‘Real risk’ of landlords fleeing BTL as profits plunge to 2007 levels

‘Real risk’ of landlords fleeing BTL as profits plunge to 2007 levels

0:01 AM, 15th June 2023, About 8 months ago 5

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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.

‘A boom period for buy-to-let landlords’

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.”

Increasing demand for rental properties

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%.

‘Debt exposure of mortgaged buy-to-let landlords’

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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Comments

Andrew Dove

9:28 AM, 15th June 2023, About 8 months ago

While it is a very important point that Lucian Cook makes on profitability, I am interested to know how he treats tax and repairs/maintenance in his research. It may be that the situation is actually worse.
Tax on its own will swing most directly owning landlords with debt facing refinance into a loss making position.
I also suspect that most landlords underestimate the true cost of repairs and landlords often forget to allow for the chunky stuff which eventually has to be replaced (bathroom, kitchen, roof, windows, boiler, flooring). I tend to allow around 20%-24% for these repairs which sounds high, but based on my experience it is reasonable for properties around the 100k mark.
If you are in any doubt, I recommend you look at my website... http://www.rentyieldcalculator.co.uk

Mark Alexander - Founder of Property118

23:44 PM, 15th June 2023, About 8 months ago

I would like to see the workings of his figures too.

Andrew Dove

11:38 AM, 16th June 2023, About 8 months ago

Mark,
I would be appreciative if you could take a look at my website calculator. You may find it interesting as it demonstrates how bad the situation is for non incorporated landlords.

Mark Alexander - Founder of Property118

12:59 PM, 16th June 2023, About 8 months ago

Reply to the comment left by Andrew Dove at 16/06/2023 - 11:38
Hi Andrew

Please post a link.

Andrew Dove

13:09 PM, 16th June 2023, About 8 months ago

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