Landlords’ profits hit 16-year low

Landlords’ profits have hit the lowest rate since 2007 according to new research, with fears many could quit the sector for good.

Average net profits for investors in the PRS dropped below 4% in the first quarter of this year, according to a report by property agent Savills, and are now at their lowest since 2007.

Landlords have been hit in the pocket by 12 successive increases to the Bank base rate, a situation exacerbated by restricted tax relief.

The report pulls no punches, describing 2023 as a ‘turning point’ for the private rented sector, claiming the impact of the current pressures will dictate the shape of the PRS of the future.

It warns that, despite growing tenant demand, landlords’ ability to turn a profit depends on their level of mortgage debt, with smaller buy-to-let landlords reliant on borrowing the most vulnerable and larger –  wealthier – landlords best placed to take advantage of increased demand.

Aging demographic

The report also warns of the impact of landlords retiring from the sector, reflecting findings from estate agent Hamptons which showed 73 per cent of all landlord sales in 2022 were made by landlords retiring from the sector. The Savills report reveals 1,911,000 properties are currently owned by 620,000 landlords aged over 65, with a further 1,982,000 properties owned by landlords aged between 55-64.

Turning point

Lucian Cook, head of residential research at Savills said: “Following a boom period for buy-to-let landlords, 2023 marks a turning point for Britain’s private rented sector. Between 2014 and 2021, landlords on average were making ‘year 1’ cash profits of 23% of rental income, but successive interest rate hikes have seen this figure plummet to under 4% this year.

“The incoming Renters Reform Bill, abolition of the Assured Shorthold Tenancy, and increasing EPC regulations, are expected to add to investors’ caution as landlords now face the prospect of having to invest to bring their properties up to a minimum EPC, further eating into profits.

“There is a very real risk that landlords will exit the sector, particularly those with high levels of borrowing, putting increased pressure on a sector where demand significantly outweighs supply in many locations.”

The NRLA said the findings added weight to its call for a full review of the taxation of the private rented sector.

NRLA policy director Chris Norris said: “The concerns raised by Savills echo those of the NRLA, which has warned the perfect storm of economic uncertainty, tax changes and increased regulation could have a devastating impact on the supply of homes to let.

“However there are things the Government can do to support those landlords who, despite providing vital homes to let, now find themselves struggling to make ends meet. 
 
“We are calling for a comprehensive review of the way the private rented sector is taxed to assess the impact recent tax hikes, including changes to Mortgage Interest Relief and Stamp Duty, are having on supply. 

“We then need the Government to bring forward pro-growth measures to encourage landlords to remain in the sector and continue to invest".

Lucian Cook will be speaking at the NRLA's National Landlord Conference, taking place in Birmingham on 24th October 2023. Lucian will be speaking about the state of the economy, and the impact on the housing market. Buy your tickets to our conference here.