Anyone who thinks there is a bright future for buy to let (BTL) has issues with reality recognition. But is it really RIP for the investment of choice for the small guy over the last twenty odd years?
BTL is certainly less attractive than it was; it is less profitable and many investors are off-loading their units in quite a hurry – but it is not clear whether that is due to panic or just smart business sense.
One thing is clear…buy to let is under attack
Landlords getting out
There has been a sharp reduction in the number of buy to let loans being taken out since 2016, corresponding with Brexit uncertainty and a bunch of negative anti-landlord policies by a Conservative government of all things.
Here are some of the headlines this year pointing to a continuing reduction of BTL landlords and BTL units:
- Simple Landlord Insurance in a survey of landlords owning just one property found one third were planning to sell up and exit the BTL market (surveys frequently suggest most BTL landlords only own one or two properties)
- Ministry of Housing figures showed that there was a fall of 46,000 in the number of privately rented units in 2017, the first fall for 18 years – suggesting that landlords were selling off buy to let units at the rate of almost 4,000 per month
- Data from UK Finance showed that 5,500 BTL mortgages were completed in March 2018, 19% fewer than the same month in 2017; in June 2018 the total was 5,400, 19.4% fewer compared to June 2017; in September the total was 5,200, 20% fewer compared to September 2017
- A trends report by specialist lender Paragon found that the average portfolio size of its borrowers was falling.
For many commentators the reduction of BTL is simply a case of the froth being skimmed off.
A common view is that the people who are opting out are mainly “accidental landlords” – people with the odd property and with no intention to develop the levels of professionalism needed to be a landlord in a political climate where tenants are flavour of the month – possibly the winning ticket for the political party wanting to form the next government.
The concerted attack on BTL
But it is not just accidental or amateur landlords who are turning away from BTL.
Serious landlords are also getting out or downsizing their portfolio to maintain profitability. It is hard to make a strong case for sticking all one’s eggs in the BTL basket.
The lion slayer is Section 24 – which is progressively slashing the profitability of non-corporate BTL landlords by reducing the tax deductibility of mortgage interest over a number of years, starting from April 2017.
It is possible to escape Section 24 by operating as a limited company. But that is only possible at great cost for some landlords, and for others it is too expensive an option.
The stamp duty surcharge from April 2016, making BTL landlords pay 3% extra stamp duty, has been another kick in the teeth for BTL investors.
The scrapping of the 10% wear and tear allowance for landlords has added to the pain.
In addition, tighter lending criteria and stress tests for BTL lending means that in many expensive parts of the country landlords have to put in deposits greatly in excess of the normal 25% in order to secure BTL loans, and in many cases it makes no financial sense to do so.
In the least affordable parts of the country, BTL is increasingly not a viable investment – especially in areas where rental returns are low.
Hounded by negative trends
There are a range of negative trends piling up for BTL investors, including:
- Greater regulation in general which has risk, time and cost implications
- Growth of landlord licensing, both a hurdle and an expense
- Extension of property licensing, both a hurdle and an expense
- Increasing running/management costs as the duties and obligations on landlords continue to pile up.
In addition, there are governmental threats which will put off many landlords including:
- Planned mandatory longer tenancies – which will restrict the flexibility of landlords to deal with their properties
- Planned letting fees ban – which could lead to higher management costs for landlords as letting agents look to recover their loss of income from landlords.
It is hard not to conclude that the direction in which BTL is going is downhill and laden with risks and dangers.
Notwithstanding the doubts about the future of BTL, research by Sainsbury’s Bank in September 2018 suggested 9% of UK adults are interested in taking out a buy to let mortgage.
BTL continues to be a bright shiny object for millions of people – definitely worrying if they end up in the buy to let sector without carrying out thorough due diligence, taking financial advice and consulting with experienced buy to let professionals – throughout their BTL journey.
The threat of build to rent
For those willing to look beyond the surface, there seems to be a clear long-term plan on the part of politicians (the conservative ones at least) to get big corporations into the housing market.
A particular favourite of the current government is “build to rent” (BTR) with corporations large and small being encouraged to provide rental units on a huge scale.
There is every indication this will appeal to a wide group of large corporations including insurance companies and supermarkets.
The big UK house builders like Barratt, Taylor Wimpey, Persimmon and Bellway seem particularly well placed to excel at BTR.
The fact that the UK population is expected to grow by 3.5 million in the next decade (ONS) means the economic rationale for BTR to take off is super persuasive.
If BTR explodes in growth as seems very likely, and is coupled with yet more anti-BTL legislation, it will become even harder for ordinary BTL landlords to make a profit.
Dodging the bullet
Many BTL landlords feel that they have dodged the bullet by investing in various parts of the North where prices are relatively modest and rental returns relatively high.
However, the relatively modest level of capital growth in such areas casts doubt on the long term viability of such an investment strategy – especially if future governments were to turn their attention to grabbing a bigger chunk of the capital gains of landlords.
Lessening the risks
With it being difficult to make a strong case for BTL long-term, the smart move seems to be towards diversification.
Many landlords are moving away from single let BTL units and focusing on more profitable alternatives such as:
- Serviced Accommodation
- Holiday lets.
Others are reducing strategies involving rental income and looking instead at making capital gains by building or developing and then selling on.
A favoured strategy is relying on permitted development rights to change from office use to residential use – a less risky and time consuming approach than having to apply for full planning permission.
Some wise and ambitious BTL landlords are turning their attention to BTR.
Typically they lack the resources to build a large number of units but by building a modest number of units they can avoid the red tape and cost of Section 106, which effectively requires developers to make a financial contribution to the local area when receiving planning permission.
If you look for properties in certain parts of the country, where there is an acceptable balance between rental returns and the prospect of capital growth, BTL can still be a good investment – at least for the next 10 to 20 years (subject of course to government policies).
However the best days of BTL are undoubtedly behind it – and it seems likely to get harder not easier for buy to let landlords to succeed.
The shrewd ones will ensure that traditional, single let BTL units form only a part of their property investments, and probably a small part at that.
The successful landlords of the future are likely to be those willing to treat being a landlord as a profession, striving to achieve the highest standards, providing top quality “pro tenant” accommodation and forming great working relationships with their tenants – who should be seen as valuable customers and not “cash cows”.
More and more landlords are moving away from traditional buy to let and there is no strong reason to believe they are wrong in doing so.
Game over buy to let? It seems we are clearly moving in that direction…although we are still a long way off.
Do you have a buy-to-let property or portfolio? How do you see the future? Are you optimistic or pessimistic, and why? Please leave your comments and questions below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com