Rents are rising off the back of a lack of properties to let, which is forcing many would-be renters to stay in their family homes
While the cost of living crisis has taken centre stage over the past 18 months, the UK has also been in the midst of a severe housing crisis. Demand for homes to rent has continued to grow at the same time as the supply of let properties has declined. Recent research from estate agency trade body Propertymark has found the mismatch between supply and demand sits at 35%, with an average of 16 prospective tenants per available property.
The effect of the imbalance between supply and demand has been soaring rents across the UK - something that has forced would-be renters to seek out alternative accommodation. Number crunching by estate agency Hamptons has found there should be 105,000 more renters than there currently are, with the number of young people leaving their family home decreasing, particularly in the South of England.
It all comes as the government has announced what campaigners have described as a “once-in-a-generation” shake up of the lettings sector. Among the reforms revealed by Housing Secretary Michael Gove in May was a crackdown on ‘no-fault’ evictions - a mechanism that was used by landlords on a record number of occasions in 2022.
So, why are landlords quitting the lettings market?
How many landlords are quitting the industry?
Official statistics show there were around 2.7 million landlords operating in the UK in the 2020/21 financial year. But there is no definitive, up-to-date statistic available that shows us how many landlords have quit the rental market over the past 12 months. What we do know is that several industry surveys have indicated there is currently a general move to exit the industry.
In its May 2023 property market survey, the Royal Institution of Chartered Surveyors (RICS) found the number of new landlord instructions (i.e. the amount of properties coming to the rental market) was 23% down year-on-year over the preceding three months. The number of new instructions has generally been declining at an increasing pace since 2016, according to its data.
Separate research by Propertymark has found the number of homes to let at its member’s branches has “remained stubbornly low”, with an average of just nine properties available per branch as of April. While the amount of would-be tenants registering with its member’s branches is well below the record peak of 147 recorded in September 2022 - there were 118 new applicants per branch - the latest figure is 24% up year-on-year.
Going forward, research by trade body the National Residential Landlords Association (NRLA) has found sentiment among landlords is dire. In the first quarter of 2023, 33% of its members in England and Wales said they intended to cut the number of properties they rent out - up from 20% in the same quarter in 2022.
For those landlords who are sticking around, many are turning to loopholes in a bid to stay in business. In February, it was revealed there had been a jump in the number of properties being let out through companies, a development that tenant organisations warned could see landlords duck their obligations to those who rent from them.
Why are landlords selling up?
There are three major reasons why landlords are selling up across the UK. NationalWorld has listed them in no particular order:
- Retirement
According to estimates by Hamptons, 140,000 landlords retired in 2022. The estate agency says retirement accounted for 73% of all landlord property sales. With the average age of a landlord now sitting at 60-years-old and 96,000 landlords set to hit the current official retirement age (65) each year over the next five years, it expects large numbers of those renting out properties to leave the sector over the medium-term. They are unlikely to be replaced at a rapid enough rate given younger age groups are struggling to afford to buy.
- Mortgage rates
Possibly pushing some landlords to retire earlier than they may have initially planned is the current situation with mortgages. There have been 12 consecutive interest rate hikes since late 2021, with the Bank of England base rate now sitting at 4.5% and expected to climb towards 6% by the end of 2023. According to research by estate agency Savills that was reported by the BBC on Wednesday (14 June), mounting mortgage costs mean landlords are now making net profits of 4% on average - well below the highs of 23% seen over the previous decade and the lowest figure since 2007.
- Government legislation
As well as the renters reform bill, which looks set to regulate landlords much more tightly from late 2024, new energy efficiency requirements, a reduction in tax relief, alongside lower capital gains and income tax allowances have all served to squeeze profitability and increase upfront costs for landlords. Meanwhile, in Scotland, a temporary rent freeze introduced last September to help tenants with the soaring cost of living is also likely to have dented the profit margins on lettings.
The NRLA has described these law changes as a “perfect storm” and has urged the government to carry out a review of how they are impacting the rental sector.
‘Very real risk’ landlords could flee buy-to-let sector as profits nosedive
A growing number of landlords are thinking of exiting the buy-to-let sector as interest rates and a government crackdown on the sector pile pressure on their finances. Savills’ research suggests that buy-to-let profits have plunged to their lowest level since 2007, and their is a “very real risk” that landlords will leave the PRS in their droves as a consequence.
Investors’ average net profits fell below 4% on average in the first quarter of 2023, marking a dramatic shift in finances for mortgaged buy-to-let buyers, the company said.
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, says Savills.
The decline in profitability has slumped following 12 successive increases in the Bank Rate, which has risen from 0.1% in 2021 to 4.5%. Further rate rises to at least 5.5% are expected to add to the challenges facing landlords.
Lucian Cook, head of residential research at Savills 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.
Despite growing tenant demand, landlords’ ability to continue to make a margin will depend on debt exposure, 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.”
More than 2.6 million buy-to-let properties in the UK have mortgages, with an estimated £38bn of debt secured against them. However, the debt is unevenly distributed, with around three out of four mortgaged investors having at least 40% equity in their properties. The availability of rental properties has also declined significantly over the past 18 months, with a 33pc reduction, according to property website Zoopla.
This decrease in supply is coupled with rising demand for rental accommodation, further exacerbating the challenges faced by tenants in finding suitable homes. Smaller landlords with higher levels of debt and those approaching the end of their fixed-rate mortgages will be hit hardest.
According to Savills research, three in four mortgaged buy-to-let properties have a Loan-to-Value (LTV) of less than 60%, while one in three have an LTV of less than 50%. In Q1 2023, those with an LTV of 60% were able to generate an average profit of 10.2% and those with an LTV of 50% generated 16.5%. While landlords leveraged at 80% saw profits move into negative territory (-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, added to this, many landlords who have been active since buy-to-let took off in the early 2000s are now nearing or in retirement, which risks limiting the future supply of rental stock," said Cook.
