As the new Labour Government settles into power, rental reform will be one of the items at the top of the to-do list.
Labour’s shadow housing team was vocal in its opposition to certain aspects of the Tory’s version of the Renters Reform Bill whilst on the opposite side of the House, but it must not rush out a butchered version of this legislation without fully considering the consequences.
Centrally, Labour objected to the inclusion in the Bill of a clause to only scrap Section 21 once court capacity had been increased. Many in the industry would urge the Party to review this stance because doing so could be detrimental to the very people it is designed to help – tenants.
The majority of landlords have accepted that Section 21 will be going.
However, if it is removed, the Bill needs to ensure that there are robust grounds introduced for landlords to gain possession of their property if they so require. They should also expect a functioning and resourced justice system to cope with the increased number of cases that will be heard by a court.
The previous version of the Bill that failed to make it through wash-up in the final days of the last Government largely achieved that. If Labour gets the Renters Reform Bill right, balancing the needs of both landlords and tenants, it could provide the clarity and certainty that landlords require to give them the confidence to continue to invest in the sector.
As the tenure of the working population, a flourishing private rented sector will help support Labour’s economic growth plans, facilitating workforce fluidity and flexibility. As new jobs are created, a transient housing option is required to provide homes for those who move for employment opportunities.
If Labour gets the Bill wrong, then we could be faced with a clogged-up court system and landlords out of pocket if they need to evict a tenant. That damages confidence and could also damage PRS stock levels.
Let’s consider some of the facts. Zoopla’s influential rental market report recently showed that tenant demand is double that of before the pandemic, yet rental stock availability is down by a third.
The result? Rental inflation, as simple supply-demand economics dictates. As the report states, ‘Only by boosting supply can we improve choice for renters and increase the chances that consumer demand will start to exert more influence over landlord decisions and the quality of rented homes’.
Rushing out legislation could fundamentally undermine confidence in private rental sector investment and contribute to declining stock levels at a time when demand for rented homes is only going to grow.
As well as retaining existing landlords in the sector, it’s also important that a new generation of landlords is nurtured to ensure good quality homes are available for those who want or need to rent.
We recently analysed industry data, which showed that the average age of buy-to-let landlords purchasing with a mortgage is falling, down to 42.9 last year from 46.4 a decade ago. Purchases by landlords in their 30s increased from 21% of properties in 2014 to 31% last year. Overall, three quarters of mortgaged buy-to-let purchases last year were made by somebody under the age of 50.
That is positive as it shows that property is still seen as an attractive investment proposition. However, these investors like certainty and a stable regulatory and fiscal environment.
This is why it is so important that the new version of the Renters Reform Bill is carefully considered and reflects the needs of all participants in the PRS.
Does it Still Pay to Be a Landlord in the UK?
A recent article published in The Times suggests that being a landlord is no longer profitable, with government regulations and higher interest rates eating into profits. However, not everyone shares this pessimistic view. A new discussion piece offers a different perspective, arguing that despite regulatory challenges, being a landlord remains a lucrative endeavour.
The impact of rising costs
Using data provided by Savills, The Times article highlights how landlord costs have soared since 2014. For instance, the cost of investing in a buy-to-let property rose from £161,404 in Q1 2014 to £236,311 in Q1 of 2024. Also, Stamp Duty Land Tax has increased significantly, from 1% (£1,614) in Q1 2014 to 3% (£7,089) in Q1 2024. This is all while rental yields have hardly changed. According to the data, the average buy-to-let property secured a gross yield of 6.5% in both 2014 and 2024, however thanks to tax changes, the article in The Times suggests what would have generated a profit a decade ago will be leaving landlord profits in the red in 2024.
Reasons for optimism
However, not all is doom and gloom for today’s landlords, according to Marc von Grundherr, director of London lettings and estate agency Benham and Reeves. He acknowledges that UK landlords have faced numerous challenges over the last decade. These include the removal of tax relief, increased capital gains tax, additional stamp duty costs and a court system clogged with repossession cases. Moreover, attempts to prevent landlords from reclaiming their properties through the failed Renter Reform Act have added to the strain.
Despite these challenges, von Grundherr argues there are compelling reasons to remain optimistic about the buy-to-let sector, including:
Many landlords are mortgage-free
More than a third (38%) of landlords do not have mortgages, so they are unaffected by rising interest rates.
Interest rates are ‘normal’
At 5.25\5, the Bank of England base rate is not particularly high by historical standards. The average rate over the last century has been 5.25%, which experienced landlords will recognise as normal.
Property value appreciation
House prices have increased by 54% in the past decade and by 152% since 2000, equating to a 6% annual return. This far outstrips the average inflation rate of 4.4% over the past five years.
Rising rents and high demand
Rents have increased by 31% since 2014, with an annual rise of 3%. Tenant demand is also at an all-time high.
Housing supply shortage
The number of new homes being built falls significantly short of demand, with an annual deficit of around 100,000. This scarcity drives up both property values and rental income.
The true value of rental yields
Furthermore, rental yields are often higher than reported. According to von Grundherr, traditional analysis compares annual rent to the current property value, but many landlords have owned their properties for years. Thus, today’s higher rents as a percentage of the original purchase price yield much higher returns. Most landlords have held their properties for over a decade, turning a 5% yield today into a 7% yield if the property was acquired in 2014.
Despite the negative narrative surrounding the sector, in light of these factors, it would seem there are plenty of reasons for landlords to remain optimistic that the fundamentals of property investment continue to offer significant opportunities for profit.