Are we entering the era of the Professional Buy-to-Let market?

Emma Cox - Managing Director of Real Estate, Shawbrook

Recent years have seen a slow trend of a greater professionalisation of the market, with portfolio landlords (those with at least four or more properties) gradually increasing their share over those 'accidental' or 'dinner party' landlords.

What started this trend?

This predominantly began with changes to regulatory and taxation for landlords a few years ago. For example, since April 2020 landlords have no longer been able to recognise any of their mortgage expenses from their rental income in order to reduce their tax bill. Now landlords receive a tax-credit, based on 20% of their mortgage interest payments. This is particularly a concern for those landlords who are or have been pushed into the higher or additional rate tax bracket. 

And this isn't the only change in taxation, in 2016 the government put in place a 3% surcharge for those buying additional residential properties that will not be their main residence.

And what's changed in 2023?

Just recently the government have halved the capital gains tax allowance from £12,300 to £6,000. This is set to halve again in April 2024 to £3,000, meaning any landlord who is planning to sell their property next year may face a much heftier tax bill.

For those who have a mortgage, rising interest rates mean a likely increase in repayments have either bitten or will bite soon. Since February 2022, the Bank of England base rate has risen from 0.5 to 5% as of June 2023. This, on top of already increasing bills and prices of everyday items means landlords are facing significantly higher outgoings, even with increased rents.

In addition, expected new regulatory proposals from the government to improve the private rental sector's energy efficiency is likely to hit landlord's pockets. While deadlines to meet any new regulation are expected to be pushed back, with the necessity to reach net zero, landlords will likely soon need to make changes to their properties to reach an EPC rating of C or above.

Opportunities for professional landlords

Given the challenging conditions many property landlords are re-thinking their future within the buy-to-let market, however, in turn this is creating opportunities for professional landlords. Indeed, 2023 looks to be the year when the professional portfolio landlord is set to grow, with 42% of landlords expecting to buy over the course of the year, rising to over 50% for landlords with 11 or more properties. With house price growth slowing in many areas, this presents further opportunities for professional investors to capitalise now.

Landlords who are looking to expand will most likely be interested in properties that offer a decent rental yield, as strong capital growth is less likely over the short term. Properties such as houses with multiple occupations (HMOs) are a good example, with these properties offering higher yields than one household homes. In addition, diversifying across regions and property types will help investors ensure they are protected against any tailwinds in different markets. 

For their buying plans, many professional landlords are now also taking the extra step of buying through a limited company, with the number doing so doubling since 2017 according to data from Hamptons. The real estate agency now estimates that 40% of all new buy-to-let purchases are made via a company structure. This point to the growing professionalization of the market, and the need for those landlords to ensure they are operating as tax efficiently and cost-effectively as possible. 

Professional landlords are also looking to stay ahead of regulations and are already making moves to improve the energy efficiency of their homes, in particular to support their tenants during the cost-of-living crisis. For brokers advising their clients on these improvements, being aware of possible incentives or specialist products available in the market will be key. Whether it's a discount upon reaching an EPC rating of C or above, or a loan to undertake development works, specialist lenders like Shawbrook can support with these ambitions. 

The market has been through a series of challenges, and many remain today, but professional landlords are not only surpassing these obstacles but also using them to their advantage, expanding their portfolios while they can, and setting themselves up for future growth.

To find out more about how Shawbrook can support your professional landlord clients on their finance missions, through a combination of advanced technology and an expert team of professionals, visit the Shawbrook website here: https://property.shawbrook.co.uk/ 

To find out more about products Shawbrook, or Buy-to-Let support Shawbrook offer, please contact the Aria FInance team on 020 3839 9998 or email info@ariafinance.co.uk. 

Content provided by Shawbrook Bank Limited