“We’re in Burnley now, a hotspot for investment, with landlords taking home an annual rental yield of 7 per cent.” So opened episode 23 of Homes Under the Hammer, broadcast this week, a BBC show that follows buyers who purchase rundown homes at auction and renovate them, either to flip for a profit, or to rent out. In a testament to Britain’s enduring fascination with property investment, the show is in its 27th series.
Once renovated, the three-bed semi will rent for £650 per calendar month, the estate agent says. It sells for £78,000 to brothers Charlie and Harry from London (with 20 properties already under their belt), who plan to put it straight out to rent after a four-week renovation that cost less than £10,000. Spoiler: they do it in three weeks and achieve an 8 per cent yield.
Sounds easy, right? Anyone with a reasonable chunk of money to invest ought to consider getting into the landlord game. Not so fast, though: the Burnley developers may have done well — but the town is in a sweet spot, where the figures for buy-to-let still add up.
Across much of the rest of the UK, investors face big mortgage interest bills and much lower yields. The broader picture for the sector is far less rosy — and some think there are even worse conditions coming down the track.
Margins are lower and regulations are tougher. Jonathan Gittos at fintech mortgage broker Porthos & Co says: “Many think their nest egg has cracked. Most are gradually paying off existing loans, moving back into properties themselves or even selling.”
Hamptons, an estate agent, this week released research showing that landlords purchased just one in 10 of all homes sold across Great Britain during the first half of this year, the lowest share since records began in 2010. The firm says high mortgage rates mean new buy-to-let investors are increasingly focusing on the highest-yielding areas to make the sums stack up.
Six of the 10 local authorities with the highest share of buy-to-let purchases are in the north of England. Sunderland tops the list, where 45 per cent of homes were bought by an investor during the first half of the year. Swindon, Enfield and Torbay are the only southern local authorities to make the top 10 list.
Meanwhile, a new report from UK Finance found lending to landlords is significantly down — with the number of new loans in the first quarter of the year, at 12,400, less than half those granted in the last three months of 2022.
Disincentives to invest have been compounded more recently by higher interest rates and political uncertainty around the threat of more rental reform
In fact, the buy-to-let mortgage market shrank for the first time, down 3 per cent year-on-year in the first three months of 2024 to 1.98mn outstanding loans.
The upward march of rental incomes seems relentless — ONS data this year pointed to some of the highest annual rental increases since 2015, especially in London. On the face of it, that spells opportunity.
But that’s because landlords are still selling more properties than they’re buying, which is reducing the number of homes available to rent. This trend has held in each year since 2016, when the 3 per cent stamp duty surcharge on second home purchases was introduced. A year later, the ability of individual landlords to offset mortgage payments against tax bills began to be phased out. These changes increased the cost of purchasing an investment property and reduced the profitability of many existing mortgaged buy-to-lets.
Aneisha Beveridge, head of research at estate agent Hamptons, says: “Tax and regulatory changes introduced since 2016 have been the main culprit, but these disincentives to invest have been compounded more recently by higher interest rates and political uncertainty around the threat of more rental reform.”
That episode of Homes Under the Hammer was recorded in July 2022. Since then interest rates have risen. Inflation has meanwhile increased the pain of repairs and replacements. Plus, the renters’ rights bill was finally announced in the King’s Speech last week, including measures to protect tenants from unscrupulous private landlords and abolish the “no fault” arrangement for evicting tenants.
The Conservatives had been lining the legislation up, but some landlords fear Labour will press ahead without providing resources for the already log-jammed courts system. Plus, there are fears that Labour will put up capital gains tax rates on property sales.
London is leading the rise in private renting across England, due to high house prices and, more recently, higher mortgage costs: The Mortgage Works, the buy-to-let lending arm of Nationwide, found close to one in three (30 per cent) households opt to rent privately in the capital, nearly double the rest of England.
But given the financial pressures faced by renters — and the real prospect they will hit their ceiling of affordability — buy-to-let is a precarious source of income for landlords.
The average tenant spends more than a third of their monthly wage on rental payments, and one in five spends over half, according to rental services provider Canopy. But insurance broker Lifesearch found 74 per cent of renters are without the safety net of income protection, insurance that can cover their essential outgoings if they are unable to work through sickness, injury or redundancy. That’s a missing vital assurance for landlords, which would otherwise ensure consistent rental income even in times of tenant hardship.
If you’re a professional landlord who can diversify between properties, regions and tenants, the sector may feel less risky.
But for many, buy-to-let had become the British dream, with individuals using property as their retirement portfolio. So a third of landlords only have one property, many of whom are probably relying on the income for their “pension”.
Faced with an increased workload, lower margins and uncertainty about whether they can continue to make decent money despite the increase in rents, many will be wondering why they should bother.
There are still attractive lower-risk and lower-effort options for their money — more than 5 per cent in a savings account, for example.
The top rates are 5.2 per cent on an easy access Isa with Trading 212 or 5.37 per cent on a 95-day notice account with OakNorth Bank. Savings accounts with Principality Building Society and First Direct (existing customers only) pay 8 per cent and 7 per cent, respectively.
For those who can stomach more risk, a portfolio of shares and funds is a good home for a property sale lump sum. Porthos says: “They really should be thinking about Isas and unit trusts.”
With the future looking bleak for both tenants and landlords, it’s time to put big warnings on property programmes that don’t represent reality, given tax changes and falling yields. “Savings under the Scanner” might not be so watchable, but it’s less of a fantasy for those who aren’t professionals like Charlie and Harry.
Moira O’Neill is a freelance money and investment writer. Email moira.o’neill@ft.com, X: @MoiraONeill, Instagram @MoiraOnMoney