INVESTOR SALES
There’s a strong argument that landlords have been hit harder by higher rates than anyone else. However, despite these challenges, most landlords are sticking it out. Even with rising running costs and higher mortgage rates eroding profits, so far this year private landlords accounted for 14.0% of all sellers in Great Britain (GB), down from 15.7% in 2022.
In number terms, this means that landlords sold 103,130 homes across GB between January and September this year, 39,270 or 28% fewer than during the same period last year as transactions have slowed across the board. Apart from when Covid hit in 2020, this also marked the lowest number of homes sold by investors during the first three quarters of a year in a decade.
If this pace continues, by the end of this year, we think that private investors are set to sell 139,820 buy-to-lets in 2023, 53,240 fewer than in 2022 and 61,810 less than in 2021 when landlord sales peaked. Most landlords cashing in are one of the 10%-20% of mortgaged investors who face making losses when remortgaging at higher rates. Typically, they bought low-yielding properties in the South of England relatively recently or they’ve been aggressively maximising their leverage and extracting equity to grow their portfolio.
INVESTOR PURCHASES
Despite this fall in investor sales, landlords are still selling more homes than they’re buying. So far this year landlords purchased 11.2% of all homes sold across Great Britain. This means that, apart from during the first nine months of 2020, landlords will have bought the fewest number of homes in any year since at least 2010 when our records began.
This trend has been happening since 2016 when a raft of tax and regulatory changes were introduced. By the end of 2023, we estimate that individual landlords will have sold 294,300 more homes than they’ve bought since 2016, which is more than the total number of homes in Manchester (237k) or Cornwall (288k). While institutional investment in the private rented sector through build-to-rent schemes will have filled some of the gap left by private landlords, overall there were 43% fewer homes available for tenants to rent in the first 10 months of this year compared to the same period in 2015.
REGIONAL DIFFERENCES
Scotland is the only region in Great Britain where the landlord sell-off has accelerated this year. Investors made up a record 12% of all sellers in Scotland so far in 2023, up from 10% in 2022. Tighter rules and regulations, predominantly in the form of rent caps, have seen landlord purchases fall to a record low too.
Meanwhile the North East, the highest-yielding region in the country, saw the pace of landlord sales slow the most this year. Here, higher average returns offer landlords more scope to cover their rising costs. Landlords accounted for 22% of all sellers in the region this year, down from a peak of 31% in 2022. However, given that 27% of homes in the North East were purchased by an investor this year, landlords are still buying more homes than they’re selling - the North East and North West are the only regions where this is the case.
In London, the lowest-yielding region in the country and where mortgaged landlords are likely to be hardest hit by higher rates, new purchases have slipped. Landlords bought 9% of homes sold in the capital this year down from a peak of 20% in 2015. The share of homes sold by London investors has also declined from 19% in 2022 to 15% so far this year. Consequently, there are half as many homes available to rent in the capital as there were in 2015.
THE SUMS
As cost pressures mount for many landlords, buy-to-let increasingly only stacks up for the highest-yielding homes. This is particularly true for the seven in ten investors with a mortgage. Consequently, landlords are increasingly selling lower-yielding homes, while those purchasing a new investment are targeting higher-yielding options.
The average gross yield achieved on a new purchase this year rose to 6.8%, whereas the average yield on sale was 5.5% across England & Wales. This yield gap equates to an extra £2,710 a year in rental income on a typical £200k buy-to-let.
Just over half (53%) of all homes sold by a landlord in England and Wales this year were achieving a sub-5% gross yield, up from 46% in 2022. Meanwhile strong rental growth has meant that a record 12% of new buy-to-let purchases this year achieved a gross yield of 10% or above, double the share in 2021. However, these returns are pre-costs and taxes which will eat into profit.
RENTAL GROWTH
Rental growth shows little sign of slowing as rents rose 11.7% year-on-year across Great Britain in October, the same annual pace as in September. The average rent on a newly let property in Great Britain rose to £1,345pcm in October, up £141pcm compared to the same month last year. This marked the third consecutive month of double-digit increases and the sixth double-digit hike recorded during the last 12 months.
Rents are rising in every region, however, London and Scotland are leading the way. Led by growth in Outer London, rents rose 14.8% across the capital last month which would cost the average tenant an extra £312pcm or £3,744 a year if they were to move into a new home.
Meanwhile Scotland, where the landlord sell-off accelerated this year, followed with rents rising 12.9% year-on-year. This marked the eighth double-digit increase for newly let properties over the last 12 months. The average cost of a three-bed home in Great Britain rose to £1,412pcm in October, crossing the £1,400pcm month mark for the first time. This represented an 11.8% or £149pcm annual hike. However, the average one-bed rent also rose 10.0% year-on-year and the average two-bed increased by 13.3%, suggesting that rent rises are embedded across all property types.
Given that the factors pushing up rents are unlikely to recede anytime soon, we think that rents will rise by a further 25% by the end of 2026.
