: “A drop in the number of buyers is the direct result of a slow-down in acceptance of mortgages, with it now taking an average of 50 days to receive a mortgage offer.” The new rules also, Hayward said, increases the risk of sales failing to go through.

However, the CML’s figures show that things have been picking up after the “sluggish start” at the beginning of the year – even within the space of the first quarter. Lending was significantly higher in March than in February, and indeed March was a fairly strong month for the mortgage lending sector. With a total of £16.5 billion lent in the form of home loans across the month, March saw fully 21% more lending for mortgages than February. While the quarter as a whole may have seen lending fall compared to the same period last year, March this year saw an increase of 7% compared to March 2014.

According to the CML’s chief economist Bob Pannell, “the underlying lending picture is stabilising.”

“Sentiment and activity,” he continued, “are showing early signs of improvement, and should be further supported by the effects of stamp duty reform. We expect to see lending strengthen over the next few months.”

Over the past few weeks, mortgage lenders have been reducing their rates, and the resulting cheaper mortgages may have helped stimulate the recent upturn in activity.

 

Inflation Stalls in February

Official figures have revealed that February saw UK inflation come to a complete standstill. Last month, the overall inflation rate dropped to 0%, marking the first time since records began that inflation in the UK stood completely still.

In January, inflation had progressed 0.3% compared to the same period in 2014. However, in February the year-on-year inflation rate had fallen to zero, leaving inflation at a net standstill compared to a year ago. The drop to zero was facilitated by price changes in a number of key sectors, including furniture and furnishings, food, and recreational products.

The Consumer Prices Index (CPI), which tracks inflation, has kept records since 1988. In the 27 years since the CPI began, this is the first time that the UK inflation rate has been shown to have dropped to zero and remained unchanged overall across a one year period.

The difference between January’s 0.3% figure and February’s 0% was also much more stark than most forecasters expected. The majority of experts predicted a drop in the region of just 0.1%. The actual fall in the inflation rate exceeded this estimate three times over.

An alternative measure of inflation, the Retail Prices Index (RPI), saw the UK inflation rate drop from 1.1% in January to just 1% in February. The RPI, which almost always gives a higher inflation figure than the CPI, works in essentially the same way as its counterpart but with some key differences. Both examine a set variety of goods, compare their prices at present to their cost one year ago, and use the difference to work out the rate of inflation. However, the CPI essentially looks at the cost of retail goods rather than household costs. The RPI includes things like council tax, rental rates, and mortgage repayments which are not used by the CPI, and this is why the figures are usually different.

According to the CBI, a prominent business lobby group, the effect of the inflation standstill is not likely to be a significant reduction in the cost of living. The group’s director of economics, Rain Newton-Smith, said “Despite inflation dropping to zero, it is unlikely we will see falling prices for a prolonged period, particularly as the pressure from lower oil prices fades.”

However, Newton-Smith noted that there were some decided consequences to this development. In particular, he said, “With the Monetary Policy Committee still alert to the risk of very low inflation becoming entrenched, a rise in interest rates anytime soon seems off the cards.”

UK Sees Falling Unemployment and Rising Wages

The UK economy is benefitting from a continued trend of falling unemployment as well growth in wages. Unemployment has dropped to 1.86 million, while wage growth is ahead of inflation by the biggest margin in nearly five years.

In the three months to December 2014, the number of unemployed in the UK fell by 97,000. According to the Office for National Statistics, this places the unemployment rate at 5.7% of the country’s current working population.

Long-term unemployment – those who have been out of work for a year or more – fell by 210,000. The UK is now home to approximately 638,000 people who are classed  as long-term unemployed.

The total employment rate for those aged 16-64 in the three months to December reached 73.2% This is a record high, tied with the three month period from December 2004-February 2005 when employment rates reached exactly the same level. Together, these periods jointly represent the highest level of employment since records first began to be kept in 1971. Overall this means that, during the final three months of last year, the UK population included 30.9 million people in work. Compared to the same time a year earlier, this is an increase of 608,000.

Unemployment for the 16-24 age group, however, remained unchanged compared to the previous quarter. This figure remained at its existing level of 16.2%.

While overall employment has risen, self-employment has fallen over this three month period. Overall, the quarter saw the number of people working for themselves in the UK fall by 19,000. There are now around 4.4 million self-employed individuals.

The same three months saw average earnings up by 2.1% compared to the same period a year before when bonuses are included. If the figure is recalculated without taking bonuses into account, wages for the quarter were up by 1.7% year-on-year. In the month of December alone, wages were up 2.4% compared to the same time in 2013. This is the furthest ahead of inflation that average wages have been since March 2010.

