Make no mistake — the private rental sector (PRS) is creaking at the seams. Tenant demand is huge, considerably outstripping supply; a consequence fuelled by myriad socio-economic factors that restrict the opportunity (and in some cases demand) for homeownership.
This has, in turn, squeezed rents even higher at a time when some tenants can least afford it.
So, with demand surpassing supply, and rents up by 10%–30% almost across the board when combining various data sources, it’s a win-win for landlords, then?
The key to a strong PRS is education and collaboration
Well, no. Quite the opposite. The same media that have been quick to condemn landlords for (supposedly) exploiting the situation — raising rents by an average 20% over the past 18 months — display considerable bias, and in no way seek to balance the socio-economic scales by showing that most landlords’ finance costs have increased by 100% in the same period.
Additionally, with many landlords securing five-year fixes since the 2017 Prudential Regulation Authority changes, thousands of them are reaching the end of their benefit period.
Furthermore, lenders’ interest coverage ratio (ICR) calculations/stress tests are proving as large an obstacle to landlord lending as is the volatility of rates and products.
Landlords are a resilient species and many have been proactive in meeting these challenges head on
Finally, some specialist lenders are not actually offering any product transfer options. Hence some landlords are being forced onto lenders’ standard variable rates, making some property portfolios non-sustainable in the long term.
Unfavourable combination
Due to this highly unfavourable combination of circumstances, some landlords are having to consider their options, whether potentially selling stock or, for those in receipt of specialist advice, incorporating their portfolio (albeit this is not the right advice for all landlords).
With finance costs having risen so dramatically since September 2022, many smaller landlords, especially those highly geared and holding stock in personal names, are exiting the market.
There is a long-held, unfair stigma around landlords in the UK
This is not necessarily a net loss to the PRS as some of these properties will undoubtedly be purchased by larger landlords who hold their stock in tax-efficient structures. However, with councils not having enough homes to house all tenants, the PRS cannot afford to lose even a few per cent of its existing properties.
Taking into account the likely need for landlords to renovate and retrofit much of their stock over the next few years to ensure it all carries an energy performance certificate (EPC) grade of C or above, the challenges facing the sector are huge. Worryingly, a survey last year found 88% of landlords were looking to fund these EPC improvements through either equity (remortgage), surplus budget or sale of stock.
Many smaller landlords, especially those highly geared and holding stock in personal names, are exiting the market
Since September, ICR calculations and lender stress tests may have restricted equity/refinance in many cases. A lot of landlords cannot afford to deploy any surplus budget while margins are so tight, and the increased sale of stock has further impacted on a stressed PRS.
This only emphasises the need for alternative funding options (through unsecured channels) and lender innovation if the government has any hope of hitting its net-zero target.
Landlords are a resilient species and many have been proactive in meeting these challenges head on — especially modern landlords working in tandem with specialist brokerages, tax advisers and conveyancers to meet society’s changing demands.
Lenders’ ICR calculations/stress tests are proving as large an obstacle to landlord lending as is the volatility of rates and products
Indeed, in addition to looking at incorporation, including working with specialist partners to obtain Section 162 tax relief where appropriate, landlords are balancing their stock with both commercial and semi-commercial property, and higher-yielding multi-occupancy assets.
Whatever your political allegiance, society desperately needs a working, efficient PRS. In many cases, this provides a protective umbrella to the most vulnerable.
There is a long-held, unfair stigma around landlords in the UK. As the socio-economic pressures within the PRS continue to rise, the modern professional landlord, while not the saviour, is hugely contributing towards the wider economy and the preservation of the social housing status quo.
Landlords’ finance costs have risen by 100%
The key to a strong PRS is education and collaboration. If our industry is to remain innovative and robust, lenders and brokers must continue to collaborate to provide landlords with viable, sustainable lending solutions.
For landlords, it is imperative they stay proactive and partner with specialist, client-centric brokers that focus on education and holistic solutions, ensuring robust structures for their portfolios long term.
Matthew Rowne is director at The Buy to Let Broker
This article featured in the July/August 2023 edition of MS.
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