It’s been noticeable how much more analysis and commentary London Wallet has been running on the state of the private rented sector and the landscape for landlords in recent months. Having a decent lettings book is an essential value driver for any estate agency business. The lack of new investment and clear evidence that some landlords are leaving is a concern for many agents planning their business for 2023 and beyond – indeed, it’s a regular topic at Zoopla’s Lettings Advisory Board.
The rental market has had a great run over the last 20 years, more than doubling in size between 2000 and 2015 supported by buy to let mortgages becoming easily accessible on much more favourable terms. Investors made great, leveraged returns as house prices rose rapidly in the 2000s and kept investing in pursuit of greater returns. Light touch tax and regulation meant becoming a landlord was something of a no brainer for those with money to invest.
The growth of the private sector stalled in 2016 and the number of private rented homes has not changed much since, at around 5.5m. The flow of new investment into the sector has been largely offset by landlords exiting the market.
I think it’s far too simplistic, to say the lack of new investment is all down to the higher taxes on investors introduced from 2016. These have played a key part but there are a wider mix of factors at play reshaping the private rented sector and the case for investing in housing.
I believe we are now seeing a rational consolidation and rationalisation of the private market after a phase of rapid expansion. The economics and return profile from investing has shifted due to a changing macro economic outlook, combined with tax changes designed to make becoming a landlord less of an obvious choice. Another important factor is the older age profile of landlords.
Lower levels of house price growth over the last decade, plus tighter mortgage regulations mean more focus on cashflow and the strength of the underlying income from a property rather than seeking capital gains as the primary driver for investing.
The types of homes to buy to drive strong cashflow with lower management costs and less need for high ongoing capital investment are different to what you would buy if chasing house price gains alone. Many private landlords got into the market by accident, renting out homes they couldn’t sell or had owned and lived in. These are the homes that have been sold in recent years. In the middle of 2020 over 50,000 homes for sale on Zoopla were previously rented.
Higher mortgage rates are another big challenge for new investors. Across most of the UK it’s impossible for an investor to get a 75% loan to value mortgage at 6% mortgage rates unless you are going to the lowest house price, highest yielding markets in northern England and Scotland. This means new investors need to put in more equity, diluting returns.
The final point to note is that landlords, like all of us, have got older over this time. Nearly 8 in 10 landlords are over 55 years old. The capital gains across many portfolios will be significant. The shifting economics of investing, including tax and regulatory environment means many landlords will be re-evaluating their portfolios from many different angle from investment needed to capital gains release and retirement planning. Landlords have been cashing their chips, not as a vote of no confidence in being a landlord but as the economics of being a landlord shifts.
We are unlikely to see a huge increase in new investment in the near term but new entrants are coming into the market and the pace of disposals will slow in the face of a weaker sales market. The message for agents is the need to talk to your landlords and their motives and position yourself as part of their strategy and planning for their business, especially the why they are investing and what this means for their portfolios and strategy.
The biggest opportunity area is the 50% of landlords who don’t use an agent at all. With more and more regulation coming it’s hard to believe all these DIY landlords are as up to speed as they should be. Making the case for why using an agent to manage your portfolio is a part of doing business is a topic everyone needs to push and build more awareness around.
Richard Donnel is executive director of research at Zoopla.
