Time to say good-‘Buy to Let’?

COVID-19 continues to catalyse myriad problems for residential property owners. Chancellor Rishi Sunak’s announcement of a Stamp Duty Land Tax (SDLT) holiday for the first 500,000 GBP of a property purchase encouraged droves of established landlords and first-time buyers to flock towards the property market, triggering a housing bubble. Buy-to-let (BTL) investments are historically renowned for their lucrative returns, but have recently been diminishing in popularity. Compounded further by tough UK government regulations intended to reform the private rental sector, around 63% of landlords felt actively disinterested in pursuing new BTL ventures in the New Year, according to Accumulate Capital.


BTL used to be one of the most prolific vehicles of cash generation. It offered not only comfortable returns and an opportunity to increase these returns considerably with a mortgage on a tangible asset, but it was strategically apt in inducing healthy returns upon eventually selling the property in a bull market. However, the novelty of owning BTL capital began to wear off in 2017 when the government introduced legislature changes that marginalised the benefits of the practice. Indeed, a survey from Paragon Banking Group in 2019 iterated that three times the number of landlords were planning to sell assets than the number seeking to expand their portfolio. This highlights the strong effects of government regulation on investor confidence.


These changes included scrapping the ‘wear-and-tear’ allowance, where landlords had previously been able to deduct mortgage interest and financial costs from rental income before calculating their tax liabilities. As of April 2020, this was cut from 100% to 0%, which saw the amount of tax owed by landlords double or triple in some cases. The introduction of the 3% stamp duty surcharge represented a ‘purchase premium’ that made it increasingly difficult for potential landlords to generate enough capital to purchase the property, whilst legislation that demanded capital gains tax bills be paid within 30 days restricted the amount landlords have available to reinvest. As of 2020/21, capital gains tax reforms have meant that unless the landlord shares occupancy with the tenant, they are likely to face much higher tax upon selling the property, disincentivising many potential BTL landlords from investing.


Moreover, COVID-19 has imposed further threats to the BTL market. Whilst the SDLT holiday shirks an immediate cost premium and ultra-low interest rates do tempt market revitalisation, the pandemic could signify an active shift towards alternative investment vehicles. Political myopia has played its part as administrations have continued to act favourably towards tenants, many of whom make up the electorate, at the expense of landlords. Response policy through arrears relief holidays and the introduction of a 6-month eviction ban has put many landlords in a difficult situation, unable to take legal action against any tenants who have broken tenancy arrangements or were unable to pay. Whilst the ban was lifted on the 20th September, landlords must still give six months’ notice for evictions, resulting in considerable financial losses. This is further compounded as the furlough scheme, which has been preeminent in preventing business redundancies, came to an end in October and may leave many tenants without income. A September 2020 YouGov poll revealed 22% of private landlords lost money due to COVID-19 in England, and despite the government introducing mortgage repayment holidays for landlords, this does not benefit those who own the property outright.


Furthermore, and perhaps more worrisome for landlords, the pandemic has induced a cultural transition and altered the BTL market trajectory, especially in London. Rightmove, a property advertising agency, stated that the number of new lets in London has been down 25% every month since June when compared to 2019, and rental prices have fallen by 20%. Whilst the initial lockdown made working from home obligatory, many companies and employees noticed benefits of working from home, notably the lack of commuting as well as augmented productivity. This likely induced an urban-rural shift as employees are realising that they do not need to pay the urban premium to be closer to their offices and can now afford to live further away in larger properties.


It seems unlikely that BTL will disappear immediately; it still offers investors a tangible asset vehicle, with the Royal Institute of Chartered Surveyors (RICS) forecasting a 15% rise in rents by 2023. However, given the tightening of profit margins following stringent taxation and regulatory measures, the appeal of BLT has been damaged. COVID-19 has only exacerbated the problem further, with arrears suspension and increased occupation vacancy. Therefore, it is not unsurprising that investors are looking for a way out, with current historic house price spikes providing a perfect opportunity.


By Tristan May

Sector Head: Theo Thomas