Landlords lose appetite for meeting tenant demand

April 23, 2024

Mortgage costs have increased by twice the level of earnings growth in the last 25 years, pushing rental demand sky high;  buy-to-let landlords, however, are heading for the door.

The period of relatively cheap mortgages immediately following the 2008 financial crisis helped to fuel a boom in buy-to-let house purchases by those in a position to take on more debt.  Despite lower rates, tighter borrowing rules ruled out other would-be landlords, as well as potential homeowners, and some sizeable  portfolios were built, with several becoming incorporated businesses. Now the party seems to be winding down.  Higher interest rates have driven thousands of landlords into loss. The number of buy-to-let mortgages with arrears of at least 2.5 per cent more than doubled year-on-year in Q4 2023, according to banking trade body UK Finance.

Some lenders have reduced rates on buy-to-let deals, expecting a base rate cut at some point this year. The spring budget also brought a reduction, from 28% to 24%, in higher capital gains tax (CGT) on sales of non-permanent residences such as buy-to-lets. Yet landlords are still voting with their feet. Dividend allowances were cut from £2,000 to £1,000 in 2023 and then to £500 from this month. By 2025, anyone receiving dividends above this amount, including many landlords who have incorporated, will pay tax on them at a rate depending on how much other income they receive.  Overall, profit margins have shrunk steadily for most; others are already in the red.

Leading property auctioneer Landwood Group reports a 150% increase in receiver appointments for buy-to-let portfolios in the past six months. It has also seen stricken landlords turning to auctions themselves before they are forced by insolvency.

Delays to the Renters’ Reform Bill – dubbed a “seismic shake-up of the private rented sector” by the National Residential Landlords Association – have caused further uncertainty in the market. Aimed at delivering a fairer deal for renters, not least in respect to evictions, the Bill has led landlords to hold off essential property improvements until the rules have become clearer. They had already faced higher operating costs as a result of tighter energy efficiency requirements. These two factors have left several properties badly maintained, sometimes to the point of uninhabitability, or even non-compliant.

March’s small CGT cut wasn’t necessarily a peace offering to landlords – the chancellor was very clear, saying: “This will encourage landlords and second home-owners to sell their properties, making more available for a variety of buyers including those looking to get on the housing ladder for the first time…”. The dynamics of buy-to-let are set to remain problematic for the foreseeable future. Conservative politicians seem keen to shrink the private rental sector, while Labour promises more protection for tenants. In any event, operating as a residential landlord is likely to get tougher before funding rates fall and the supply-demand imbalance in the UK housing stock eases.

If you are a debt-laden landlord considering unwinding residential portfolios and company structures, contact us at Buchler Phillips to receive early professional advice for a managed process with an optimal outcome.

Written by our analysts’ team at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.

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