Inflation, meanwhile, stood at 0.5% in December. The most recent data, released this week, shows that January saw inflation fall to a mere 0.3%. This is the lowest level of inflation seen since records began.

The pound has risen in value against other major currencies, and in particular has reached a seven-year high against the Euro. The strength of the labour market, with rising employment and wages, is believed to be a significant factor contributing to the strengthening of the pound.

SSE Becomes Fifth “Big Six” Company to Cut Gas Prices

SSE has now become the fifth of the “big six” energy suppliers to cut the price of domestic gas supply. This follows similar price cuts by British Gas, E.On, Scottish Power and Npower. EDF is now the only one of the “big six” to have not cut domestic gas prices, though this may just mean they will be the last company to announce price changes.

SSE is the name of a company that trades under a number of other names in different parts of the country. It may therefore be more familiar to consumers under names like Southern Electric, Scottish Hydro and Swalec. The company supplies both gas and electricity, and has roughly 8.7 million customers across the UK. It claims that around three million of those customers – on gas-only or variable dual-fuel tariffs – will benefit from the price cut.

The price cuts come as a result of cuts in wholesale prices, resulting in savings for the energy companies that can be passed on to the consumer. Following plummeting oil prices, the price of wholesale gas has also dropped significantly over the last few months.

As well as announcing cuts to prices, SSE has also said that its existing guarantee not to increase the price of gas or electricity within a certain period will be extended. This is likely to involve an extension of at least six months, which would make the guarantee valid until July 2016.

The company’s director of GB domestic, Steve Forbes, said “We were the only supplier to freeze prices and we promised we would cut them if we could; now we’re delivering on that promise with an average £28 reduction in gas bills.”

However, the energy companies that have so far cut prices have come under some criticism for the way these cuts have been implemented. In particular, they have been accused of making only “token” price cuts which fail to meaningfully pass on much larger savings to their consumers. Citizens Advice executive Gillian Guy, for instance, accused energy firms of carrying out “a phoney price war” and said that “Token energy price cuts to standard tariffs do not reflect the big savings that energy firms can pass on to households.”

Defending the decision not to cut prices further, SSE said that the wholesale cost of energy is “less than half of the typical household energy bill.” The company went on to say that “There are significant other costs within energy bills, including those relating to government-sponsored environmental and social policies and the roll-out of smart meters.”

UK-UAE Economic Overview

Both the United Kingdom and the UAE are considered leading economic powers in the global scene. According to the most recent World Economic Forum’s annual Global Competitiveness Index report, the UAE’s economy has now become the best rated in the Arab World and is also the world’s 12th most competitive. The report also provides interesting insights into the current economic climate in the UAE, as it shows that the local economy now rubs shoulders with well-established European powers, such as Denmark and Norway. Moreover, the data suggests that should economic growth continue to rise at this pace, the UAE’s economy will be soon able to catch up with countries like Sweden or the United Kingdom. The Emirates have undergone a very rapid recovery following the period of decline experienced during the global financial crisis. Between 2007 and 2009, the UAE’s economy dropped to the 37th position in the Global Competitiveness Index, a fact that makes their recovery all the more significant.

Image by Jemasmith

Future opportunities for collaboration

The future looks bright and full of opportunities for strengthening the economic ties between both countries. For instance, the Abu Dhabi 2030 plan has set out to diversify the local economy beyond its current reliance on the profits derived from oil and gas exploitation, focussing instead on the research and development of new technologies. This is where the UK industry sector comes into play.

In September 2014 the president of the Khalifa University of Science, Technology and Research announced that this institution was planning a series of joint ventures with 26 British companies. This would serve to bring together the expertise of UK leading firms and the potential of the UAE’s brightest graduates, who are set to work in high-value industry areas in the UK, which include aerospace, defence, biomedical, and engineering.

Likewise, talks have already taken place to explore the possibility of joint collaboration in the security industry. In January 2014, members of the UK Trade and Investment Defence and Security Organisation met with UAE officials to discuss how the British security industry could help the UAE prepare for the Expo 2020 by providing security equipment and police training. It is expected that more than 100 British companies will have the opportunity to take part in this exchange.

What does all this mean to you? There are multiple opportunities for growth and development arising from the close economic ties between the UK and the UAE. A Master in Accounting and Finance can improve your future prospects and help you successfully navigate the current economic climate. Gaining a qualification in this area can improve your own marketability in an  increasingly competitive job market, where only the best qualified individuals have a chance to get ahead. There has never been a better time to invest in your future with a postgraduate qualification.

