Many Landlords could Make a Loss on their Properties in the next 2 Years

Many private landlords could make a loss on their properties over the next two years, according to the latest monthly analysis from property investment specialist BondMason.

The BondMason Private Landlord Index, which assesses investment returns in the UK’s private rental sector, shows that the average buy-to-let landlord will be lucky to generate annual returns above 2.5% for the next couple of years.

In fact, many private landlords could make a loss in the next two years, once costs, tax and their mortgages are taken into account, with an average investor likely to make just a 2.5% return on their investment each year – and that’s assuming that UK house prices bounce back following a poor 2018.

By contrast, listed corporate residential landlords continue to generate good returns of 10%+ per year, according to BondMason’s BRIX index.

The BRIX index, which tracks returns of shares in corporate residential landlords, was up by 2.5% on a monthly basis in April and 10.7% annually.

On the other hand, the Private Landlord Index shows that an average landlord will make almost no money from the rent received after expenses and tax are deducted this year, while many may make a loss. Assuming the property market is slightly healthier than in 2018, the capital gain from house price growth will still only give an overall return of around 2.5%.

Part of private landlords’ woes come from the effective tax rate that they face, which has soared from 8% of their rental income at the start of 2015 to 47% today. It will go up further to an effective rate of as high as 56% next year, when counting the non-deductibility of mortgage interest.

Assuming slightly higher, but still subdued, house price growth this year and next, the average buy-to-let landlord will be lucky to generate a return of more than 2.5% this year and into 2020, BondMason warns.

Stephen Findlay, the CEO of the firm, explains: “Britain has around 2.5m private landlords, but we can see this to be a high water mark, as the high tax rates that have now kicked in mean that many landlords will struggle to cover the cost of their mortgage and other expenses, and may only make money by selling their property.

“By contrast to the decline in fortunes of the direct buy-to-let market, there are interesting opportunities for private investors who want exposure to residential property investments through corporate landlords.”

He continues: “Corporate activity in the private rental sector continues to grow, with the burgeoning build to rent market gaining momentum. A number of these companies are now listed on the LSE and AIM stock markets, and provide investors with the investment opportunity to access returns from the underlying buy-to-let property market, without having to buy a property directly.

“However, private investors need to do their research before deciding to invest if they are looking to get exposure to the residential rental property market. Many listed property companies and funds are weighted towards the commercial property sector, and those categorised in the residential sector include housebuilders, which exhibit different characteristics to the corporate landlords.”

Findlay adds: “So, investors have to choose carefully to identify the relatively small but growing number active in the residential rental area.”