0:01 AM, 15th June 2023, About 8 months ago 5
Mortgaged buy-to-let investors’ net profits plunged below 4% in the first quarter of the year – a level not witnessed since 2007, one real estate firm reports.
And Savills warns that there is a ‘very real risk’ that landlords may now sell up and leave the private rental sector (PRS).
The firm’s research reveals that this shift in financial fortunes is down to a dozen consecutive Bank base rate hikes – and aggravated by limited tax relief.
The increasingly challenging environment for property investors is now, the firm says, putting the future viability of the buy-to-let market at risk.
Savills’ head of research, Lucian Cook, said: “Following a boom period for buy-to-let landlords, 2023 marks a turning point for Britain’s private rented sector.
“Between 2014 and 2021, landlords on average were making ‘year 1’ cash profits of 23% of rental income, but successive interest rate hikes have seen this figure plummet to under 4% this year.”
He added: “The incoming Renters’ Reform Bill, abolition of the Assured Shorthold Tenancy, and increasing EPC regulations, are expected to add to investors’ caution as landlords now face the prospect of having to invest to bring their properties up to a minimum EPC, further eating into profits.
“There is a very real risk that landlords will exit the sector, particularly those with high levels of borrowing, putting increased pressure on a sector where demand significantly outweighs supply in many locations.”
However, the increasing demand for rental properties doesn’t guarantee success for landlords, as their profit margins hinge on their debt exposure.
Savills’ latest research reveals that the Loan-to-Value (LTV) ratio plays a crucial role in determining profitability in the BTL market.
The study shows that 75% of mortgaged BTL properties maintain an LTV below 60%, while 33% boast an LTV under 50%.
In the first three months of 2023, property owners with a 60% LTV generated an average profit of 10.2%, and those with a 50% LTV saw a 16.5% return.
But landlords with an 80% LTV experienced a negative profit margin of -2.4%.
Mr Cook said: “Debt exposure of mortgaged buy-to-let landlords will play a critical role in the future shape of the private rented sector.
“Viability will be a real issue for smaller landlords with higher levels of debt who are coming to the end of their fixed rate, while larger, wealthier landlords are in a much better position to benefit from the rental growth seen in the period post-pandemic.”
He adds: “Future investment is now likely to be dominated by cash buyers and those with low borrowing requirements.
“Even landlords with modest gearing are now more likely to enter the sector or expand existing portfolios in areas furthest from London, with a greater focus on smaller properties which offer bigger returns.”
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