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Why buy to let still makes sense – and sustainability adds value

Jon Hall | 21.07.2022

“Reports of my death have been greatly exaggerated,” wrote author Mark Twain, having read his own obituary in the New York Journal in 1897. Parallels might be drawn with recent national press coverage of the buy to let sector. The publication of the white paper on ‘a fairer private rented sector’ on 16 June has fuelled speculation in some quarters that the government has PRS landlords in its sights - again - and that a combination of further regulation and rising interest rates is set to make buy to let investment unprofitable, spurring a widespread sell-off of rental property and killing off the sector as we know it.

It is of course true that changes to the tax regime phased in since 2016 have eaten into the profitability of many buy to let landlords, and the size of the PRS has shrunk slightly – there are now 4.4m rented properties in Britain, down from 4.65m in 2017, according to the latest English Housing Survey. But the PRS still houses around 20% of the UK population and, given supply and demand, that figure is unlikely to change substantially.

On the housing supply side, we know all too well that successive governments have failed to build sufficient affordable homes or provide adequate social housing for decades. And demand for private rented homes remains buoyant and looks set to stay that way for the foreseeable future due to a combination of factors; the average age of a first-time buyer is now 32 years old, up from 27 in 20111, meaning people are forced to rent for longer, and the number of students in higher education hit a record of 2.66m2 last year. What’s more, renting is no longer a stop-gap for younger people on their way to homeownership – the English Housing Survey reports that 28% of tenants in private rented accommodation have children. It’s little wonder that landlords across all regions reported increasing tenant demand in the BVA BDRC landlord survey Q2 2022.

So, the demographic and structural elements underpinning the PRS remain solid.

Nevertheless, some commentators have expressed fears that the day-to-day running of rental property will get tougher with the white paper’s abolition of Section 21 (outlawing no-reason evictions) working against landlords. But the new rules should also benefit landlords, who’ll gain more powers to tackle rent arrears, get rid of serial antisocial tenants and reduce the notice periods for some offences so that repossessions can happen more quickly in instances where the tenant is at fault.

Overall, the proposed changes should benefit the whole sector. Legislating to improve the quality of property in the PRS is good for society as a whole – switched on landlords know this and already invest in their properties to make them attractive to good tenants.

Plus, buy to let investors are tenacious and innovative. The tax changes introduced since 2016 have prompted tens of thousands to move their properties into limited company holdings, and these professional landlords – with 269,3003 limited companies between them at the last count – now form the core of the PRS. And despite the current challenges, according to the BVA BDRC landlord survey Q2 2022, 83% of landlords are making a profit from their letting activity.

Admittedly, that is a fall of 4% on Q1, with yields coming under more pressure thanks to higher borrowing costs which landlords may not be able to pass on in full in rents, but the longer-term focus should be on total returns of rental income plus capital growth. Hamptons calculates that, over a nine-year period to the end of 2020, adding rental income plus capital growth, the average UK landlord made a total net profit of £76,8204 – that’s a 39% return on investment and an annual net yield of 4.3%, and the calculation was made before last year’s double digit property price increases. So, even while net yields may be shrinking, especially for higher rate taxpayers, given capital growth, in most cases buy to let should remain profitable.

Concerns have also been voiced in some quarters about the cost of bringing rental properties up to suggested EPC standards. But sustainable properties are a win-win; cheaper to run, more appealing to tenants and more valuable when it comes to resale. Farsighted landlords understand this, though they may need the help of a good broker to identify the best financial solutions to fund improvements and upgrades.

Change often provokes fear, particularly when it’s described in the form of a political attack on a sector. But as an industry we should embrace positive change, as developing a good-quality, sustainable PRS is in everyone’s long-term interests.

Investors with an eye on the long-term picture are the backbone of the PRS rather than short-term speculators, and tenant-centric, responsible landlords will continue to be successful – particularly those well-advised on their finances by experienced brokers.

1 Halifax First-Time Buyer Review 2021 - Lloyds Banking Group plc

2 Higher education student numbers - House of Commons Library (parliament.uk)

3 RECORD 47,400 NEW BUY TO LET COMPANIES SET UP IN 2021 (hamptons.co.uk)

4 Do the Sums Still Stack Up (hamptons.co.uk)

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