Opportunity time for landlords in a changing market

For the last twenty years, people in the UK may have noticed the growing importance of our private rented sector as a means of putting roofs over heads. Across the country, the sector has increasingly taken the slack for problems caused by the housing shortage that we’re all familiar with. The rental sector has been looked after by private landlords, most of whom have only a small handful of properties. With economic uncertainty looming, softening house prices and heavier taxes, questions have been raised about the prospects for landlords.

However, we believe there are more potential opportunities for serious landlords right now than there have been for years.

To set the scene, we should first take a step back and think about how much renting has changed in the last two decades. In 2001 there were 2.6m private rental households in England & Wales, comprising 17 percent of all households. Over the course of the next ten years, the private rented sector exploded. There are three main reasons this happened. First and foremost was the impact of the Housing Act 1988 which first opened up the sector as an attractive enterprise for small scale investors. The new rules tipped the balance in favour of landlords, who had previously been put off by inflexible tenancy regulations.

The second element was the housing market boom which sent prices across the country soaring. Although this may have been partly fuelled by irresponsible lending, the attraction of becoming a private landlord became too much for many people to ignore. In England and Wales in 2001 the average price of a home was £88,000. By 2007 that had increased by 112 percent, meaning that anyone with an investment property was capturing all that capital inflation, and using a tenant to pay the interest. It was a time which produced some big winners.

The third element was an increasing social acceptance of renting as a lifestyle choice. While it’s true that most people would rather own than rent, it became the tenure of choice for many young and upwardly mobile people who weren’t ready to settle down. The flexibility of the tenure, the lack of commitment burdens and the ability to experience multiple areas of England became attractive in its own right, rather than a pure necessity.

The result was that in 2011 the rented sector held 4.2m households and 21 percent of the population, an increase of 1.6m households or six percent. Following this trend, we estimate than in 2017, the private rented sector now represents 24 percent of all households.

In 2009 the credit crunch caused house prices to fall by around twelve percent in England and Wales. While some landlords got burned by the market stalling at an inopportune point in their investment timescale, most landlords continued to thrive because rents continued to rise and rental demand was stronger than ever.

The thing that is likely to have the biggest impact on the shape of renting in the UK is the tax changes that have come into effect in 2016 and 2017. In April 2016, stamp duty rose for owners of a second home which of course includes landlords. In April 2017, the government began phasing out buy-to-let tax relief, replacing the mortgage interest cost deduction with a 20 percent tax credit (the change will be in full effect in 2020). This sounds complicated, but it essentially means that landlords will get taxed on turnover rather than profit. With margins for landlords being so thin, this can make all the difference between a positive and a negative outcome for those perhaps just looking for another form of annual income.

So you may be thinking that the outlook for landlords doesn’t look particularly optimistic. Well, the environment is certainly more complex now than before. There are perhaps more challenges for ‘casual’ landlords and many still may get caught out if they still think the realities of 2005 apply. However, the opportunities for landlords are exciting in the extreme. Those who undertake cash-flow modelling and planning and work with agents who know the market can still be big winners.

Demand for rental properties is higher than ever, and it is likely that there will be less competition, as some landlords may be deterred by the new regulations. This therefore leaves opportunity for other landlords who are still looking to invest in their property portfolio, as they will now have their pick of properties in desirable locations for renters and be able to take advantage of the next property market upswing which will occur over the next few years.

The truth about the residential property market is that when the press start reporting on potential dips in the market, all that happens is that a very small number of sellers have to wait longer to sell their homes and a few perhaps have to sell for less than they’d like. But a much larger number of people benefit from a tidal wave of opportunities - which will be even more profound if the mortgage lending environment keeps buoyant. So even when things look gloomy, you can be a winner, as long as you have a strategy.