A changing landlord market that still offers solid long-term value

Originally published by Mortgage Soup

Landlords have faced a tough set of challenged over the past decade. Higher taxes, the loss of full mortgage interest relief, rising mortgage costs and a wave of new rules have all added pressure.

As a result, some have sold, and some investors who might have invested, may have taken a step back. Yet the full story is more balanced than that.

For many landlords who bought well and stayed the course, steady rental growth has taken much of the strain out of these pressures. And for newer landlords, the outlook is more stable than some headlines suggest.

According to recent data via Hamptons, rents in Great Britain are now 51% higher than 10 years ago and 35% higher than five years ago. That strength is one of the main reasons many long-term landlords have seen their returns increase.

During the same five-year period, house prices rose by 24%. Over 10 years, they rose by 49%. This means a landlord who invested in 2016 has seen strong rental growth while also gaining from house price growth.

YIELDS & RETURNS

The average gross yield for someone who bought in that year has risen from 6.1% to 8.2% today. A landlord who paid £300k for a property in 2016 and kept pace with wider rent levels would have seen their yearly income rise from £18,300 to around £24,600.

Returns are even stronger in parts of the North, where lower entry costs and higher rent levels have helped landlords weather growing costs. In the North East, a landlord who bought in 2016 saw their average gross yield rise from 9.4% to 12.1%.

Even someone buying there today is likely to achieve close to an 11% gross yield. By contrast, returns in the South and in London are lower, and rents in the capital have dipped this year. Even so, someone who bought in London in 2016 would still have seen yields rise from 5% to 5.7%, with the most marked growth over the past five years.

As a result, many landlords are much more focused on holding, and growing, their assets rather than selling. So far this year, 13.9% of all sellers across Great Britain have been landlords.

That is slightly higher than last year but still well below the levels seen in 2022. London has seen the highest share of landlord sales, at one in four, but this has remained stable. Landlords are cautious, but most are not leaving at scale.

NEW ENTRANTS

At the same time, new landlords are entering the market, and the age profile is changing. Hamptons data shows millennials now account for half of all new shareholders in buy-to-let companies this year.

That is the first time any age group under 45 has held this share. It also fits with what we see at Fleet. Our first-time landlord business has held firm for years. These are often smaller landlords buying one or two homes, many through limited companies. They tend to work closely with advisers because they want clear guidance on rates, rules and long-term planning.

Another agent, Savills, recently announced it expects rents to grow by 12% across the next five years. They expect yearly increases of around 2% to 2.5%, including for London. This sits closer to normal levels, after a period of extreme volatility.

It also means that, for someone buying today, the outlook for returns is steady. Savills also expect rental affordability to improve as income growth stays firm and demand becomes more balanced. That should help the wider market settle after a period in which renters have taken on a larger share of their income to cover costs.

RENTERS’ RIGHTS ACT REPERUSSIONS

One point raised by Savills is worth noting. If new rules under the Renters’ Rights Act lead to a drop in supply, rents could rise more quickly again. This is one of the reasons advisers should stay close to their landlord clients.

The Act brings in new duties next year that must be taken seriously. Many landlords will need support to stay organised and avoid mistakes. Pressure on supply could also make rental conditions harder for tenants, which is why it is important the sector remains workable for landlords as well as renters.

There is clear interest in limited company structures, with new incorporations running ahead of last year’s record levels. This trend ties in with the rise of younger landlords and with the need for effective planning under today’s tax rules. It also shows many see buy-to-let as a long-term asset.

The market is still adjusting. Mortgage costs have been higher, although they have reduced recently, and there are more responsibilities with being a landlord. But the wider numbers show a sector that is resilient, with strong long-term returns for those who plan well.

Landlords who take advice, keep on top of their duties and think ahead are finding ways to make the landscape work. And with new landlords entering the market and steady rental growth forecast, it is clear the sector remains a meaningful long-term investment choice. One that advisers should be central to.