Future of Buy-to-Lets.
Recent research conducted by Savills found that there is “no longer any profit to be made” from buying and renting a property with a deposit of less than 30%”. Since 2014, 73% of buy-to-let mortgages taken out fall into this category and today, landlords collectively owe £300bn to UK banks. While those with bigger deposits can still make money, the flow of new landlords into the market is expected to dry up.
The estate agent, Hamptons, says landlords in the UK are now paying 40% more in interest payments than last year. Landlords are feeling this impact as 11,500 rental properties were behind on mortgage payments over the last three months, and rising mortgage rates could mean that defaults continue to rise.
Amidst the chaos of the private rental sector, with supply shrinking, interest rates rising, rents soaring and more legislation on its way with Section 21, “no-fault eviction”, looking set to be abolished. What is the future of Buy-to-Lets (BTL)?
A mismatch between demand and supply:
For the seventh year in a row, more landlords in Britain sold their properties rather than purchasing them, with investors selling 14% of all homes sold in the first nine months of this year and only 11% of all homes bought to rent this year. Demand in that same period has grown by 41%, with the supply of rental homes has shrunk by 35%.
And it looks to get worse as only 50,000 new landlords will enter the market between 2023,2024, and 2025 compared with a pre-pandemic average of 77,000. As demand increases, the supply of homes to rent will continue to shrink, causing rents to increase further.
Future forecast:
With supply falling and demand increasing, Savills forecasts that the rental crisis will remain entrenched for years as landlords facing rising rates and tax curbs continue to increase rents. It forecasts that rents will increase by 9.5% this year, followed by a 6% increase next year. Forecasters, however, have underestimated the exodus of landlords over the next two years.
With interest mortgage payments increasing, cashflow for most landlords leveraged less than 30% loan to equity will find it harder to make the numbers stack up, especially in London and the south-east where mortgages will be bigger; thus, interest rate rising have a bigger impact on landlords’ profitability in these areas of the country.
Broken down by region, landlords are most reluctant to invest in properties in London, where prices are highest and yields lowest. Only 9 per cent of purchases were made by a landlord here in the year to date, while 15 per cent of homes sold were by landlords.
The only regions where the percentage of homes bought by landlords exceeded those sold were northwest (15-14) and northeast England (27-22), which have cheaper properties that might not need mortgages and better returns. Scotland was the only place where the landlord sell-off has accelerated in the last year. This is mainly due to the Scottish government introducing rental caps.
With more legislation on its way, interest rates increasing, reducing profitability for landlords and 70% of landlords being over 55, the private rental sector is looking to go through a seismic shift towards a major supply crisis in the next two years. The growing rental yields could tempt some investors with high equity to invest in the sector as they chase cash flow and good returns on investment. However, rents will eventually have a ceiling, and they will not and cannot continue to rise at the pace they are currently rising.
Over the next few years, the government may have no choice but to intervene in the private rental sector and offer investment incentives. Abolishing section 24 would be a positive step towards preventing landlords from leaving the market in droves and encouraging further investment in the sector. Failure to act could exacerbate the crisis by shrinking supply and driving up rents.