The exodus of the private landlord

The exodus of the private landlord

4:00 AM, 20th February 2023, About A year ago 19

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Ben Beadle, the chief executive of the National Residential Landlords Association, wrote an excellent piece in the Telegraph at the beginning of this year which illustrates the crisis in the buy-to-let sector with demand far outstripping supply and a planned increase in the exodus of landlords from the sector during 2023.

He puts tax at the centre of the issue and specifically targets S24 and SDLT on investment properties as areas where the government could act to reverse the tide of rental supply reduction.

There is no doubt that demand is outstripping supply of rental properties. This is having a knock-on effect on landlords seeking to obtain possession of their properties, with a visible increase in the incidence of eviction proceedings, partly due to tenant’s being blackmailed by councils to ignore section 21 notices and await bailiff eviction. That is the only way councils will agree to consider their housing needs.

The rental sector is very fluid. Comprising of hundreds of thousands of landlords and tenants, any imposed change generally has a rapid counter-reaction. It doesn’t take much tweaking to steer this ship, compared to the relatively immovable corporate world.

We have seen rising values (falling yields) in the south of England result in a large-scale change of use from single household lets to HMOS. We have seen the S24 tax result in a similar scale change of use to serviced accommodation and we have seen a continual attack on landlords by the taxman, councils and a broken legal process result in the exodus we experience today.

It should not be ignored that a strong period of capital growth has facilitated the exodus. There are pull factors at play as well as push factors. Fewer landlords would be leaving the sector if their earned equity had not been as great. The reversal of values makes it an optimum time to liquidate.

But my belief is that the main driving factor of landlord behaviour is not financial, but emotional. The basic principles of ideal property investment are to make equity on purchase, cashflow positively and have multiple exits. Over time the cashflow and equity growth elements of ownership interchange. We are currently facing a period where both are declining, but it is not hard to see this is a storm that has calmer waters ahead.

It is a well-known fact that inflation erodes debt. For so many years, landlords have experienced relatively static rental income, low loan servicing costs and reasonable cashflow. Equity growth has been healthy, but debt has remained relatively unchanged. Inflation generates wealth by reducing debt in real terms. This is how those in their later decades of life have generated the wealth on their homes that resulted in the emergence and growth of the buy-to-let sector.

So it is a bit surprising that the exodus of landlords coincides with a period of high inflation and record-breaking tenant demand. Is this not the period we have all been waiting for?

Even if inflation is not currently impacting property values, the relationship between gross rent and property value is being shifted to the benefit of the investor. That rent is unlikely to drop in the future, unlike interest rates. Then it is likely that capital values will surge again in years to come.

There are some highly leveraged landlords with low-yielding investments that simply cannot make positive cashflow after tax. It is understandable that these people are selling at the moment. However, they are very much in the minority. The majority are seeing reduced cashflow due to increasing loan servicing costs and increases in pretty much all other areas of expense, but cashflow is still positive.

So why are they selling? Is there a golden investment bandwagon elsewhere they wish to jump on? Absolutely not! In fact, liquidating to cash right now presents considerable challenges as inflation appears to remain rampant.

I prefer to believe the exodus is due to the strongest driver of human behaviour – fear.

Fear of the future is causing the decisions to get out of the market. In some cases, it is totally irrational, but that doesn’t deny its existence. When you have been beaten by a whip daily, you fear the whip. When you have been attacked from all sides since 2015 and vilified by the press, you fear further attacks.

With values, declining, a very unpredictable war in the east of Europe, a Labour party favouring rent controls being the bookies’ favourite for next year, talk of further tenant protection legislation from the current government and concerns over more punitive tax regimes that will take your capital when you sell, there is plenty to feed the insomnia of the anxious.

People are getting out because they fear the loss of control. Government intervention is the main issue where the control of the landlord is being removed piece by piece. The fear is this will continue and even increase in the years to come.

I am not convinced the reversal of S21 or removal of SDLT will reverse the current exodus. It will likely encourage new investment. But the current cohort of landlords are spooked. Trust is lost and they are getting out, regardless of whether their debt is eroding, capital increasing or cashflow holding out. They have felt the whip.

This is the very reason, I made an active decision last year to stick in the market. As a natural contrarian, I view the opportunities that lie ahead and the knowledge that governments only respond to symptoms. The current symptom is insufficient rental stock and the fix for the government is to relax its current grip on landlords. This will boost investment and increase values. Meanwhile, the war in Europe, Covid and Brexit hangover will pay havoc with inflation and the Bank of England will continue to wield the ineffective axe of interest rates in a futile attempt to control it. Of that we can be certain as it is the only axe in their toolbox.

Meanwhile, the years ahead of us will be of full occupancy rentals and real-term debt reduction. Bring on tenant-friendly policies. I never minded pets and never wanted to evict a good rent-paying tenant with two months’ notice in any event.

If tenants can have more secure rights of tenure, then perhaps they will be the ones to fund a new kitchen. But that is an altogether different discussion for another day.

Rupert Chapman is a private property investor. He runs a membership support group for property investors called Unity. Unity members communicate daily on a closed forum and have weekly online meetings to provide experienced answers to assist each other with their projects. 

