The Changing Landlord
Landlords are changing as the market evolves
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Landlords are mysterious creatures, acting and making decisions behind closed doors for reasons which are remarkably hard to track. This is why landlords are often poorly understood and hard to characterise. But we do know that they are changing as the rental market evolves. We aim to shed some light on how landlords behave as the private rented sector comes of age.
Mostly people, not companies…
Market conditions play an important part in how, what and why landlords purchase property. Although the majority of buy-to-lets are owned by individuals, the imminent changes to tax relief on mortgage payments has meant that more people are purchasing buy-to-lets under a company name. The proportion of buy-to-lets bought by companies peaked in 2016 at 14%, up from 9% in 2015. Although homes owned by companies still make up a small proportion of the market, their owners tend to behave slightly differently to other investors. Company landlords are more likely to own multiple properties and are more focused on generating shorter and higher returns, which affects what and where they buy property. A bigger proportion (64%) of multi-landlords own property in urban areas, where yields tend to be highest.
Most still own one property, but the number of multi-property landlords is growing
It is not new information that the majority of landlords only own one property, but changing market conditions have meant a higher proportion of investors now own between two and four buy-tolets. Historically low interest rates and a slowing sales market have made it easier and cheaper for investors to buy rental properties over the last few years. But we are unlikely to see this trend continue as the stamp duty surcharge introduced in April 2016 has increased entry costs and further regulatory changes are making it more complicated for the amateur landlord.
While many landlords are ‘accidental’, most choose to invest
Why do people invest in buy-to-let? The majority of landlords invest in order to generate a high returning second income, often as a step towards retirement planning. Whereas some enter the sector almost by accident, for example by inheriting a property or being unable to sell their home. Immediate returns are of higher importance for multi-landlords whom sometimes use it is as their full-time job. Those who inherit a home and make the decision to let it out are much more likely to only own one buy-to-let property.
But downturns encourage the number of accidental landlords…
Market conditions also determine why some people become landlords. During the last downturn there was a rise in the number of accidental landlords. The term ‘accidental landlord’ covers a range of scenarios where people rent out their property because of circumstance rather than choice, usually because they are unable to sell their main home at the price they want to achieve.
…just like what happened following the 2008 recession
This scenario occurs most often when activity levels are low, making it harder for people to sell. This is reflective of the market in 2010 when 13% of landlords let their property because they were unable to sell, peaking in 2011 at 18%. But since 2011 there has been a gradual decrease in the proportion of people letting their homes because they are unable to sell, falling to a record low of 7% in 2016. Since the property they are letting used to be their own home, accidental landlords are more determined to find quality tenants who will look after their property. But they are also more likely to be reliant on the income generated from letting in order to fund their new home.
And now we are seeing them rise again
Now, with the sales market slowing again, we are seeing the rise of the discretional landlord. These are people who make a more calculated decision to let their home instead of selling by taking advantage of historically low interest rates. In May, the month before the referendum, 5% of landlords let their property because they were unable to sell, but by November this had risen to 8%. Discretional landlords are willing and able to wait for a better time to sell.
The rental sector is both evolving and maturing
While it’s been heavily shaped by government policy in the last few years, it is also changing as it matures naturally. Back in the year 2000 there were just 120,000 outstanding buy-to-let mortgages in the UK, around 7% of the current number. While almost all of this growth over these 17 years has come from small investors, it’s likely over the next 17 much more growth will come from institutional investors. By offering tenants a greater choice of whether to move into a property owned by a ‘professional’ landlord, smaller landlords will have to continue adapting or face being squeezed out.
How stamp duty changes have affected what and where landlords buy
2016 was a difficult year for landlords, with the extra 3% stamp duty surcharge for second homeowners starting and the tapering of mortgage interest relief on the horizon in 2017. With rental growth slowing, even falling in some places, and high house price growth further raising entry costs, landlords’ margins are getting squeezed. But investors are finding new opportunities by changing what and where they buy property.
Investors have always tended to buy their buy-to-lets in cheaper areas than where they live, but the new stamp duty surcharge means more are having to look at other affordable areas further afield. The proportion of investors buying an investment property in the same local authority where they live has reached a record low of 54% in 2016, down from 60% in 2010. Additional stamp duty raising entry costs, means some investors are having to buy cheaper properties in order to pay the upfront cost. The new stamp duty surcharge for second homeowners’ means the average stamp duty bill for an investor in London is £25,670, compared to £3,790 outside the capital – a huge increase from £4,910 and £1,020, respectively, back in 2010. Whereas others less concerned about stamp duty are also looking to cheaper areas in search of stronger future capital growth or higher yields.
Over the past six years there has been a steady decline in London based investors purchasing buy-to-let homes in the capital. As prices in London have boomed, investors are increasingly looking to cheaper areas further afield to secure their margins. Now only 56% of investors from London buy investment property in the capital, a significant decrease from the 80% recorded in 2010. London investors are now looking to more affordable areas in the South East, East of England and the North – where sales for buy-to-lets have risen by 8%, 7% and 5% respectively since 2010. Those in search of the highest yields head to the northern regions while those wishing to invest closer to home buy in areas such as Thurrock, Luton and Milton Keynes.
Stamp duty has also changed what landlords are willing to pay for a property. Historically investors have always bought cheaper properties than owner-occupiers, but since the stamp duty surcharge was introduced in April 2016, investors are increasingly having to compete with first-time buyers – meaning they are having to spend more. Between April and December 2016, the average property bought by an investor cost £220,000 compared with £287,000 by an owner-occupier, 23% less. This is a record low, down from 31% in 2015 and 47% in 2010. Tougher competition means the gap is closest in London where investors only spend 19% less than the average buyer. But all these additional costs continue to squeeze landlords’ yields.
|A Changing Environment||Stamp Duty Surcharge||The Changing Landlord||Yields||Rental Forecasts|