We are in the midst of a rental crisis: investment in private rental properties has stagnated while demand from tenants has shot through the roof, pushing rents skyward — but have reports of the death of buy-to-let been greatly exaggerated?
Landlords have been selling up. A significant number of them undoubtedly took advantage of the pandemic’s red-hot sellers’ market — fuelled by Rishi Sunak’s stamp duty holiday. Now proposals to make it harder to evict tenants, and a requirement for costly eco-upgrades by 2030, are worrying landlords. Rising interest rates also mean the numbers simply do not add up for many. Facebook groups full of small-time landlords are asking whether it is worth it any more.
The answer is still “yes” for a surprising number. In 2022 12.2 per cent of properties sold in Britain were bought by an investor, according to the estate agency Hamptons, the highest proportion of sales since 2016, and up from 11.7 per cent in 2021. Meanwhile the number of landlords registering with lettings agencies is up 9 per cent, with investors — priced out by the high house-price growth in the past couple of years — seeing an opportunity now property prices are falling.
Perversely, low sentiment among landlords is the reason that investment in rentals could continue to increase in 2023, according to Rob Dix, cofounder of Property Hub. He says: “Historically the best time to invest is when people are the most negative. It means there’s limited competition and the opportunity to do strong deals. This is a complete contrast to the first half of 2022, which was great if you already owned property, but made it extremely difficult to buy anything at a good price.”
At the end of last year there was a huge spike in rental demand as professional city-dwellers returned from working from home in the country to their offices in cities. The return of tenants, coupled with stagnant investment in private rentals, led to average rent increases of 7.9 per cent in Britain last year, Hamptons reports.
Advertisement
It’s possible that investors may outnumber first-time buyers in the coming months, predicts Aneisha Beveridge, head of research at Hamptons. “Rising rents are tempting landlords to dip a toe back into the slowing sales market to try and pick up deals they couldn’t have got six months ago. With sellers more open to negotiation and rents rising rapidly, returns for equity-rich landlords have been rising.”
The stock shortage and rising costs associated with being a landlord, including higher mortgage rates, means rents are forecast to keep rising throughout 2023. Chestertons estate agency has predicted that rents will increase by an average of 5 per cent next year; Savills is more optimistic, predicting a 6.5 per cent rise.
Simon Ruocco, a landlord in Manchester, has tenants moving out in February, so he relisted the property to let last week. Even though he increased the rent by £50 a month, 25 people viewed it on the open day. “There’s so much demand that you don’t really get void periods with buy-to let,” he says.
Ruocco, 39, became a landlord in 2007, and he accumulated a large enough portfolio to quit his job in finance and set up his own online lettings agency in 2016. On Monday he expects to complete on a Victorian house that has been converted into two flats. It will be his first foray into serviced accommodation; he can charge a higher rate per night than he would for a long-term rental, which should cover his higher borrowing costs.
He says: “If I can get an asset that’s cash-flowing from day one, even if it’s not as much as it used to be because of interest rate rises, why wouldn’t you still want to invest in that? Property prices may come down in the next 12 months, but if you’re not looking to sell, it’s only a loss on paper, and you would expect it to go up again over time.”
Advertisement
Interest rate rises have hit landlords particularly hard — most buy-to-let mortgages are interest-only on a variable rate. Landlords coming off of fixed-rate deals are also likely to see their profit margins destroyed by higher mortgage rates. The financial data company Moneyfacts reports the average two-year fixed rate for a buy-to-let mortgage was 2.94 per cent this time last year, but is 6.29 per cent now. This could expose the landlords of some 365,000 properties to losses next year, according to analysis by Capital Economics.
One way of making the numbers work is to sell an expensive investment in the south for a more profitable property in the north. House prices have increased the most in the northeast of England, 17.3 per cent last year, according to research by the comparison website Quotezone using government statistics. It’s also the region with the highest rental yields; in Newcastle the average yield is about 10 per cent compared with just 2.3 per cent in London.
A list of 2022’s highest-yielding areas in the country compiled by Hamptons is dominated by northern towns and cities such as Hartlepool (average yield 9.9 per cent), Co Durham (9.2 per cent), Middlesbrough (8.9 per cent) and Sunderland (8.7 per cent). Two areas in south Wales, Blaenau Gwent (8.8 per cent) and Neath Port Talbot (8.6 per cent), completed the top ten.
After the short-lived chancellor Kwasi Kwarteng’s mini-budget in September, 1,087 buy-to-let mortgage products disappeared overnight, according to Moneyfacts. While consumer choice still hasn’t returned to what it was, 781 products have been introduced to the market since then.
This is another reason for landlords to be cheerful, Dix says. “When you buy now you can make sure the numbers work at today’s rates. Previously everyone knew that rates would rise at some point but not when or by how much, so that uncertainty has been removed.”
Advertisement
Softening house prices have also cushioned the blow of higher mortgage rates in northwest London, where most of married couple Noor al-Naseri and Gary Batchelor’s buy-to-lets are situated. “If the property you got two years ago is now worth £100,000 less, but the [mortgage] rate has doubled, you’re paying the same anyway. Property is a long-term game, it’s not something you do for quick money,” Naseri says.
The couple plan to invest in another buy-to-let property in the next few months, and they are looking to expand with five more later in the year. However, they are not tempted to go north in search of meatier profits. Knowing the local rental market well and having a trusted roster of local tradespeople is more important to Batchelor. He says: “It depends what kind of landlord you are. If you’re prepared to give [the properties] to a management company then you can step back in a way. We manage many of our properties so we like to be within a certain distance in case issues arise.”
They remain upbeat about the property market, sticking to their long-term goal to “build generational wealth”. “It’s easy to make it sound doom and gloom, especially in a recession,” Naseri says. She agrees with Savills’ forecast of an average 10 per cent house-price fall in the UK next year. “But that will just take you back to mid-2021 prices, so in real terms [adjusted for inflation] it would only turn the clock back a couple of years.”
