Why landlords are looking for the exit

Residential bridging finance broker, Finbri, looks at why a growing number of landlords are exiting the market, highlighting four main reasons why many are calling it a day.

Related topics:  Finance,  Landlords,  PRS
Property | Reporter
13th June 2023
For Sale 115
"The mounting pressures resulting from the recently proposed Renters' Reform Bill, costly EPC requirements, increased interest rates, and tax changes have left landlords in an unenviable position"

Newly released data shows that as many as 10% of homes currently for sale are ex-rental. Landlords are selling up, but who's to blame?

1: Renters' Reform Bill

The newly proposed Renters' Reform Bill is expected to have a significant impact on landlords across the UK. Combined with increased interest rates, EPC requirements and tax changes, the proposed changes to landlords and the private rental sector within Bill have already seen landlords leaving the market.

These changes have reduced the profitability of operating in the PRS, making it increasingly difficult for landlords to make a return on their investments. As a result, the UK is anticipating a large exodus of landlords from the PRS. And it's already begun.

The Renters' Reform Bill introduces the following key proposals, many of which have not been positively received by landlords. The Renters' Reform Bill sets to:

- Abolish Section 21 'no fault' evictions
- Introduce more comprehensive possession grounds so landlords can still recover their property - especially in instances where the tenant is at fault
- Provide stronger protections against backdoor eviction
- Introduce a new Private Rented Sector Ombudsman
- Introduce a Privately Rented Property Portal
- Give tenants the right to request a pet in the property
- Application of the Decent Homes Standard to the private rented sector to give renters safer, better value home
- It will now be illegal for landlords and agents to have blanket bans on those who receive benefits or have children
- Give local councils more power to enforce and protect renters' rights

The removal of Section 21 aims to provide security to renters in the PRS, where landlords must give longer notice periods for evictions as well as stronger rights for tenants to challenge unfair evictions. Landlords are concerned that the repeal of Section 21 will ultimately lead to higher costs and make it harder to reclaim their properties. As such, many landlords plan to sell up before this policy can be enacted.

These changes will likely place a burden on landlords and make it harder for them to make a profit from rental properties.

2: EPC requirements

An Energy Performance Certificate is a government-issued report that assesses the energy performance of residential properties and provides recommendations for improving energy efficiency. An EPC is legally required if the building in question was built before April 2018, in order to be rented out.

All privately rented residences must comply with a minimum rating of E in England and Wales, the updated regulation came into fruition in April.

Around 60% of rental properties on the market were rated D or lower in terms of their energy performance certificates, rising from 57% in the year prior. This suggests an increasing number of properties with inadequate energy efficiency ratings are on the market.

Finbri's survey revealed that 48% of landlords intend to make EPC-related improvements in 2023.

The government estimates that landlords will need to spend approximately £4,700 to make improvements to their properties to reach an Energy Performance Certificate (EPC) C rating, with further financial burdens ahead particularly with all private rental properties (including existing tenancies) needing to be between bands A-C by 2028.

3: Further interest rate rises

Interest rates have increased by a quarter of a percentage point, reaching 4.5%, the highest it's been since 2008. This was done in reaction to the small decline in the inflation rate, which currently stands at 8.7%. Following the rate increase announcement, the Bank of England has warned that interest rates will most likely be above 5% before the end of the year.

Finbri's survey shows the impact of rising rates on landlords, with 44% indicating their intent to sell their investment properties, while 45% are seeking alternative forms of investment.

Whilst 53% of landlords are planning to increase rent prices due to the recent interest rate rise to 4.5%.

These findings paint an alarming picture of the UK's private rental sector, which is already struggling with a rental shortage. With further rate rises forecasted, renters and landlords alike are expected to face increasingly dire circumstances.

4: Tax changes

The annual exemption amount on the Capital Gains Tax (CGT) was lowered from £12,300 to £6,000. Even steeper taxes are on the horizon as the CGT exemption amount will be reduced once more to £3,000 for the 2024/25 tax year. This change will especially hit landlords who look to sell their property for a profit, as they must now pay taxes on any capital gains made above the new much lower thresholds.

In a move that could prove damaging to landlords with sizable investments, the income tax additional rate threshold for the 2023/24 tax year has been decreased from £150,000 to £125,140. This means more high-earning landlords will be subject to the 45% rate on income over the reduced limit.

Landlord exodus will increase property shortage and rents will rise

It's easy to see why landlords are looking to exit the PRS, with mounting legislative changes increasing administrative requirements and reducing profitability. The Renters' Reform Bill, changes to tax legislation and rising interest rates are all factors likely to lead to an exodus of landlords in the coming years.

With an expected decrease in landlords and available rental properties, as a consequence, rents will increase and it will be even tougher for those searching for rental properties. It's clear that the PRS is facing another challenging year, with a number of issues being the source of landlords' desire to invest elsewhere and sell off their properties.

As landlords are looking to cash in and leave the market, and with ex-rental properties available at 25% cheaper than owned homes, first-time buyers could be in luck - if only they could get a mortgage. 10% of UK mortgage deals have recently been taken off the market due to fears over how high increasing mortgage rates will go.

And with rate rises resulting in house repossessions shooting up by 50% quarter-on-quarter, there are uncertain times for the UK property market ahead.

A spokesperson from Finbri said: “The mounting pressures resulting from the recently proposed Renters' Reform Bill, costly EPC requirements, increased interest rates, and tax changes have left landlords in an unenviable position.

"It appears many are on the brink of exiting the BTL market, posing the potential for a greater shortage in the private rental sector in the near future. And many have left already. Ultimately, this shift in legislation and regulations has resulted in landlords' return on investment significantly dropping, leading them to look for alternative opportunities.”

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