New research indicates that landlords’ profits have reached their lowest level since 2007, sparking fears that many may abandon the rental sector altogether. According to a report released by property agent Savills, average net profits for investors in the private rented sector (PRS) dropped below 4% in the first quarter of this year.
The decline in profits can be attributed to a combination of factors, including 12 consecutive increases to the Bank base rate and restricted tax relief. The situation has been exacerbated by the cumulative effect of these pressures, prompting the Savills report to label 2023 as a “turning point” for the private rented sector.
The report emphasizes that the ability of landlords to generate profits hinges on their mortgage debt levels. Smaller buy-to-let landlords, who rely heavily on borrowing, are considered the most vulnerable, while larger and wealthier landlords are better positioned to capitalize on increased tenant demand.
In addition to financial challenges, the study highlights the aging demographic of landlords as a significant concern. Findings from estate agent Hamptons reveal that 73% of all landlord sales in 2022 were due to landlords retiring from the sector. Savills’ research discloses that 1,911,000 properties are currently owned by 620,000 landlords aged over 65, with an additional 1,982,000 properties owned by landlords aged between 55 and 64.
Lucian Cook, head of residential research at Savills, warns that the ongoing pressures faced by landlords will shape the future of the PRS. Cook states, “Following a boom period for buy-to-let landlords, 2023 marks a turning point for Britain’s private rented sector. The impact of successive interest rate hikes has caused ‘year 1’ cash profits to plummet from an average of 23% of rental income between 2014 and 2021 to under 4% this year.”
Moreover, the impending Renters Reform Bill, the abolition of the Assured Shorthold Tenancy, and increasing Energy Performance Certificate (EPC) regulations are expected to heighten investor caution. Landlords now face the prospect of investing in their properties to meet minimum EPC standards, further eroding their profits.
The National Residential Landlords Association (NRLA) emphasizes the need for a comprehensive review of the taxation of the private rented sector in light of these findings. Chris Norris, the NRLA’s policy director, states, “The concerns raised by Savills echo those of the NRLA, which has warned that economic uncertainty, tax changes, and increased regulation could have a devastating impact on the supply of homes to let.”
Norris calls on the government to support struggling landlords by conducting a thorough assessment of recent tax hikes, such as changes to Mortgage Interest Relief and Stamp Duty, and their impact on the rental market. Furthermore, he urges the government to implement pro-growth measures that encourage landlords to remain in the sector and continue investing.