Cormac Henderson has been a buy-to-let investor for 20 years, at one point owning more than 40 rental properties in London, Manchester, Liverpool, Cardiff, Leeds and Birmingham with three friends. Yet he is now selling up.
"We are down to 25 properties but are selling them as soon as a tenant gives notice and a property becomes vacant," says Henderson, 42, an entrepreneur who lives in east Kent.
"We sold four in the last 12 months and have three on the market now. Even before mortgage rates rose sharply in the autumn, buy-to-let was becoming less and less favourable due to government tax policy," he adds.
"I am now paying tax on losses on a number of properties, while ensuring homes meet proposed energy efficiency standards is another cost that means the numbers increasingly don't stack up."
Henderson and his investment partners plan to sell all their rental properties and put the money in the stock market or pension investments instead. "Landlords have had a good run in the property market and enjoyed all the growth," he says. "They can exit and put their money somewhere else but it's the tenants who suffer when good quality rental stock is taken out of the sector."
Tracking the sell-off
Many other property investors across the country are also throwing in the towel. Analysis of auction catalogues by Hamptons estate agency reveals that in October, in the aftermath of the disastrous mini-Budget which sent mortgage interest rates soaring, a record one in four lots was being sold by an investor. The percentage has climbed each month since then, hitting almost 29pc in January.
"Auctions play a small but important role in the market," says David Fell of Hamptons. "They allow homes to change hands quickly and there has been a surge of homes advertised by investors, with some leveraged landlords whose cheap mortgage deals are expiring looking to sell up as fast as possible."
The property buying company Spring has seen a seven-fold increase in the percentage of enquiries since September of landlords looking to sell their properties.
"Landlords coming to us are citing the same economic pressure as the general population as a reason to want a quick and convenient sale of their rental property," says Samar Shaheryar, of Spring. "Many live a distance from their rental homes and the increased cost and hassle of both management and regulation is driving their desire to sell."
Hamptons' data shows a big rise in rental properties being put up for auction in Scotland - over the past three months, 41pc of all auction listings were previously let.
"This is likely a reflection of the eviction ban, coupled with the inability of landlords to raise rents at a time when many of their costs are increasing substantially," says Fell, referring to the moratorium on evictions and rent freeze from September 2022 to March 31 this year.
Under current plans, private landlords will be allowed to raise rents by a maximum of 3pc from April - though can apply to increase this to 6pc - and evictions will continue to be suspended.
Making a loss
Increasing numbers of landlords have also been selling up through estate agents, notably in London and the South East, where rental yields are lowest. More investors are expected to sell this year, as their fixed mortgage deals expire and they contemplate a significant spike in payments.
The average rate on a two-year fixed buy-to-let mortgage in January 2021 was 2.89pc, compared to 6.04pc today, according to the data company Moneyfacts. This means the monthly interest bill for a landlord borrowing £200,000 has more than doubled, from £482 to £1,007.
"Once the cost of servicing the mortgage is taken into account, many landlords will not only make paper losses due to house price falls but also see the cost of their mortgage exceed their rental income," says Andrew Wishart, of the consultancy Capital Economics. His firm estimates that 365,000 buy-to-lets will be making a loss by the end of this year.
This sharp rise in borrowing costs comes after landlords had already seen their profits squeezed, with tax relief on buy-to-let mortgage payments now restricted to 20pc, while income tax of 40pc is charged on rental income for higher rate taxpayers. This means they still have to pay tax even if their properties are losing money.
Those landlords not selling up are expected to put up costs for tenants, with a recent survey by Aldermore Bank reporting that almost two-thirds of landlords said they would have to raise rents by at least 10pc in the next 12 months.
Avoiding red tape
And there are other issues facing buy-to-let investors. The renters reform bill pledges to shift the balance of power further towards tenants, while proposed government energy efficiency regulations will require all newly rented properties in England and Wales to have an energy performance certificate (EPC) rating of C from April 2025, with the rules set to apply to existing tenancies from 2028.
While this will help meet net zero targets and bring down tenants' energy bills, it represents a significant cost burden for landlords. Analysis by Outra, a data science company, found that over 3m of the UK's rental homes have an EPC rating of D or below, with London and the West Midlands the worst-performing areas, with over 60pc of total rented properties rated D or below.
The average cost of upgrading a rented property to EPC C stands at £7,646, according to the Department for Levelling Up, Housing and Communities. But 63pc of landlords surveyed by Shawbrook Bank said the burden of EPC improvements made them more likely to sell their properties in the next five years.
Yet selling isn't always possible, especially if it means banking a loss. Lawyer Richard Cooper bought a one-bedroom new-build flat in Shad Thames, central London, for £650,000 in 2005. "At the top of the market it was worth £850,000, but it is now worth little more than I paid for it," says Cooper, 55. "Over the time I have owned it, the rent has gone up 18pc and the majority of that was over the last year."
When he adds up all the costs, including rising interest rates and service charges, Cooper estimates he has lost about £28,000 being a buy-to-let landlord over the past three years. "If it weren't for falling capital values, I would have exited the market 18 months ago," he added.
And it's not straightforward for landlords who've made a gain, either. In his Autumn Statement in November, Chancellor Jeremy Hunt announced that the annual capital gains tax allowance would be cut from £12,300 to £6,000 in April this year and reduced again to £3,000 in April 2024.
The average landlord who sold in 2022 in England and Wales sold their buy-to-let for £98,050 more than they paid for it, according to Hamptons. After deducting 10pc for costs, this would leave the average 20pc taxpayer with a £13,670 CGT tax bill, rising to £21,260 for a 40pc taxpayer.
When the threshold is reduced to £6,000 in April, Hamptons found that, at today's prices, a 40pc taxpaying landlord who cashes in will pay an extra £1,770 in tax; from April 2024, their bill will rise by a further £2,610. Matthew Rowne, of The Buy to Let Broker, said: "This might make private landlords more reticent to sell."
Increasing numbers of investors are opting to hold their properties in a company, with the number of companies set up to hold buy-to-lets doubling over the past five years to 300,000. Although the dividend allowance is being reduced, incorporated landlords are still able to offset mortgage interest before they're taxed.
And some investors are even looking to buy - though only if they have deep pockets. "There are simply more people wanting to rent homes than there are homes available," says Amelia Greene, of Savills estate agency. "Investors, particularly those with cash to hand, could take advantage of price falls over the coming months to secure stock with less competition from mortgaged buyers."
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