A brief overview of UK-UAE economic relations

Although both countries are economic powerhouses in their own right, it is useful to look at their common economic ties. The UK and the UAE have a solid history of prosperous bilateral relations, whose origins can be traced back to 1971. According to the UAE’s embassy in London, there are more than 100,000 UK citizens living and working in the UAE, and Emirati tourists and visitors contribute significantly to the British tourist sector. Every year, the UK exports goods to the UAE for the value of £3.2 billion, and conversely, the UAE exports over £1 billion worth of goods to the UK. In fact, the UAE is among the UK’s top 15 largest export markets.

The potential of bilateral economic relations was further enhanced by the 2009 UK-UAE Joint Economic Committee, in which both countries agreed to increase mutual trade links by 60 per cent in just six years. This target was surpassed in 2013, two years ahead of time. In addition, several Memorandums of Understanding have been signed since 2008 to guarantee collaboration in the strategic renewable energies sector.

Bank of England Decides to Keep Interest Rates in Place

The Bank of England has voted to keep interest rates at their current low levels for the time being. Only two members voted in favour of increasing the rate to 0.75%, with seven voting in favour of keeping rates at just 0.5%.

Continuing low levels of inflation were a key factor in the bank’s decision to keep rates where they are. There was, according to the bank’s minutes, a “material spread of views” on what the outlook was for inflation in the near future, and what the risks associated with interest rates were. However, even if through different reasoning, it emerged that the majority of members agreed that rates should be kept steady for the time being.

According to the minutes: “For most members, the outlook for inflation in the medium term justified maintaining the current stance of monetary policy.”

It seems that the two members who vote in favour of an increase were Martin Weale and Ian McCafferty. For many, this will not be a surprise. Weale and McCafferty have been consistently voting in favour of interest rate rises since August, and in the run-up to the meeting there was some speculation about whether they would continue this trend or not.

It was judged by the meeting that interest rates remaining lower than had been hoped for was “partly the consequence of a margin of spare capacity bearing down on domestic costs and prices.” This, according to the minutes of the meeting, created a definite possibility that expectations for inflation in the medium term would be lowered. The period for which inflation would stay low – specifically under the 2% level – could therefore be lengthened. 2% is the level of inflation which the bank currently hopes to try and maintain, and it was felt that continuing to keep interest rates down could help the situation.

October saw the annual rate of inflation rise to 1.3%, up from the previous month’s figure of 1.2% but still well below the hoped-for 2% level. Just last week, the Bank of England issued a warning that the next six months could see the rate of inflation fall as far as the 1% level.

The current interest rate of 0.5% has been in place since March 2009. The Bank has repeatedly decided against immediate increases in a hope that the low rate will facilitate recovery in the UK’s economy.

The Bank’s nine members voted unanimously on other issues, such as the decision to leave quantitative easing unchanged.

September saw Increase in Public Borrowing

According to the most recent figures released by the Office for National Statistics, September saw a significant rise in the UK’s levels of public borrowing. The government borrowed £11.8 billion, which is a year-on-year increase of £1.6 billion compared to September 2013.

The increase goes against expectations, as economic experts were predicting that public borrowing would remain flat. It also represents bad news for George Osborne (pictured right). In March, the Chancellor pledged that, over the course of a year, he would slice 10% off the budget deficit. This plan has since consistently struggled to get off the ground, with the latest figures forming a fresh blow.

Total borrowing for the financial year up to September came in at approximately £58 billion. Compared to the equivalent portion of the 2013/2014 financial year, this represents a year-on-year increase in borrowing of £5.4 billion or 10.3%.

According to economists, the government will certainly feel the effects of this situation of increased borrowing. As the general election approaches next year, they are likely to find themselves with only limited options. According to Capital Economics senior economist Samuel Tombs, “The continued run of poor UK public borrowing figures looks set to severely hamper the chancellor’s ability to announce giveaways to address his party’s deficit in the national opinion polls before next year’s general election.”

Furthermore, Tombs believes that in the Autumn statement, which is due for December, “the chancellor will be forced to acknowledge… that the fiscal consolidation is not going to plan.”

These sentiments were echoed by Chris Leslie, the shadow chief secretary to the treasury, who described the increase in borrowing as “a serious blow to George Osborne.” Leslie went on to say that the figures have left Osborne “set to break his promise to balance the books by next year.”

