The exodus of the private landlord

Ben Beadle, the chief executive of the National Residential Landlords Association, wrote an excellent piece in the Telegraph at the beginning of this year which illustrates the crisis in the buy-to-let sector with demand far outstripping supply and a planned increase in the exodus of landlords from the sector during 2023.

He puts tax at the centre of the issue and specifically targets S24 and SDLT on investment properties as areas where the government could act to reverse the tide of rental supply reduction.

There is no doubt that demand is outstripping supply of rental properties. This is having a knock-on effect on landlords seeking to obtain possession of their properties, with a visible increase in the incidence of eviction proceedings, partly due to tenant’s being blackmailed by councils to ignore section 21 notices and await bailiff eviction. That is the only way councils will agree to consider their housing needs.

The rental sector is very fluid. Comprising of hundreds of thousands of landlords and tenants, any imposed change generally has a rapid counter-reaction. It doesn’t take much tweaking to steer this ship, compared to the relatively immovable corporate world.

We have seen rising values (falling yields) in the south of England result in a large-scale change of use from single household lets to HMOS. We have seen the S24 tax result in a similar scale change of use to serviced accommodation and we have seen a continual attack on landlords by the taxman, councils and a broken legal process result in the exodus we experience today.

It should not be ignored that a strong period of capital growth has facilitated the exodus. There are pull factors at play as well as push factors. Fewer landlords would be leaving the sector if their earned equity had not been as great. The reversal of values makes it an optimum time to liquidate.

But my belief is that the main driving factor of landlord behaviour is not financial, but emotional. The basic principles of ideal property investment are to make equity on purchase, cashflow positively and have multiple exits. Over time the cashflow and equity growth elements of ownership interchange. We are currently facing a period where both are declining, but it is not hard to see this is a storm that has calmer waters ahead.

It is a well-known fact that inflation erodes debt. For so many years, landlords have experienced relatively static rental income, low loan servicing costs and reasonable cashflow. Equity growth has been healthy, but debt has remained relatively unchanged. Inflation generates wealth by reducing debt in real terms. This is how those in their later decades of life have generated the wealth on their homes that resulted in the emergence and growth of the buy-to-let sector.

So it is a bit surprising that the exodus of landlords coincides with a period of high inflation and record-breaking tenant demand. Is this not the period we have all been waiting for?

Even if inflation is not currently impacting property values, the relationship between gross rent and property value is being shifted to the benefit of the investor. That rent is unlikely to drop in the future, unlike interest rates. Then it is likely that capital values will surge again in years to come.

There are some highly leveraged landlords with low-yielding investments that simply cannot make positive cashflow after tax. It is understandable that these people are selling at the moment. However, they are very much in the minority. The majority are seeing reduced cashflow due to increasing loan servicing costs and increases in pretty much all other areas of expense, but cashflow is still positive.

So why are they selling? Is there a golden investment bandwagon elsewhere they wish to jump on? Absolutely not! In fact, liquidating to cash right now presents considerable challenges as inflation appears to remain rampant.

I prefer to believe the exodus is due to the strongest driver of human behaviour – fear.

Fear of the future is causing the decisions to get out of the market. In some cases, it is totally irrational, but that doesn’t deny its existence. When you have been beaten by a whip daily, you fear the whip. When you have been attacked from all sides since 2015 and vilified by the press, you fear further attacks.

With values, declining, a very unpredictable war in the east of Europe, a Labour party favouring rent controls being the bookies’ favourite for next year, talk of further tenant protection legislation from the current government and concerns over more punitive tax regimes that will take your capital when you sell, there is plenty to feed the insomnia of the anxious.

People are getting out because they fear the loss of control. Government intervention is the main issue where the control of the landlord is being removed piece by piece. The fear is this will continue and even increase in the years to come.

I am not convinced the reversal of S21 or removal of SDLT will reverse the current exodus. It will likely encourage new investment. But the current cohort of landlords are spooked. Trust is lost and they are getting out, regardless of whether their debt is eroding, capital increasing or cashflow holding out. They have felt the whip.

This is the very reason, I made an active decision last year to stick in the market. As a natural contrarian, I view the opportunities that lie ahead and the knowledge that governments only respond to symptoms. The current symptom is insufficient rental stock and the fix for the government is to relax its current grip on landlords. This will boost investment and increase values. Meanwhile, the war in Europe, Covid and Brexit hangover will pay havoc with inflation and the Bank of England will continue to wield the ineffective axe of interest rates in a futile attempt to control it. Of that we can be certain as it is the only axe in their toolbox.

Meanwhile, the years ahead of us will be of full occupancy rentals and real-term debt reduction. Bring on tenant-friendly policies. I never minded pets and never wanted to evict a good rent-paying tenant with two months’ notice in any event.

If tenants can have more secure rights of tenure, then perhaps they will be the ones to fund a new kitchen. But that is an altogether different discussion for another day.

Rupert Chapman is a private property investor. He runs a membership support group for property investors called Unity. Unity members communicate daily on a closed forum and have weekly online meetings to provide experienced answers to assist each other with their projects. 

For more information about Unity CLICK HERE

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