The private rented sector (PRS) is witnessing a watershed moment for private UK landlords. Official statistics published by the Government in 2022 showed that 2.74 million landlords declared income from rental properties during the 2020 to 2021 financial year, on their Income Tax Self Assessment (ITSA) to HMRC.
Whilst they generated a combined total of £41 billion during these 12 months, there was a marked decrease in the number of UK landlords overall. It was down from the 2.79 million individuals reported just one year before (2019-2020). Data from the English Private Landlord Survey 2021 revealed that 45% of this group were classed as ‘amateur landlords’, meaning they own one rental property only. That leaves 55% of unincorporated UK landlords with a portfolio containing two or more rental properties.
Still unsure whether you should continue as a UK landlord or exit the market given the current cost of living crisis, rise in inflation and increasing regulation? Here’s our guide to what we know about the exodus from the private rented sector so far.
An Overview of the UK Private Rented Sector
Recent economic hardship has meant that many would-be first-time buyers are renting one of the 5.6 million private rental properties for longer. This demand for private rented housing has grown since the turn of the millennium. Consequently, the PRS has long been viewed as a prudent source of income for UK landlords looking for a stable investment.
However, regional variation continues to characterise the private rented sector. With no upper caps on monthly rental prices, there are different yields to be drawn from properties across the country. For example, our 2022 report UK Landlord Rental Market Statistics revealed that Newcastle-upon-Tyne had the highest estimated return in England (7.2%).
This is almost five percent more than the lowest annual yield witnessed in Winchester (2.3%). It also noted how Oxford residents spend 65.3% of their annual income per year, whereas their Worcester counterparts pay just 19.9% of their salary.
UK landlords and therefore the PRS own 18.8% of the housing stock in the UK. This consists of fixed short and longer-term tenancies as well as rolling contracts. Both the landlord and tenant agree to set obligations for the intended rental period. An assured shorthold tenancy binds each party to the signed tenancy agreement for 6 months.
Anything beyond this is classed as a long-term lease. Time frames aside, a fifth of families in the UK are renters, meaning there are still opportunities for landlords to meet this significant demand.
However, it hasn’t all been good news for landlords in the UK of late. The cost of borrowing, in terms of increased interest rates, has also affected the landlord’s outgoings, reducing the yield they can expect to receive. This puts landlords in the unfortunate position of having to raise their tenants’ rent should they choose not to accept a lower ROI.
Speculation of a volatile property market has done little to boost UK landlords’ confidence about the future. We examine some of the reasons for this shift below.
Why are UK landlords Quitting the PRS?
Whilst each landlord is an individual with their own set of circumstances, it is fair to say that several factors are causing landlords to turn their backs on the PRS in the UK. Interestingly, not all of them are financial in nature.
The Renters’ Reform Bill
The first cause of discontent is the Renters’ Reform Bill. Introduced in 2019, the Government claims it will provide more protection for private tenants against unscrupulous landlords. Naturally, renting out private domestic properties is a balancing act and few mindful UK landlords want to provide dangerous living conditions for renters and their families.
However, new seismic measures look set to drive landlords in the UK (particularly ‘amateur landlords’) to sell their rental properties before the changes are implemented.
The bill, also known as the fairer private rented sector white paper, seeks to end:
- Section 21 ‘no fault’ evictions
- Arbitrary rent review clauses
- Bans on renting to families with children
- Landlords forbidding pets in the property without reason
There would also be the creation of a Private Renters Ombudsman dedicated to settling disputes between landlords and tenants.
Propertymark, a membership body for property agents, has raised concerns that “changes to the rules could result in fewer homes being available for tenants and that the bill doesn’t give enough protection to landlords and letting agents”.
Whether such changes will become legislation is by no means certain. This private rented sector white paper has been delayed as of May 2023. Indications are that it will be before the May 25th Parliament recess, which finished on the 5th June, but this is not guaranteed.
Changes in Rental Demand
In February 2023, the Bank of England expressed its own concerns within its Monetary Policy Report. This publication showed that an increasing number of landlords are selling their properties whilst the supply for rental properties cannot currently meet today’s demand.
Its authors noted that “contacts attributed this to a combination of factors including tax and regulation, higher maintenance and borrowing costs, and an inability to recoup increased costs in rents”. Savills echoed this sounding of the alarm, stating that “an increasing number of landlords decided to exit when the sales market was particularly hot, to realise the capital growth”.
In contrast, not everyone has been quick to suggest a dip in the number of landlords in the UK PRS. The Housing Secretary Rachel Maclean MP has deflected criticism, saying “If one [landlord] leaves [the PRS], I'm almost certain another one will come in. So this idea that our regulation will drive them out in the sector. I don't accept that”. Time will tell if the large-scale trend of UK landlords quitting the private rented sector continues.
Cost of Living Crisis
Landlords in the UK are also feeling the pinch of the current economic crisis from both sides. On one hand, there is apprehension that their tenants will not be able to afford their rent due to the nationwide cost of living crisis and inflation. This could mean they have to fit the bill if arrears occur, making the private rented sector a far less viable investment.
On the other hand, the costs of their bricks-and-mortar investments have also been affected by the effect of rising interest rates, which rose from 0.5% in December 2021 to 4.5% in May 2023. Couple this with the end of the mortgage interest relief since April 2020 and the newly introduced increase in the amount of capital gains tax (CGT). This latter change means that any sales from April 2023 will incur higher payments (in the thousands).
Another explanation for the mass quitting amongst UK landlords is the Government’s failure to tackle anti-social behaviour, especially with measures surrounding the possible introduction of The Renters’ Reform Bill.
As 50% of participants in a National Residential Landlords Association survey have had to repossess their property from criminal or anti-social tenants, the NRLA wanted the Government to “beef up” its efforts to address this issue. Low confidence in these areas may lead many landlords to reconsider their investment in the property sector.
How Does This Impact the UK Property Market?
Ironically, few parties are set to make gains if large numbers of landlords withdraw from the UK PRS. Jonathan Samuels, Chief Executive of the buy-to-let lender Octane Capital, has criticised the UK Government which he feels has “looked to eradicate amateur landlords via a string of legislative changes”. He said that these new rules were “designed to dent profit margins in order to address the shortage of stock within the sales market”.
Feeling deterred whilst facing a diminished return that would weaken such private rented sector schemes, the withdrawal of buy-to-let landlords would shrink the volume of private rented sector properties on the UK property market by 14% or 383,600 fewer homes worth £223.5 billion. Crucially, this loss would negatively impact the PRS economy and create more competition for homes among renters. A reduced housing supply will then push up the prices for those looking to rent.
The PRS is rapidly evolving, becoming more regulated than ever. Compliance, effective tenant-landlord communication, and landlord insurance for UK homes are now crucial to managing a successful tenancy or property portfolio.
Now is the time to take charge of your tasks and embrace technology to streamline and digitise operations with benefit-led tech for landlords to keep ahead of the changes around the corner.