The need for greater volumes of borrowing comes in part from lacklustre income tax receipts. For the first half of the 2014/2015 financial year, the year-on-year increase in income tax receipts stood at a mere 0.1%.  This, according to IHS Global Insight chief economist Howard Archer, is down to a number of factors such as weak earnings growth and the fact that “much of the employment growth has been in low paid jobs or in self-employment.” The fact that the personal allowance has increased during the current government’s term has also had an impact on income tax.

A spokesperson for the Treasury acknowledged that the figures were less than ideal. The spokesperson admitted that “the impact of the great recession is still being felt in our economy and the public finances” and that “we have to recognise that the UK is not immune to the problems being experienced in Europe and other parts of the world economy.”

Slowdown Hits UK Housing Market

Recent months have been a period of slowdown for the UK housing market, and this has been further illustrated by the latest mortgage lending figures. According to newly-released data from the Band of England, August saw the number of mortgage approvals drop by almost 1900.

Altogether, August saw 64,212 mortgage approvals for the purchase of a residential house. This was down from July’s figure of 66,100, which itself represented a drop compared to the 66,923 approvals seen in the month of June.

These  figures back up the belief that many experts already had that the UK housing market is not going to keep up the pace it has recently displayed. According to HIS Global Insight’s chief UK and European economist, Howard Archer, “With housing market activity moderating from its early 2014 highs, we believe house prices are likely to generally rise at a more restrained rate over the coming months.”

This news comes soon after the revelation that this month has seen growth in house prices come to a stop. For the first time in a year and a half, according to Hometrack, house prices did not rise in September. Hometrack’s survey also identified the fact that more and more potential buyers are expressing concerns about the potential of a price bubble, as well as the fact that an increase in interest rates could be on the horizon.

The release of the Bank of England’s figures is also timely in coming shortly before new mortgage lending restrictions are due to take effect. Designed to cool off lending in the mortgage market, banks and building societies will be limited in their ability to lend to people who borrow more than 4.5 times their annual income.  Institutions will now be able to provide no more than 15% of new mortgages to customers within this group.

On the general sentiment among borrowers at present, Archer said: “While markedly improved consumer confidence – currently at the highest level for more than nine years – means people have become more prepared to borrow in recent months, they still appear wary of taking on a large amount of new debt.”

Mark Harris from SPF Private Clients, a mortgage broker, took a comparatively optimistic view. Harris pointed out that according to the figures, the remortgage market is in comparatively good health. This is largely thanks to homeowners switching onto better deals as lenders cut fixed rates.  However, Harris also warned about the possibility of interest rate rises in the near future. “While the governor of the Bank of England pledged that increases would be limited and gradual,” Harris said, “borrowers must still plan ahead and ensure they can afford their mortgage now and in the future.”

Energy Trading to be Screened at EU Level

For the monitoring of wholesale energy markets, the Regulation on Wholesale Energy Markets Integrity and Transparency (REMIT) aims to establish a sector-specific legal structure to highlight and deter market manipulation.

This revolutionary step means that energy trading will be scrutinised at EU level to monitor for abuses and ill-discipline, and should lead to more trusted and effective energy markets – thus regaining the confidence of both consumers and participants. It is the first time that an EU-wide framework has been established to define, monitor and investigate market abuse.

Goals

ACER, the Agency for the Cooperation of Energy Regulators, will be involved at all levels once REMIT is in place and will follow the principles below:

1) ACER will be responsible for collating and analysing the wholesale markets and other essential information to try and pinpoint any possible abuses within those.

2) ACER will also keep the National Regulatory Authorities (NRAs) informed after an initial evaluation if there is believed to be any grounds to show that abuses have been committed.

Actions

Once the NRAs have been notified of an offence, the national authorities in member states will examine and investigate the issues and data in great detail and implement the requisite penalties to prevent these abuses or manipulations from occurring again in the future.

For these elaborate monitoring procedures to take effect, a careful and diplomatic stance needs to be endorsed because they involve intricate traded products and markets: these actions need to be followed in a circumspect method that will not overly encroach with the functions of energy markets.

Affected parties

REMIT concerns anyone and everyone who participates in or whose role directly impacts upon the wholesale energy markets within the EU – including non-EU residents. Non-EU and non EEA market participants might come under the scope of REMIT if they are involved with transactions in at least one wholesale energy market within the EU. This also means the registration of such involved bodies or firms under REMIT is essential, regardless of their location.

Sources:

http://www.acer.europa.eu/remit/Pages/Background.aspx

http://www.lseg.com/markets-products-and-services/post-trade-services/unavista/regulation/remit-regulation-wholesale-energy-markets-integrity-and-transparency