It is not news – at least not to anyone involved in the sector – that the UK is en route to something of a rental crisis, at least in the short term.
A BBC investigation in March found the supply of rental homes in the UK had fallen 33% in the previous year, with the resulting surge in demand driving rents up by around 11%. Landlords are selling up – and the rate at which they are leaving the market is best described as an exodus.
Official figures from HMRC suggest landlords sold 153,000 properties in 2021/22. Letting agents report that not only are the number of rental homes being placed on the market increasing, 90% of them are then bought as main residences.
This is against a backdrop of falling prices. It is difficult to say how far house prices have fallen, as inflation has masked the true drop, but eventually a nominal peak-to-trough fall of around 8% is expected. Factor in the high levels of inflation and it is possible the decline will have been closer to 20% in real terms.
It is not hard to see why landlords are getting out. The main reason is affordability. The additional rate of stamp duty for second properties was introduced in 2016. This was then compounded by the phasing out of mortgage interest relief over the past five years, meaning a double-whammy in terms of taxation.
Then came the interest rate rises. The Bank of England raised them 14 times from 0.25% to 5.25%, sending the cost of servicing debt skywards. The costs of repairs and maintenance have likewise soared.
In theory, this should mean the supply of housing for owner-occupiers is increasing. It could even be argued this was partly the rationale behind some policies. However, this is far from the case. Until very recently, prices remained high. The average UK house price rose by around 40% over the past five years, and affordability reached its lowest point last year since 1876. This may change, but for the moment, landlords stampeding for the exit is not turning the UK into nation of homeowners.
Are there upsides? Clearly, if rental properties are being sold at a loss, there will be some opportunities for investors to pick up discounted or distressed assets. Those in a financial position to make acquisitions and grow their business portfolio will be well-placed to take advantage of this.
Property investors who are not over-leveraged – and can work with their finance providers to show a good business case – will be in the best position of all.
A Handelsbanken survey of professional landlords at the start of the year found 60% planned to expand their portfolios, with fewer than one in seven expecting to sell anything. The overwhelming majority – 92% – expected their portfolio to appreciate in value. Almost two-thirds expected to diversify further. All of which points to a longer-term confidence in the UK private rental sector, despite current challenges.
This highlights an increasing professionalisation of the buy-to-let sector, which may be good news for landlords and tenants alike. Investors with larger portfolios will have both the experience of managing properties and the ability to maximise economies of scale. In some areas, such as the growing need to decarbonise with a move towards net zero, they will be able to take advantage of this as an opportunity to increase efficiencies.
They will also be able to replicate best practice across their various assets. Finally, they will have access to networks and centralised functions that are simply not available to amateur landlords.
A number of factors are in play – the medium term, intended effects of legislation, combined with shorter-term shocks to the economy affecting the market – but the overall trend of amateur landlords being edged out of the market need not be bad news.
Many will be smaller investors who chose buy-to-let as an investment vehicle that made fiscal sense at the time, but who would, in the current environment, be equally well served by a different investment strategy. At the same time, lower costs, greater stability, and professional experience on the landlord side should also translate into a better overall experience for tenants. Finance providers will be keen to work with property investors who show a strong track record in the market, and they will be able to make strong purchasing decisions.
Over the longer term, it may well be that what looks right now to be an exodus will be the genesis of a stronger market overall.
Simon Bradley is chief credit officer at Handelsbanken