4:00 AM, 20th February 2023, About A year ago 19
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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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Old Mrs Landlord
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Sign Up10:47 AM, 21st February 2023, About A year ago
The fact is that landlord don't want to play this game any more because the other side has not played fair. In fact we are pitted against two teams:(i) the combined tenants' advocacy organisations and (ii) the tax-seeking, vote-chasing government. To make matters worse, one of these opponents is also the referee and keeps changing the rules while the game is in progress. Landlords can see they have no chance of winning and, quite rationally, are leaving the game and taking their ball (the rental properties) with them.
Andrew57
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Sign Up18:43 PM, 21st February 2023, About A year ago
And Serco working for the government are now desperately trying to find landlords with rental properties to rent for 5 years for refugees. Gov.uk need to understand that 90+% of landlords are an asset to the UK not a hindrance.
Northen Boy
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Sign Up22:12 PM, 22nd February 2023, About A year ago
Reply to the comment left by northern landlord at 20/02/2023 - 12:56
Excellent analysis I've had 3 tenants leave in the last two weeks just gone all owing over £1200 on gas and electric houses terrible state I am redecorating my last one and that will be getting sold along with the other two enough is enough the government and local councils will look back on what they have been doing to LL over the last 8 years and regret it I feel but will be too late
Mick Roberts
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Sign Up7:45 AM, 25th February 2023, About A year ago
Reply to the comment left by northern landlord at 20/02/2023 - 12:56
Great words northern, my heart is too ruling my head. Many of us set this up years ago to improve our future finances. Now we doing tenants cheap rent cause we can afford to, when we know we can get £3000 per year more each house. We shun't be giving money away like this. But we do. Govt & Councils are wrecking situations like this cause one extra thing snaps us & makes us think That's it, had enough.
Mick Roberts
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Sign Up7:46 AM, 25th February 2023, About A year ago
Reply to the comment left by Crouchender at 20/02/2023 - 13:27
Yes, exactly as u describe is happening in Nottingham in the Licensing areas & surrounding too. If my tenants ever do a swap with me, they have to pay the new increased rent which is 40% more than what they are paying now, as we signing up to all new modern rules/regs/rules that I didn't invent. And we never know where the next attack/charge is coming from, so we got to get what we can while we can. When Labour get in, they gonna' tax us 1% on our property value-Just like that-Cause they can. Cheap rents will be no more.
Abraham George
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Sign Up6:57 AM, 26th February 2023, About A year ago
The current judicial system doesn't address the true grievances of genuine landlords who are struggling with rogue tennants who wont leave your property and neither will pay the rents properly on time and in full !
It took me 1 yr to get my house back despite ending the tenancy agreement officially ! This happened despite in the background of pursuing all proper legal avenues and going through the current judicial system as well ! Lack of Council involvement and encouragement for deliberate homelessness , Snail pace court hearing dates and a Judiciary favouring tennants that deliberately postpones Court hearings for months and months , worsening illegal and unlawful migration of refugees are all contributory factors that's prompting landlords to quit / liquidate their properties !
With a smaller portfolio or without rental properties landlords could have peace of mind and sleep well ; Otherwise when you face difficult tennants , the current system will make you feel helpless and vulnerable despite being the Landlord ! Instead the current system will only give you stress, sleepless nights and ongoing financial loss incurred by the long and protracted inefficient legal system ! I am owed more than 10000pounds as rental arrears for which one has to go through the County court system while the unruly tennant has no issues with his credit ratings !
Things are only going to get worse unless the current UK judicial system overhauls the Tenancy agreement contracts giving protection to the landlords and their investments; as in it's current form Landlords have very little legal say in evicting tennants and getting timely justice! Hence it's better to liquidate and shift your money to safer areas within or outside UK where there is more protection and say on your tangible assets !
If UK Landlord Tenancy contracts is not overhauled drastically with swift judicial process to address genuine grievances of honest landlords the burden of social housing with all its secondary problems will only end up with the Govt , Media, Local Councils and County Courts ! Moreover in the log run it could adversely impact the whole of UK's household asset value and personal wealth !
Abraham George
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Sign Up7:15 AM, 26th February 2023, About A year ago
Reply to the comment left by northern landlord at 20/02/2023 - 12:56
We should start selling or should increase the rents so that whole world and Govt should get the message that UK Landlords are not a soft touch for whole world refugee problems !
If Govt / Local Councils and Judiciary system dont see the value of Landlords let them take on the responsibility of housing all the homeless in this country! It will also send a strong message to the outside world not to flock to UK for free housing and benefits ! Work hard for your family and house ! Roof over your head should be earned and one should be extremely grateful to whoever provides the same !
Crouchender
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Sign Up8:36 AM, 26th February 2023, About A year ago
Unfortunately we know Trussonomics spooked the financial markets, which had an impact on LLs finances for decent fixed term deals. However the market confidence came back and some LLs have recovered from BUT 'Gove'nomics is really spooking the LL market and judging by all the posts once confidence has gone it does not come back as the financial markets did in Q4 2022.
Govenomics is playing into the hands of labour. As their election narrative will now be stronger on rent freeze/ caps/evictions pause.
It is obvious LLs leaving the market NOW = increasing rent for tenants (less supply)
Exodus of spooked LLs= More USE of S21 before it gets binned= more evictions.
Most parts of the media will love this bad news story and LLs will be the scapegoats so the 11m renter electorate will obviously vote on housing policies which curb the so called power/wealth of LLs. Most of the LLs acquired that wealth asset by working their butts off for their families and trying to better their lives.
So Labour will be waiting in the wings making it impossible to sell our assets. Ie I am sure they will slap a higher than 40% CGT on us to dissuade selling and also making it a political policy that you can't make money from brick and mortar anymore.
No wonder there is an genuine exodus.
Crouchender
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Sign Up9:08 AM, 26th February 2023, About A year ago
Reply to the comment left by Crouchender at 26/02/2023 - 08:36
PS: Let's not forget CGT WEALTH tax was 40%, went down to 18% (in a Gordon Brown Government admittedly during the credit crunch crisis!!), then went up to 28% for high tax payers (Osbourne era) and are bound to go up (>40% for all) under a Starmer Government.
I think we will all have to do the maths to work out if the rental income profit over 5 year Starmer government will outweigh any increase he will make on CGT wealth tax as part of his 'emergency' housing (ie cost of renting crisis) budget.
In summary we only have less than two years to Sell or Stick as we could be Stuffed after that!