15th
Jun 2023
Ever daily growing numbers of landlords are not only considering but are actually giving up on the sector because of the government’s legislative and tax campaigns, coupled with escalating rises of interest rates has decimated profits, this is according to a UK and worldwide real estate services plc.
Its latest analysis of the sector implies that profits for PRS landlords have crashed to its lowest level since 2007 and there is a “very real risk” that many will sell up.
The company said that average net profits for landlords/investors on during this year’s first quarter dropped below 4% hitting hard mortgaged BTL investors.
The Bank of England’s 12 successive increases of the base rate along with the reduced mortgage interest tax relief has crashed profits… and of course the impending government Rental Reform Bill will also be feeding the ‘need to leave’ mindset.
Lucian Cook, head of residential research of the plc, said: “Following a boom period for buy-to-let landlords, 2023 marks a turning point for Britain’s private rented sector. Between 2014 and 2021, landlords on average were making ‘year 1’ cash profits of 23% of rental income, but successive interest rate hikes have seen this figure plummet to under 4% this year.
“The incoming Renters Reform Bill, abolition of the Assured Shorthold Tenancy, and increasing EPC regulations, are expected to add to investors’ caution as landlords now face the prospect of having to invest to bring their properties up to a minimum EPC, further eating into profits.
“There is a very real risk that landlords will exit the sector, particularly those with high levels of borrowing, putting increased pressure on a sector where demand significantly outweighs supply in many locations.”
He says although tenant demand outweighs housing supply, landlords’ margins are still determined by their debt exposure.
Cook continued: “Debt exposure of mortgaged buy-to-let landlords will play a critical role in the future shape of the private rented sector. Viability will be a real issue for smaller landlords with higher levels of debt who are coming to the end of their fixed rate, while larger, wealthier landlords are in a much better position to benefit from the rental growth seen in the period post pandemic.”
The research shows, three in four mortgaged buy-to-let properties have an LTV (Loan-to-Value) lower than 60%, while a third have an LTV less than 50%.
In Q1 2023, those BTL investors with an LTV of 60% were able to make an average profit of 10.2% whilst those who have an LTV of 50% generated 16.5%.
But landlords with an LTV of 80% saw profits plummet down to -2.4%.
“Future investment is now likely to be dominated by cash buyers and those with low borrowing requirements. Even landlords with modest gearing are now more likely to enter the sector or expand existing portfolios in areas furthest from London, with a greater focus on smaller properties which offer bigger returns,” said Cook.
The research also found another factor determining large numbers of landlords that could leave the sector over the coming years is that approximately 620,000 landlords are aged 65+ with around 1,911,000 properties; there are also another 1,982,000 properties owned by landlords aged between 55-64 who will be considering their retirement plans.
Cook adds: “While existing tenants will benefit from greater security, a combination of factors means there is a risk that new tenants will have less choice. With fewer properties available, stock is more likely to be let out to tenants who are better paid, and in more secure employment, inadvertently hitting less affluent households unless measures are taken to increase rental supply.”
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