The profitability of landlords in the UK has plummeted to the lowest level since 2007 due to successive increases to the Bank base rate and restricted tax relief.
The latest research from property firm Savills reveals that investors’ net profits fell below 4% in Q1 2023, marking a drastic shift in the financial landscape for buy-to-let buyers with mortgages.
“2023 is a watershed year for Britain’s private rented sector after a period of boom for buy-to-let landlords,” says Lucian Cook, head of residential research at Savills. “From 2014 to 2021, landlords were making ‘year 1’ cash profits averaging 23% of rental income. However, this figure has nosedived to under 4% this year due to a slew of interest rate hikes.”
Savills foresees additional challenges for landlords with the impending Renters Reform Bill, abolition of the Assured Shorthold Tenancy, and increasing Energy Performance Certificate (EPC) regulations.
These changes could prompt landlords to invest in upgrading their properties to meet the minimum EPC requirements, further diminishing profits.
Cook warns that these conditions could prompt landlords, especially those with high borrowing levels, to exit the sector, thereby exacerbating the supply-demand imbalance prevalent in many locations.
Regarding the future viability of buy-to-let, Cook said: “Debt exposure will be crucial for mortgaged buy-to-let landlords. Smaller landlords with high debt levels nearing the end of their fixed rate will struggle, while larger, wealthier landlords could capitalise on the post-pandemic rental growth.”
Savills’ research indicates that 75% of mortgaged buy-to-let properties have a loan-to-value (LTV) ratio of less than 60%, and one-third have an LTV ratio below 50%. In Q1 2023, landlords with an LTV ratio of 60% and 50% were able to generate average profits of 10.2% and 16.5% respectively. However, landlords with an LTV ratio of 80% experienced negative profits (-2.4%).
Future investments, Cook suggests, are likely to come from cash buyers and those with minimal borrowing needs. He expects more activity in areas further from London, with a focus on smaller properties offering higher returns.
Furthermore, a generation of landlords who joined the sector during the buy-to-let boom of the early 2000s are approaching or entering retirement. This could potentially limit future rental stock availability.
Current data reveals 1.91 million properties are owned by over-65 landlords, while a further 1.98 million properties are owned by landlords aged between 55-64. Cook warns of potential negative effects for new tenants: “With fewer properties available, rental stock is likely to go to tenants in higher-paying, secure jobs. This could inadvertently disadvantage less affluent households, unless steps are taken to increase rental supply.”
