Landlords focus on refurbishment over purchase, study finds

The Paragon report drawn from talks with more than 200 landlords suggests the Stamp Duty surcharge combined with government plans to reduce higher rate tax relief, prompted a focus on renovation over purchases.

The number of landlords keen to buy properties fell to 9%, down from 14% in the previous quarter.

However, fewer landlords said they would reduce the level of development on properties as a result of decreased income due to tax relief cuts. In Q4 of 2015, 31% of those surveyed said they would cutback spending against 14% in Q1 2016.

Affordability levels are also improving with landlords spending, on average, 28% of their rental income on mortgage repayments, while more than half of all respondents spend less than a quarter of their rental income. Returns were found to be stable with the average net rental yield remaining at 4.7% for the third consecutive quarter.

John Heron, director of mortgages at Paragon, said: “The PRS is facing the prospect of a great deal of change as a result of the significant shift we have seen in fiscal and regulatory policy. Some landlords are responding to this uncertainty by planning fewer new purchases and investing in their existing portfolios. At the same time credit profiles are very robust and improving, a picture that is somewhat at odds with the picture being painted in some quarters.”

The survey found landlord credit profiles, with average levels of gearing – the value of a buy-to-let portfolio less the value of the outstanding mortgage – down from from 38% in Q4 2015 to 36% in the latest quarter.

The vast majority, or two thirds of landlords surveyed have borrowings of less than half the value of their investment property portfolios.

There were also rising levels of awareness about the implications of the tax relief changes. More than three quarters (76%) of respondents said they now understand what the changes to tax relief will mean for them, up from 62% in Q4 2015.

“If landlords materially reduce investment, those that have to rely on the PRS for a home could be hit quite hard. It may well become even more difficult and expensive to rent a home with no obvious commensurate benefit to homeowners,” said Heron.