Are we entering the era of the professional Buy-to-Let market?

Years ago, you might have sat around the dinner table and heard guests discussing second homes they’d either inherited or perhaps first homes they had retained when graduating to larger family homes and were now using as a Buy-to-Let property. Affectionately known as ‘dinner party’ or ‘accidental’ landlords, they were likely to be enthusiastic about this type of investment benefiting from strong house price growth, rental yields, and favourable tax relief. 

Fast forward to a dinner party today with the same guests you will likely hear a very different and less positive conversation. High interest rates, slow price growth and more stringent tax rules have eroded Buy-to-Let’s charm for these types of landlords. This does not however mean that the Buy-to-Let market is no longer popular. Far from it. 
 
Recent years have seen a slow trend of a greater professionalisation of the market, with portfolio landlords (those with at least four or more properties) gradually increasing their share over those ‘accidental’ or ‘dinner party’ landlords. 

What started this trend?  

This predominantly began with changes to regulation and taxation for landlords a few years ago. For example, since April 2020 landlords have no longer been able to recognise any of their mortgage expenses from their rental income in order to reduce their tax bill.  Now landlords receive a tax-credit, based on 20% of their mortgage interest payments. This is particularly a concern for those landlords who are or have been pushed into the higher or additional- rate tax bracket.  
 
And this isn’t the only change in taxation, in 2016 the government put in place a 3% surcharge for those buying additional residential properties that will not be their main residence.  

And what’s changed in 2023? 

Landlords have come under further pressure in 2023, with a combination of additional tax changes, high interest rates and incoming regulations dissuading many from entering the market and prompting more to sell-up.  

Just recently the government has halved the capital gains tax allowance from £12,300 to £6,000. This is set to halve again in April 2024 to £3,000, meaning any landlord who is planning to sell their property should perhaps consider doing so now, lest they face a much higher tax bill. This is particularly pertinent if they or their family have had the property for several years and seen substantial price growth. For those ‘accidental landlords’ this will be a big consideration, particularly if they have inherited the property and already been subjected to a substantial inheritance tax bill.  
 
For those that have a mortgage, rising interest rates will mean their day-to-day costs will have risen or will be likely to soon rise upon remortgaging. Since February 2022, the Bank of England base rate has risen from 0.5 to 5.25 as of August 2023. This, on top of already increasing bills and prices of everyday items means landlords are facing significantly higher outgoings, even with increased rents.  
 
In addition, what was expected as new regulatory proposals from the government to improve the private rental sector’s energy efficiency has hit landlord’s pockets. While the regulations have now been scrapped, with the necessity to reach net zero and increasing demand from tenants for energy efficient properties, landlords still need support to make the changes.   

Opportunities for professional landlords  

Given the challenging conditions many property landlords are re-thinking their future within the Buy-to-Let market; however, this is creating opportunities for professional landlords. Indeed, 2023 looks to be the year when the professional portfolio landlord is set to grow, with 42% of landlords expecting to buy over the course of the year, rising to over 50% for landlords with 11 or more properties. With house price growth slowing in many areas, this presents further opportunities for professional investors to capitalise now. And with the supply of rental properties struggling to keep up demand, landlords who offer quality properties will benefit.  
 
Landlords who are looking to expand will most likely be interested in properties that offer a decent rental yield, as strong capital growth is less likely over the short term. Properties such as houses in multiple occupations (HMOs) are a good example, with these properties offering higher yields than one household homes. In addition, diversifying across regions and property types will help investors ensure they are protected against any tailwinds in different markets.  
 
For their buying plans, many professional landlords are now also taking the extra step of buying through a limited company, with the number doing so doubling since 2017 according to data from Hamptons. The real estate agency now estimates that 40% of all new Buy-to-Let purchases are made via a company structure. This points to the growing professionalisation of the market, and the need for those landlords to ensure they are operating as tax efficiently and cost-effectively as possible.  
 
Professional landlords are also making moves to improve the energy efficiency of their properties, in particular to support their tenants during the cost-of-living crisis. For brokers advising their clients on these improvements, being aware of possible incentives or specialist products available in the market will be key. Whether it’s a discount upon reaching an EPC rating of C or above, or a loan to undertake development works, specialist lenders can support with these ambitions.  

The market has been through a series of challenges, and many remain today, but professional landlords are not only surpassing these obstacles but also using them to their advantage, expanding their portfolios while they can, and setting themselves up for future growth.