Spring is property auction season, when a motley collection of semi-derelict houses, flats with leases in the single figures and the homes of mortgage defaulters get sold off. This year, though, a scan of the catalogues of some of the UK’s leading property auction houses reveals a new class of property under the hammer: rental flats.
Under pressure from rising interest rates and increasing regulation, many landlords are opting for an exit strategy. According to recent research from estate agent Hamptons, Britain’s rental sector is losing homes at a rate of 66 per day. Agents across the country report an influx of instructions from small-time landlords who’ve decided to invest elsewhere.
The great rental exodus has been triggered by a complex mixture of government policy and wider economic conditions. But one thing is clear. Owning a buy-to-let (BTL), once seen as a copper-bottomed way to earn an easy, passive income, is rapidly becoming a financial albatross.
The first hint of lean times for landlords came in 2016, when buyers of ‘additional properties’ to their main home were hit with a 3 per cent stamp duty surcharge. A year later, in 2017, HMRC began stripping landlords of the right to claim tax relief on their mortgage interest payments. Meanwhile local councils began introducing registration schemes for landlords, adding to their administrative burdens.
More recently, a combination of rising interest rates and increasing maintenance have trimmed even more fat off BTL profitability. The average rental yield in the UK now sits at 3.63 per cent, according to Seven Capital – barely more than interest rates on the high street.
And this year will bring more pain for landlords. Their capital gains tax allowances will be cut in April, followed later in the year by an overhaul of rental rules, featuring indefinite tenancies and the end of ‘no fault’ section 21 evictions.
Also looming on the horizon is another potentially costly set of regulations. In 2020 the government unveiled plans for new energy standards for rented homes. By 2025, it announced, all newly rented properties would need an EPC rating of C or above. All rented properties would need to comply by 2028. Energy efficient rental stock is, of course, a good thing. But the average EPC rating for a UK property is D, and bringing a period house up to scratch can be extortionately expensive.
Since the announcement was made three years ago there has been a deafening silence on the matter; a spokesman would only say that the government remains ‘committed to improving energy performance standards’ and would make a further announcement ‘in due course’.
This uncertainty is doing little to calm landlord nerves, and the results are clear. Existing landlords are selling up, and the number of BTL purchases is slowing. In 2015, 117,500 rental homes were bought across the UK. according to data from UK Finance. In the first 11 months of 2022, the most recent figures available, there were just over 97,000 – a drop of more than a fifth.
‘Landlords have been hit with a double whammy of higher borrowing costs and less generous tax treatment which has made it much harder for them to justify expanding their portfolio or buying into the residential sector,’ says Lucian Cook, head of residential research at Savills. ‘At the same time, many landlords who have been active since buy-to-let took off in the early 2000s are now nearing or in retirement and looking to liquidate assets.’
In Richmond, south-west London, Xavier Marqués-Wicks, director of Chestertons estate agents, says BTL demand peaked in 2014. It has been all downhill since then, since the only buyers who can turn a profit on a BTL nowadays are cash buyers. Marqués-Wicks calculates that anyone buying a two-bedroom flat to rent out in the area, with a 20 per cent deposit to put down, would probably make a loss. ‘Your net yield would be -1.5 per cent and this is largely because of the increase in the cost of the mortgage wiping out all of the rent,’ he says.
The problem is not confined to England. ‘Demand for buy-to-let properties fell dramatically in Wales as soon as the Welsh government began introducing longer “no fault” notice periods, giving tenants more protection from eviction, and compulsory electrical safety testing in December 2022,’ said Carol Peett, managing director of West Wales Property Finders. http://www.westwalespropertyfinders.co.uk ‘This puts such a burden on the landlord that frankly many people feel it is not worth their while owning buy-to-lets and many sold or are selling those they had. Therefore, the demand for rentals, which has always been high, is now totally out of hand. Rents have increased dramatically so the whole thing is incredibly short-sighted and ridiculous.’
Peett is right to point out that the current scenario doesn’t only hurt affluent investors. The one in five households who live in a privately rented home are facing rapid rent hikes as landlords try to keep themselves in the black.
In 2019 the median rent was £700pcm in England, rising to £1,450pcm in London, according to the Valuation Office Agency. The pandemic triggered an initial dramatic dip in rents as many tenants fled back to their parental homes, followed in 2021 and 2022 by a rapid increase as they flooded back. Median rents in England hit a record £800 last year, while London’s median monthly rent rose to £1,475, another record.
A potential solution to the problem is the burgeoning build-to-rent (BTR) sector. Rather than individual landlords buying and renting property the old-fashioned way, BTR involves institutional investors, routinely from overseas, building entire blocks and developments aimed at renters. According to the British Property Federation there are almost 80,000 such homes built, another 72,000 on their way, and well over 100,000 more going through the planning process.
Aside from the simple fact that they are being built while traditional privately rented homes are being sold, BTR does have some selling points. The properties are modern, often come with extras such as on-site gyms and social events, bills tend to be inclusive and tenants usually don’t pay a deposit.
But the downsides are significant. BTR homes tend towards hotel-style ensuite bedrooms with kitchenettes – fine for a student or twenty-something, not so great for an older renter or a family. And then there is the cost. At Vonder Wembley, half a mile from the stadium in north London, for example, a compact studio room starts at £1,450pcm (inclusive), and a three-bedroom flat starts at £3,000pcm.
Probably the best solution for renters is a hybrid model. Landlords need to be given a reason to carry on – adjustments to their tax burden would help while interest rates are high, as would clarity on EPCs. And the planning system could be used to encourage BTR developers to offer more cost-effective, and family friendly, options.
But, as always, attempts to manipulate the property market require a deft, light touch – and not the kind of hammer blows that landlords have become accustomed to.
The Spectator – 22nd February 2023 – https://www.spectator.co.uk/article/the-death-of-the-landlord/
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