Landlords’ confidence knocked as government changes take effect

Landlords’ confidence falls back as tax burden rises and house prices growth slows; 41 per cent hold a positive outlook for their portfolios, down from just 67 per cent three years ago

Landlords’ confidence has fallen as investors face the prospect of higher tax costs and weakening house prices, according to the sixth edition of Kent Reliance’s Buy to Let Britain report.

Just 41 per cent of landlords are confident about the prospects for their portfolios, following the recent taxation and regulatory changes, according to a survey of more than 750 property investors. This represents a fall from 44 per cent in the previous quarter, and compares to 67 per cent seen three years ago. Political and economic uncertainty will only add to landlords’ concerns.

The value of the sector has risen by £68 billion in the last year, climbing to a record of £1.3 trillion. However, this annual rate of increase (5.5 per cent) is just half the level seen a year ago. Lower confidence amongst landlords mirrors this slower growth in the value of the PRS. The slowdown in house price inflation has been a key driver, with the annual average increase slowing to 3.2 per cent in the last year. Indeed, in the last two quarters, prices actually fell.

There are now 5.5 million households in the sector, but annual growth of 2.3 per cent is now only a third of the level seen three years ago. Tenant demand is still growing, albeit more slowly. A quarter (27 per cent) of landlords saw tenant demand increase in the last quarter, more than saw it decrease, but this was down from 39 per cent a year ago, as first time buyer numbers continue to recover.

On the supply side, there is a noticeable change too. In the first three months of 2017, the number of landlords expanding portfolios only slightly outnumbered those reducing them. Nineteen per cent of landlords now expect to reduce their portfolios, compared to 13 per cent increasing, as amateur landlords leave the market in response to the new tax rules affecting higher rate taxpayers.

Additional pressure on supply has come from the Bank of England’s Prudential Regulation Authority’s new underwriting standards, introduced in January. A quarter of landlords (24 per cent) who have sought mortgage finance this year have found doing so more difficult, with a further six per cent seeing their application rejected altogether.

Landlords react to tax changes and rising costs

While there is likely to be consolidation in the market as tax costs rise, property investors are also taking action to mitigate the impact of government intervention through rent rises and incorporation.
Running properties via limited companies means landlords are taxed as a company, rather than an individual, and can continue to offset all finance costs against rental profits.

Kent Reliance’s data shows six in ten applications for buy to let mortgages were via limited companies in 2016. Demand for limited company lending has not yet hit the heights seen last year, but limited company applications have still accounted for more than four in ten loans so far in 2017.

With one in four landlords (24 per cent) considering transferring their portfolio to a limited company or a partner or spouse, demand will strengthen in the long-term.

Landlords are also increasing rents to cover higher costs. Average rents per property now stand at £889 per month across Great Britain. Even though the rise was less steep than a year ago, the typical rent increased 1.9 per cent annually. This is likely to continue as the mortgage tax changes bite.

One third of landlords expect to raise rents in the next six months, compared to just three per cent who expect them to fall. With rents rising, and house prices falling in the past two quarters, yields have edged up to 4.5 per cent. Across the PRS, steady growth in the number of households and monthly rents means landlords are collecting a record £4.9 billion per month in rent.

Andy Golding, chief executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy to let, comments, ‘A perfect storm of weakening house prices, higher taxes and lending restrictions have knocked investors’ confidence. On top of this, investors are now being buffeted by the winds of political uncertainty following the election, and its impact on the economy.

‘Uncertainty will pass, but the impact of changes to mortgage tax relief and underwriting standards will leave a more indelible mark on the sector. We believe these changes will alter the mix of landlords, creating a more professional and stable sector in the long-term. There are already some signs of consolidation, with highly geared amateur landlords most likely to leave, and we are also seeing investors take action to protect their margins.

‘The fundamentals supporting the PRS have not drastically changed. Yes, first-time buyer numbers have been recovering, but there is still an underlying supply and demand gap across the country. Given the inability of any party to win a clear majority in the election, the implementation of a strategy to create a necessary housing boom seems unlikely. Affordability issues will therefore remain, and rental accommodation will retain its importance to those unable to take their first step onto the property ladder.’

Further reading on landlords

Owen Gough, SmallBusiness UK

Owen Gough

Owen was a reporter for Bonhill Group plc writing across the and titles before moving on to be a Digital Technology reporter for the

Related Topics