The headline news from a survey conducted by the Residential Landlord Association is that almost one in five buy-to-let landlords plans to divest themselves of their portfolio. The reasons for this include concerns about the housing market, changes to tax and the difficulties of getting a mortgage.
Concerns about the housing market
While the laws of supply and demand mean that, overall, the UK property market tends to follow an upward trend, in the short term it can plateau and dip. Hitherto, these situations have been seen as positive for buy-to-let landlords since they offered buying opportunities, but landlords who have already decided that they wish to exit the market will probably want to start the divestment process as quickly as possible, partly to avoid any short term downturns in the market, partly because an extensive portfolio can take time to sell and partly to ensure that they make the best use of their annual capital gains allowance.
Changes to the tax system
Another reason why landlords may well want to sell up quickly is because the tax system is in a process of transition from the old system, in which landlords paid tax on net profits (i.e. after mortgage interest payments) to a new system in which they effectively pay tax on turnover minus an allowance for mortgage interest payments. This change is due to be completed by 2020 and has serious implications for higher-rate taxpayers, who may find that their profits flatline or even turn into losses and that’s before considering the impact of the 3% stamp duty surcharge.
Difficulty in getting a mortgage
While it’s understandable that the Prudential Regulation Authority has followed in the footsteps of the Mortgage Market Review and has obliged lenders to look at overall affordability rather than simply headline income, there are concerns amongst landlords as to how this is to be implemented in practice. In particular, there is confusion about how lenders will assess landlords with more than four properties in terms of the requirement to look at overall profitability, for example will they insist that the portfolio as a whole meet a certain level of profitability or that each, individual property does? With everything which is going on in the buy-to-let market as a whole, it’s understandable that for some landlords, this may be the final straw.
Landlords who stay in the market are raising rents and looking at yields
According to the results of the survey, almost half of landlords plan to raise rents next year, which is understandable, but obviously bad news for renters, all the more so given that landlords exiting the market will either reduce the supply of rental properties or reduce the number of landlords competing for tenants. Landlords have also taken note of the fact that rental yields outside of London and the south (east) of England are much more attractive than those around the capital and hence there is increasing interest in properties away from the Thames Valley and, indeed, even outside of England, with Scotland also showing a good return on investment.