In a gloomy assessment of the UK buy to let market, global ratings service KBRA (Kroll Bond Rating Agency) has painted a challenging picture for investors. With economic difficulties stemming from rising interest rates, sluggish house price growth, and mounting living costs impacting tenants, the sector is grappling with regulatory and financial hurdles.
The latest report from KBRA delves into the predicaments faced by investors in the UK buy to let sector. Particularly worrisome is the plight of landlords seeking to remortgage amidst the new economic landscape. The agency points out that regulators have implemented policy changes to ensure higher quality buy to let mortgage origination, including mandates for energy-efficiency improvements in older properties.
The report highlights several key takeaways:
- Growth in the buy to let sector is expected to decelerate, and there is even a possibility of contraction due to a surge in financing costs, diminishing tax advantages, evolving regulations, and the financial struggles of tenants.
- Loans nearing the end of their fixed-rate period face elevated remortgage risks.
- KBRA’s analysis of nearly 20,000 buy to let loans reveals that 20.3% of them may carry a higher remortgage risk due to relatively low debt service coverage ratios or high loan-to-value (LTV) levels.
- London exhibits a “fairly high” level of exposure within the subset of buy to let loans with fixed rates nearing their conclusion.
- However, remortgage risks can be mitigated by landlords’ ability to increase rents, the diversification benefits offered by portfolio landlords, and the comparatively low borrower leverage prevalent in the buy to let sector.
- The buy to let sector faces additional imminent risks stemming from changes in tenancy rights, taxation, and energy-efficiency regulations.
With storm clouds gathering over the buy to let market, investors are left grappling with an uncertain future. As the sector contends with mounting challenges and regulatory headwinds, the road ahead appears rocky.