Professional landlords are still backing BTL despite the political noise

Originally published by Mortgage Solutions

With Andy Burnham having become our next Prime Minister, there has been no shortage of analysis around what his ‘new’ government could mean for housing policy, particularly the possibility of changes to stamp duty, council tax and wider property taxation.

Some commentators have suggested this uncertainty could encourage prospective buyers to delay purchases while they wait to see whether reforms emerge that might save them money.

That may well be true for owner-occupiers – however, I am less convinced the same argument necessarily applies to professional buy-to-let (BTL) investors because, quite simply, their motivations, tax treatment and investment horizons are very different. Plus, will any changes even apply to them?

Professionalisation continues at pace

For a start, our latest Q2 Rental Barometer data demonstrates just how much the BTL market has evolved over the past year.

The average Fleet landlord now owns 16 investment properties, compared with 10 during last year. That figure has risen steadily from 10 to 12, then 14 and now 16 over successive quarters, which is a clear indication that experienced landlords have continued adding to their portfolios despite interest rate volatility, changing market conditions and ongoing geopolitical uncertainty.

The composition of those portfolios is changing as well. A year ago, landlords with 15 or more BTL properties accounted for 16% of all applications we received. Today, they represent 26% of our business. By contrast, those with between one and three properties have fallen slightly from 32% to 29%, while landlords with between six and 14 properties have increased their share of applications from 26% in Q1 to 30% in Q2 this year.

Equally telling is the continued dominance of limited company borrowing, which now accounts for 78% of all applications we receive. Nearly eight out of every 10 landlords choosing to borrow through a corporate structure is no longer a developing trend. It has become the norm for professional investors who increasingly view their portfolios as businesses rather than simply collections of individual properties.

Taken together, these figures paint a very different picture from the one often portrayed in headlines suggesting landlords are abandoning the sector.

Politics matters, but perhaps less than many think

That is not to suggest political developments are irrelevant, because they clearly are not.

If the government were to pursue major reforms to stamp duty or replace council tax with some form of property or land tax, those proposals would inevitably attract significant attention. However, there are still many unanswered questions before anyone should assume such reforms will materially alter BTL investment decisions.

As we already know, landlords are treated differently when purchasing property because of the additional stamp duty surcharge that applies to second homes and investment purchases. If stamp duty were abolished for owner-occupiers, would those additional charges also disappear for landlords? There is no certainty that they would because government may decide to retain a different tax treatment for investment property, just as it does today. Would, for instance, a Burnham-led government want to be seen as somehow ‘rewarding’ landlords?

Similarly, while council tax reform understandably attracts headlines, the reality is that most landlords are not currently responsible for paying council tax because that liability generally sits with tenants, except in areas such as houses in multiple occupation (HMOs) and certain other property types. Should a future property tax instead become payable by landlords, it is reasonable to expect that many would seek to recover at least some of those additional costs through rents, meaning the overall economics of the sector could simply adjust rather than fundamentally change.

In other words, what appears straightforward in a headline often becomes considerably more complicated once the detail is examined.

The bigger question may concern tomorrow’s landlords

Where political uncertainty may have a greater impact is among those considering entering the sector for the first time.

Our figures show first-time landlords now account for 9% of applications, compared with 14% a year ago. That reduction may partly reflect higher mortgage rates and funding costs over recent months, although it is equally possible that prospective investors are also unsure about the future and are waiting to see.

That will certainly be an interesting trend to watch over the coming quarters. However, what our data clearly demonstrates is existing professional landlords have continued moving forward. Purchase activity moved from 33% of our lending in Q1 to 36% in Q2, portfolio sizes have continued growing over the longer term and experienced property investors remain committed to expanding where the right opportunities exist.

For advisers, that has important implications, because the typical landlord client is becoming increasingly sophisticated, requiring specialist understanding and knowledge. Larger portfolios, greater use of limited companies and more complex borrowing requirements all require this, while the increasing professionalisation of the sector reinforces the importance of working alongside lenders that understand those complexities.

Political headlines will continue to come and go, and there will undoubtedly be further speculation about housing taxation over the months ahead. However, the evidence from our own lending book suggests professional landlords remain focused on building long-term property businesses rather than attempting to second guess policies that may never come to pass.