Why are landlords exiting the PRS?
Introduction to the research
In November 2021 the London School of Economics (LSE) published a report commissioned by the NRLA. The purpose of this research was to address the first of a three-strand NRLA research programme launched in 2021 looking at:
- the impact of tax policy on landlords
- understanding the motivations and goals of different groups of landlords and
- the economic contribution of the PRS to the wider economy.
The core objectives of the report are firstly to understand how changes since 2015 in taxation have affected landlords’ business models and incentive structures and how landlords might respond to those changed incentives
Secondly, the report examines how landlord taxation in England compares to systems in other comparable economies.
A third objective, particularly given the timing of this research, which was from April to October 2021, has been to clarify landlord views on the relative importance of recent tax changes as compared to the impact of Covid on their business decisions.
A blog looking at the impact of tax changes upon landlords from this report can be found here.
This blog looks at a short section of the report where former landlords were asked a selection of questions about their previous portfolios and their reasons for leaving the PRS.
Former landlord sample
Some 61 respondents to the survey were former landlords who no longer rented out property. This landlord grouping were previously members of the NRLA and are therefore expected to be more professional and well informed on legislative and tax changes affecting the PRS.
By asking this grouping why they have left the private rented sector, we can assess what the most prevalent reasons behind PRS exit are for landlords. Engaging ex-landlords is an area of research that the NRLA does not usually cover - the primary focus is usually on current active landlords.
As is standard in most NRLA surveys, landlords are asked about the size of their portfolios. This is an essential metric to assess differences between landlord behaviour in the sector.
This group of former landlords were found to most likely be smaller portfolio landlords. Almost half of former landlords were previously single property landlords (49%), this contrasts with the larger survey of active landlords where just 32% were single property landlords.
Though the majority of former landlords were smaller portfolio landlords, 7% did state they previously owned 11-25 properties.
On top of former landlords being more likely to be smaller portfolio landlords, they were also less likely to be solely reliant on rental income. A majority of former landlords (80%) stated that rental income made up less than 40% of their total income.
Are landlord portfolios funding retirement?
As part of the survey sent out to both landlords and former landlords, respondents were asked their age. Former landlords were more likely to be older than current landlords. Over half of former landlords were aged 60 or over, 54% compared with 51% of active landlords. Former landlords were even more likely to be over 70 when compared with active landlords, 24% compared with just 17%.
On top of this, more former landlords were collecting pensions (46%) than receiving income from employment (44%). This may indicate property disposals are linked to retirement: exiting the landlord business eliminates the responsibility of maintaining a property and dealing with tenants (for those who manage properties themselves) and capital receipts from property sales can supplement pension income.
Long-term landlords leaving
Landlords were asked in which year they had acquired their first property, this gives an indication of the experience of landlords in the sample. We can therefore establish the relative experience of landlords who have left the PRS.
This was a relatively experienced group: of the landlords who exited the sector in the last two years, about half (46%) had acquired their first property in 2005 or earlier. Some 58% had stopped renting out property in 2020 or 2021—that is, since the most recent suite of tax changes and the Covid pandemic. Most former landlords (75%) had sold their unit(s), while 11% were living in the property themselves or allowing family members to do so.
Covid pushing landlords out?
Over the last two years the private rented sector has been subject to numerous regulations. The most notable example would be the suspension of possession proceedings and extension of notice periods, these notice periods only being reinstated to pre-pandemic time periods on October 1st 2021. In December 2020/January 2021, the NRLA surveyed its members about the effects of Covid. Some 60% of the 1,391 respondents said they had lost rental income during the pandemic.
Despite the seismic impact of Covid on the economy, on the whole respondents said tax changes impacted their plans more than the pandemic. This probably reflects a perception that the tax changes represent a fundamental and possibly permanent reordering of the incentive structure, while the pandemic—difficult as it has been—is temporary. Some 26% of respondents to the LSE survey said tax changes had a decisive or major impact on their businesses, while 10% said the same of Covid. About half of landlords said Covid had not affected their business plans, whilst only 30% stated recent tax changes had made no impact on their plans.
Why are landlords exiting?
Quarterly research conducted by the NRLA consistently finds the main reasons for landlords adjusting their portfolio are
- Increasing landlord costs
- Changes in regulation
- Changes in tax
Analysis from the NRLA Quarter 3 survey shows that these 3 reasons are the highest amongst landlords who have sold in the previous 12 months. In contrast, landlords who have bought property cited reasons such as "changes in local property market conditions", indicating they were in good financial stead to take advantage of the market.
The LSE research offered an opportunity to ask landlords who had completely left the sector what were the biggest reasons behind that decision. Once a NRLA member ceases being a landlord (as opposed to simply reducing the size of their portfolio) then of course there is no reason for them to participate in our surveys before their membership lapses.
So, among this group of former landlords surveyed by the LSE, the top 3 reasons for exit closely mirrored the views of regular NRLA surveys of active landlords. There was however an increased emphasis on the impact of tax changes, being cited as the second most important reason as opposed to third. This could highlight the magnitude of tax changes upon landlords' decisions to leave the sector.
Conclusions
The report conducted by the LSE found many interesting and insightful conclusions, the section on former landlords is no exception as it provided insight on a group of landlords - former landlords - the NRLA research observatory is less able to reach.
Former landlords were found to have had smaller portfolios than current active landlords, with the income provided by their rental properties typically not being their primary source of income. This grouping were also more likely to be older and collecting pensions than active landlords. This suggests that many landlords are selling their buy-to-let properties to supplement their income upon retirement.
When asked for their reasons on why they are leaving the sector, this grouping of landlords echoed similar sentiments to active landlords who have reduced their properties. Increasing landlord costs, tax and regulation were the most common reasons for leaving the sector, with tax being ranked higher amongst former landlords than active landlords. It is tax and the increase in costs associated with the PRS sector rather than the economic impacts of Covid-19 which is driving landlords towards the exit.
