Will The Buy to Let Sector Survive?

Our government seems to be intent on destroying the buy to let sector. Changes to taxation have made it far more difficult for landlords with mortgages to make a satisfactory return on their investment. Frequent changes to legislation have imposed huge extra costs on landlords and have left them in fear of being hit with savage fines for minor breaches of the ever more complex rules.

The cost of complying with the new Minimum Energy Efficiency Standards (MEES) will be enormous and it may be impossible to make some properties compliant. The constant threat of rent controls has frightened many landlords. The list of anti-landlord measures goes on and on but the recently announced plans to end Section 21 evictions is, for many landlords, the final straw. If the government was trying to destroy the buy to let sector on purpose, they could not be doing a better job and hundreds of thousands of landlords are now saying that they will be selling off their properties. However, I do not believe that they will actually do so. So, why do I say this?

The first issue is taxation. The majority of landlords bought their properties many years ago and they will now be worth far more than they paid for them. In many areas, prices have doubled over the last ten years. This means that they are sitting on a big capital gain and if they sell their properties, they will pay capital gains tax on the increase in value probably at 28%. Assuming a 4% net yield, this will wipe out every penny of rent that they have received from their property for the many years. After tax, it will wipe out every penny of rent that they have received on their property for even longer. Most landlords are simply not prepared to pay this amount of tax.

If they do sell, they will also need to decide where to reinvest the proceeds of their sale. When they consider their options properly, they will find it very hard to get the same returns that they have achieved from their buy to let portfolio over the last ten years. Returns will vary from one area to another and from one property to another, but it would not be unusual for a landlord to have achieved an average of 6% per annum increase in the capital value of their property plus a 4% net rental yield. In total, this gives a return of 10% a year on a compound basis. What else could they do with their money which gives this rate of return for so little risk? The banks are still only paying savers 2 or 3% interest and they will probably reduce from this level quite soon. The stock market has been very volatile recently and many financial commentators think it is due for another crash so it’s not easy to see where investors could go for a better return with the same level of risk.

The final factor is that government actions will almost certainly have exactly the opposite effect to what they intended. Buy to let investors who bought their properties recently with large mortgages will be forced to sell because the increase in interest rates will mean that in most cases their rent will no longer cover their mortgage payments. Other landlords might decide to switch to holiday lets where the returns are better. The legislation covering holiday lets is also less onerous to comply with and the tax burden is much lighter. This reduction in the supply of buy to let properties will inevitably drive up rents which will mean that the buy to let investors who remain will achieve much better yields.

Taking everything into account, I think that well-run letting agents will easily survive the latest threats to their existence. Whilst some landlords will sell, the increased rents on the properties that remain will mean that most agents will be able to maintain their fee income despite managing fewer properties. For this reason, we are still achieving record prices for letting agencies and there are plenty of buyers who still want to enter or increase their presence in the sector. It would seem therefore, pretty certain that the buy to let market will continue for a long time yet.

Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than forty years.