Savills research reveals 1,911,000 properties are currently owned by 620,000 landlords aged over 65, with a further 1,982,000 properties owned by landlords aged between 55-64.
“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,” added Cook.
New report calls for support for landlords as profit margins squeezed
The Intermediary Mortgage Lenders Association (IMLA) has today released its latest research report, examining the Private Rented Sector (PRS).
Private landlords have for years been faced with a growing burden of regulatory and tax changes, which have increased their operating costs. Until recently, these additional costs have been offset by falling mortgage rates – but the current sharp rises in buy-to-let mortgage rates risk making large numbers of private landlords’ business models uneconomic. While there is still no evidence of a mass exodus from the PRS, the loss of any rented properties will affect supply and almost certainly cause rents to rise in the long-term – to the detriment of tenants,
Tough regulatory environment
The drip effect of increased regulation and adverse tax changes have gradually discouraged investment in the PRS. The report highlights the changes that have, or might result in, increased operating costs, including:
+ The restriction of mortgage interest tax deduction for landlords to the basic rate of income in 2015
+ The reduction of capital gains tax for other assets but not for residential property in 2016
+ Lack of clarity around proposals (first consulted on in September 2020) to require enhanced energy efficiency standards
+ Provisions in The Renters (Reform) Bill (currently before Parliament)
+ Calls in some quarters for a temporary rent freeze and eviction ban
The report notes that the costs of the increased regulatory burden will – ultimately – fall on tenants.
Rising costs
The IMLA report found that the cost of servicing a buy-to-let mortgage has increased significantly. It cites a report from Octane Capital which claims that landlords needing new deals have, on average, seen the cost of their monthly interest payments jump by 75.7% over the last year.
While the majority of landlords remain on low fixed-rate loans for now, their interest rate payments will rise over the coming months as they reach the end of their current fixed deals. This will place additional and unwelcome upward pressure on rents – which have not kept pace with inflation over recent months.
In the year to April existing private rents (as measured by the ONS) were up 4.8%3 and newly agreed rents (as measured by Homelet) were up 9.9% – both under consumer price inflation, which was 8.7% (April).
Between 2013 and mid-2022, estimated net yields for landlords exceeded buy-to-let mortgage rates, meaning that landlords could achieve positive gearing, increasing their return on the equity they put into the property by increasing their debt. This provided a favourable economic environment for further investment. Today, however, 2-year fixed-rate mortgage rates are above average net yields, producing negative gearing.
The relatively sudden increase in funding costs is causing a significant proportion of buy-to-let landlords to fail affordability assessments when seeking to refinance loans. Some may seek to exit the market altogether, while others may be obliged to sell some properties and re-balance the debt on their portfolios.
Kate Davies, executive director at IMLA said, “the PRS serves some some 4.6 million households – the equivalent of 11 million people – and represents approximately 19% of the housing market. Maintaining the health of the sector is therefore essential if we are to manage the UK’s chronic housing shortage. Our report highlights the tough environment that landlords currently find themselves in and, more concerningly, the outlook for the PRS and tenants if policymakers’ approach to the sector doesn’t change. Demand for rented housing is clearly high, and measures to increase tenant protections are important. However, the focus now needs to be on prompting increased investment in the sector and supporting landlords, whose operating costs risk becoming unaffordable. If we don’t get the balance right, the result will be higher rents, and lower availability of properties – both of which are bad news for tenants and landlords.”
Average UK rent increases 9.1% as landlords start passing on mortgage crisis costs
Renters have been feeling the pain of rising mortgage rates as landlords across the country continue to attempt to recoup their costs by increasing rents, according to analysts and campaigners. Data released this week from the estate agency Hamptons showed the average rent on a newly let home in Great Britain was up 9.1 per cent in May compared to last year.
London saw the biggest annual increase, with rents rising by 13.1%, followed by Scotland (11.6%) and the North (9.2%).
Aneisha Beveridge, Head of Research at Hamptons said, “higher landlords costs” are one of the “biggest driving forces” behind why rents have increased so much in the past six to nine months. Rents are rising pretty much across the regions and for different property sizes which points towards this."
Some landlords are being hit with huge increases to their monthly mortgage repayments as buy-to-let mortgage rates soar. An average two-year fix for a BTL landlord sat at 3.59% last June, according to the data analytics firm MoneyFacts, with the average rate now at 6.1%.
This means a landlord with a £200,000 mortgage on a 25-year term would see monthly payments of £1,300, up £289 per month from £1,011 on the amount they would pay if they signed a comparable deal a year ago.
Dan Craw, deputy director at the campaign group Generation Rent said, "the problem with rising buy-to-let mortgage rates is that some landlords will probably be trying to put up the rent, while some landlords will suddenly be made unprofitable because of rising rates, he didn’t think that’s going to be a huge number."
A national survey of private landlords carried out by the Government in 2021 found that just over half (57%) of landlords had a buy-to-let mortgage, while more than a third (38%) had no debt or borrowing.
Mr Craw said, "many of those who do have a mortgage will have owned their property for a long time and will therefore have already paid off a large chunk of it. At the same time a lot of landlords are putting up the rent just because they can, because rents have been going up in the market."
Ms Beveridge said, "rising rates are yet to lead to a mass landlord exodus, landlords have made up just 15% of sellers this year, the lowest proportion since 2015. In a way it’s a little hard to believe given how stretched some landlords will be when they come to re-mortgage this year, but we think that a large chunk of investors won’t actually be re-mortgaging at the moment because they’ll likely be on a longish fix.