Property Pontoon - Will you Stick or Twist?
Ben Rose, Head of Group Business Development at NRLA Recognised Supplier Less Tax 4 Landlords on the current state of the private rented sector, and how factors such as legislation change and falling supply are having an impact.
By far my favourite card game growing up was Pontoon. On every hand there would come a point where you needed to stick or twist.
And right now I think many landlords are looking at their hand and asking themselves the simple question – do I want to be a landlord?
More and more, we’re seeing the answer to that is no. The landlord sector has dropped from 2.88 million landlords in 2017 to 2.66 million in 2019 and it seems likely that trend is continuing.
And yet, rapid rental growth will see Great Britain’s tenants pay £63bn in rent this year according to Letting agency Hamptons. This represents a huge record high being “driven by a lack of homes on the market alongside investors passing on higher running costs to tenants.” [i]
So on the one hand we have landlords leaving the market, and on the other we have rocketing rents, particularly in the capital where the average monthly rent in London has risen above £2,000 for the first time.
This is simply a result of our old friends supply and demand, with less than half of sold buy-to-let properties returning to the PRS according to a recent Propertymark report. [ii]
On the face of it, the many predictions of major market upheaval and increased tenant costs in the wake of the great finance tax-relief axe do seem to be coming true. However, it is too early, and far too complex to pin-point the market changes on one factor alone.
Here then are just a few of the areas likely to be weighing on the astute Landlord’s mind:
- Fear of property bubble
- Taxation
- Abolishment of Section 21
- Rising Interest Rates
- EPC Policy
- The rise of Build to Rent
That last point deserves a quick mention, as I fear it could be the stealth factor that landlords don’t consider until too late.
Whilst still a tiny percentage of the PRS, a record £1.6bn was invested into UK Build to Rent in Q1 2022. [iii] And contrary to where you might traditionally relate the BTR sector in recent years, family homes have become a key driver of growth in the sector. The proportion of people aged 35 to 44 choosing to live in BTR developments has also increased significantly, up to about 25 percent. [iv]
With so much to stay on top of, how will the average portfolio landlord manage and compete moving forward?
Certainly landlords with smaller portfolios may find it hard to absorb the bureaucracy and concentration risk of this changing market. In comparison a larger portfolio brings with it the advantage of the laws of probability, and an ability to more readily absorb shock across the entire business.
Just as Government are seeing the opportunity to professionalise and regulate the industry through greater transparency and tighter regulation, corporations and portfolio landlords are looking to fill the void they know is and will be left by accidental landlords leaving the market.
You may not have the same economy of scale as British Land or Grainger PLC, but that doesn’t mean you cannot enjoy the commercial benefits of building, running, and growing a professional property business.
We set up Less Tax 4 Landlords and the One Consultancy Group to help landlords do just that, supporting your business model with a business structure and services that can help magnify your success.
After all if you’re going to ‘stick’, you want the odds in your favour.
Far too many private landlords are paying an effective rate of 50% tax or higher on their ‘real’ profits. As interest rates rise, those profits are decreasing but the tax is not. At some point, taxation will quite literally make a profitable business, un-profitable. Talk about having the deck stacked against you!
Don’t let this happen to you. If you’re paying much more than 20% tax on your property profits then you are almost certainly paying more tax than necessary. The question then just becomes whether a business restructure makes commercial sense for you.
Whilst you might tell I like a gamble or two, it is the government that have been playing games here all along. Raising the stakes for UK landlords and forcing many to fold.
So if you're sitting at home with your cards close to your chest, deliberating your next move, remember folding your hand (or in this case your property business) may not be your only option.
Do you want to be a landlord? …
If the answer is yes, don’t let tax be your undoing.
Take our free initial assessment here.
[i] https://www.hamptons.co.uk/research/articles/annual-rent-bill-projected-to-hit-pounds63bn#/
[ii] https://www.propertymark.co.uk/resource/a-shrinking-private-renter-sector.html
[iii] https://www.telegraph.co.uk/property/buy-to-let/new-threat-landlords-profits/
[iv] https://www.ft.com/content/e46f3638-768a-3c95-b6cc-af692383a01a
