Landlord investors’ net profits fell below 4.0% in Q1 2023, marking a dramatic shift in finances for mortgaged buy to let buyers, according to the latest research by leading property company Savills.
Average net profits for landlords are now at their lowest since 2007, due to the impact of 12 successive increases to the Bank base rate, exacerbated by restricted tax relief, increasingly legislation and ‘red tape’ and various other market forces which have caused costs for property owners to rise considerably.
With the Private Rented Sector (PRS) still providing most of the available rented property in the UK, such a marked drop in profitability for the sector is likely to have dramatic consequences for the long-term availability of rental accommodation.
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 the current level.
The incoming Renters Reform Bill, which includes abolition of the Assured Shorthold Tenancy, and increasing energy performance requirements for properties, are expected to add further pressure to the market, as landlords now face the prospect of having to invest significant sums of money to bring their properties up to a minimum EPC rating of C or above. It is clear based on the current levels of profitability, that this will simply not make economic sense or be viable for many property owners.
There is a likelihood 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. We are already seeing the effects of this in rising rents and falling stock level.
Debt exposure of mortgaged buy-to-let landlords will likely play a critical role in the future shape of the private rented sector.
According to Savills’ research, 75% of mortgaged buy-to-let properties have a Loan-to-Value (LTV) of less than 60%, while a third have an LTV of less than 50%.
Assuming mortgage rates do not return to a manageable level, then, future investment is now likely to be dominated by cash buyers and those with low borrowing requirements.
Added to this, many landlords who have been active since buy-to-let took off in the early 2000’s, are now nearing or in retirement, which risks limiting the future supply of rental stock.
We will monitor developments closely and report the latest market research to our readers as it is published.
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