Buy-to-let (BTL) landlords are making a worse return on their investment than at any point since 2007, according to data from agency Savills (SVS). The average net profit for a landlord has slumped to below 4 per cent – the lowest profit margin in 16 years.
The agency said that BTL landlords' paltry returns are in stark contrast to the boom years of 2014 to 2021, when they booked an average “year 1 cash profit” of 23 per cent. It blamed the downturn in fortunes on rising interest rates and a restriction in tax reliefs.
Head of research Lucian Cook said the forthcoming Renters Reform Bill and stricter energy efficiency regulations will “add to investors’ caution” and “further eat into profits”. The government has consulted on increasing the Energy Performance Certificate (EPC) threshold for all new privately rented homes from E to C by 2025, though it has yet to respond to this consultation.
The news comes as rents rise at their fastest pace on record. The annual rate of rental growth across the UK hit an all-time high of 4.8 per cent in April, according to the Office for National Statistics (ONS).
The data revealed landlords have been increasing rents in response to interest rates and surging demand for rental property. However, the dismal returns show rent increases are not offsetting their costs, which could fuel further rent increases.
Landlords of the future?
The increase in interest rates and nosedive in profitability has opened up the possibility that the market will be taken over by more well-heeled investors and institutional players.
Cook added: “Viability will be a real issue for smaller landlords with higher levels of debt who are coming to the end of their fixed rate. Larger, wealthier landlords are in a much better position to benefit from the rental growth seen in the period post-pandemic."
Institutional players who fund the development of new homes under a model called build-to-rent (BTR) have flooded into the sector over the past decade. According to Savills, the number of completed BTR developments has skyrocketed from a mere 3,000 in 2013 to 83,000 today. Meanwhile, the amount of money invested into BTR in 2022 hit £4.3bn, the fourth consecutive record year.
The large BTR players, which include the likes of Grainger (GRI) and PRS Reit (PRSR), also tend to be more supportive of stricter regulation.
Grainger chief executive Helen Gordon released a statement loudly voicing approval for the Renters Reform Bill the day it was revealed. She said: "A better supplied rental market, with more professional, long-term and institutional-investor landlords, providing better quality, mid-market priced homes is what is needed."