For more information about Unity CLICK HERE


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Comments

northern landlord

12:56 PM, 20th February 2023, About A year ago

I think this article hits the situation on the head. Existing Landlords are spooked with many seeking to get out while they still can. We fear for the future. We fear that banning section 21 will mean we will lose control over our most valuable asset, our property. We fear a situation where tenants will become essentially non evitable if they pay the rent, and even if we manage to justify eviction under Section 8 it will cost us money and take more than a year during which time we could be losing rent and having our property destroyed. We fear that we will not be able to sell up and retire when we want to. We fear upcoming changes to the EPC regulations with many facing bills of up to £9,000 to upgrade each property. While Landlords are asset rich in terms of property many are cash poor and can’t afford the hit. What happens if you can’t afford to comply? Will you be allowed to sell? Or will you be fined, or will Landlords have to refund rent to tenants for making them live in suddenly substandard houses that were fine before the regulations came in? We fear compulsory licensing, potential rent controls, a tenant biased ombudsman scheme. We worry about tenants “re-decorating” to their taste and keeping unruly pets. We worry that tenants can stop paying rent, wreck a house and escape all liability by pleading poverty. We worry our investments are going to become a millstone around our necks. Of course nobody has any sympathy for Landlords as we are portrayed as scavengers making a living out of other people’s misery rather than performing a public service in providing people who cannot afford to buy with a roof over their heads.
I am currently hanging on hoping for the best. I have good tenants some on benefits who have been with me a long time. Their rents are on the lower side and I know they probably couldn’t afford anywhere else. Currently my heart is ruling my head but am I just being cowardly pushing the problem down the line?

Crouchender

13:27 PM, 20th February 2023, About A year ago

Reply to the comment left by northern landlord at 20/02/2023 - 12:56
100% agree with this article. FEAR or as I say in a on another forum- PANIC. See below for the posting I have just done on on another popular forum only just done a few minutes prior to this article. For me- I am sticking with PRS for at least another 5 years and will navigate the challenges as they come.

POSTING....

Not too sure how may LLs active on the forum have experience of SL implementation and the knock on effects. My borough council has just introduced it into the ‘poorer area of the borough’ (50% of the borough).
I have just done a round robin phone round of all of my estate agent contacts who I deal with that border the SL area. All of them report an increase in LLs selling due to hassle of SL AND also panicking about S21 removal. When I asked them what the profile of LLs is- most have said it is a LLs with 1 maybe 2 properties, 50+ old.
This is also having a knock on effect for tenants as I am a Local portfolio LL in the non-selective part of the borough and have relet recently my rents have gone up 30+% because of the reduction in local supply from the council’s SL rollout.
We all know that SL (with punitive civil penalties for innocent/ unaware LLs who sign up to the scheme) is a council money spinner and so called ‘dodgy’ LLs avoid any licencing especially HMOs.
So in order to tackle the ‘minority dodgy’ LLs (5%?) then the other 95% of rented properties the tenants have to put up with less supply and significant increases in rent! So the tenants are paying for licencing YEARLY not every 5 years as LLs have to do.

Is anyone else finding this insight too?

Luke P

13:35 PM, 20th February 2023, About A year ago

Reply to the comment left by northern landlord at 20/02/2023 - 12:56
Fantastic post, but yes...you are being cowardly. The opportune moments aren't appreciated until they're gone and for now, at least, we still have autonomy. Get the hell out.

Luke P

13:39 PM, 20th February 2023, About A year ago

Reply to the comment left by Crouchender at 20/02/2023 - 13:27
A cornered animal will strike out. If councils are covered by the market situation AND them having the powers to make the rules, they'll just advantage themselves and screw you over. It won't be a case of simple economics of the market/supply & demand dictating, they'll do whatever's 'necessary' to not make the problem (lack of homes) theirs. There has even been mention, no matter how loosely, of a 'transfer' (requisitioning) of the PRS...!

Rebecca Anelay

15:14 PM, 20th February 2023, About A year ago

Brilliant piece!!!! Yes I'm scared to death. I can't live with the fear any longer, it is literally making me ill.

Rebecca Anelay

15:20 PM, 20th February 2023, About A year ago

Reply to the comment left by northern landlord at 20/02/2023 - 12:56
You've just said it all so well. Thank you.
It's so comforting to hear your views are identical to mine as it gives me more strength to get on and sell....as an accidental and small landlord I don't have the experience to know what to do for the best...but I know my health comes first. Thanks again

Luke P

15:39 PM, 20th February 2023, About A year ago

Reply to the comment left by Luke P at 20/02/2023 - 13:39
*concerned (not 'covered')

DPT

17:53 PM, 20th February 2023, About A year ago

In his recent Podcase, Ben Beadle said that despite the number of landlords rushing to the exit, the number of rental properties is still increasing. If that is so then the Government strategy is working and they will just keep feeding us the medicine.

Alexandra

18:48 PM, 20th February 2023, About A year ago

Reply to the comment left by David at 20/02/2023 - 17:53
Nor sure I believe Mr Beadle

Crouchender

21:21 PM, 20th February 2023, About A year ago

Even if the RRB is softened up for LLs by the conservative's (miracle but it could happen), the fact that LLs are going to be dealing with a predicted Labour government won't make that fear go away. Especially when Labour's wealth taxes (NI on unearned income CGT at 40% at least, removal of 20% tax credit, rent controls etc etc) are being developed in the background to the Nandy review of PRS. The future is volatile for LLs so non-exodus LLs need to develop risk mitigating plans now.

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