In response to a series of what they view as unfavourable policies enacted by recent Conservative governments, private landlords in England and Wales are downsizing their property portfolios, despite a significant surge in buy-to-let rental incomes. A recent study conducted by Benham and Reeves reveals that these landlords are increasingly challenged by tax changes and regulatory reforms.
According to the research, landlords in England and Wales have witnessed an 8.7% increase in their rental portfolio incomes over the past year, raising the average annual income for a landlord from £67,304 to £73,186. However, the buy-to-let portfolio sizes have contracted by 5.6% year-on-year, declining from an average of 9.1 to 8.6 properties per portfolio. Certain regions have been hit even harder by this trend.
In Wales, landlords have been departing from the buy-to-let market in large numbers, with portfolio sizes plummeting by a staggering 42.9%, dropping from an average of 12.6 properties in 2022 to 7.2 in 2023. In England, the East Midlands has been particularly affected, with landlords reducing their portfolios by 33.9%, from an average of 11.8 to 7.8 properties.
Similar reductions have been observed in the North West, where average portfolio sizes decreased by 17%, falling from 10.6 to 8.8 properties. It’s worth noting that regions with lower house prices have attracted new investors with smaller portfolios, contributing to the overall decline in average portfolio sizes.
Several factors have contributed to this decline in portfolio sizes, with tax and regulatory changes over recent years being major culprits. These changes have left many landlords struggling to maintain profitability. Additionally, the investment climate appears to be deteriorating further, with the upcoming reduction of the personal capital gains tax allowance from £6,000 to £3,000 starting next April.
The elimination of Section 21 evictions could also make it more challenging for landlords to deal with problematic tenants. Furthermore, landlords with inefficient properties will be required to upgrade them to an Energy Performance Certificate (EPC) level of C by 2028 to continue renting them out, potentially incurring substantial costs for those with older housing stock.
However, it’s important to note that not all regions are experiencing this trend of reduced portfolios. In the East of England, typical portfolio sizes have actually increased by 43.8% year-on-year, rising from 6.4 properties in Q1 2022 to 9.2 properties in Q1 2023. Smaller increases have also been observed in Yorkshire and the Humber (11.1%), South East (10.1%), and West Midlands (8.2%).
The remaining six regions, including the North East (-1.0%), London (-1.3%), and the South East (-3.8%), have seen minor reductions in portfolio sizes.
Marc von Grundherr, the director of Benham and Reeves, commented on the situation, stating, “It’s getting harder to be profitable as a landlord, and that impact is starting to show. Losing income tax relief had a big effect, while many investors are understandably worried about the upcoming changes to Capital Gains Tax, minimum EPC rules, and the elimination of Section 21 evictions.”
“Declining portfolio sizes should act as a warning to the government. The tax landscape is unfairly balanced against landlords, and unless the authorities want rental stock to continue falling in the years ahead, they may need to reverse some of these hostile policies which are driving professional landlords away,” von Grundherr continued.
However, despite their discontent, many landlords are opting to retain their current investments for the mid-term due to the challenges associated with selling buy-to-let properties in the current market climate, including rising mortgage costs.
As private landlords adapt to a changing regulatory landscape, the future of the buy-to-let market remains uncertain, with potential implications for the availability and affordability of rental properties across England and Wales.