You are here: Home -

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

by: Jon Hall, group managing director, mortgages, OSB Group
  • 21/07/2022
  • 0
“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 whitepaper on ‘a fairer private rented sector’ on 16 June has fuelled speculation in some quarters that the government has private rented sector (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 PRS has shrunk slightly. But the PRS still houses around 20 per cent 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.

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

 

New government rules should benefit landlords

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, no-reason evictions, working against landlords.

But the new rules should also benefit landlords, who will 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.

 

Buy-to-let investors are ‘tenacious and innovative’

Plus, buy-to-let investors are tenacious and innovative. The tax changes introduced since 2016 have prompted tens of thousands to move to their properties into limited company holdings, and these professional landlords – with 269,300 or more limited companies between them at the last count – now form the core of the PRS.

Despite the current challenges, according to the BVA BDRC landlord survey Q2 2022, 83 per cent of landlords are making a profit from their letting activity.

Admittedly, that is a fall of four per cent 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 £76,820 – that’s a 39 per cent return on investment and an annual net yield of 4.3 per cent, 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.

 

Sustainable properties are a ‘win-win’

Concerns have also been voiced in some quarters about the cost of bringing rental properties up to suggested Energy Performance Certificate (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 is 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.

Related Posts

Tags

There are 0 Comment(s)

You may also be interested in