Why Are Landlords Selling Up Their Properties in Great Britain?

The UK's buy-to-let (BTL) market is experiencing an exodus as landlords sell up their rental properties in great numbers. This buy-to-let sell-off has profound implications across Great Britain's housing sector.  

A survey by Uswitch¹ suggests that the motivations behind landlords' decisions to sell include increased mortgage payments, increased taxes and increased maintenance costs. Additionally, almost half of landlords surveyed are concerned about the cost and time required for Energy Performance Certificate (EPC) rating improvements to meet new legislation. The sell-off, in turn, leads to less supply of rental properties and higher rents.  

According to data from Letting Agent Today¹, whilst the percentage of homes sold by landlords in Britain edged down from 15.7% in 2022 to 14.0% in 2023, investor sales remain historically high. British landlords have cumulatively offloaded nearly 300,000 more properties than they have purchased since 2016, thus significantly reducing the supply of rental properties. Though moderating, the buy-to-let sell-off persists at intensities unmatched in recent memory, with major implications for rental availability and affordability across Britain.  

In simple terms, the flood of landlords selling up and leaving the market continues, just at a slightly slower pace since 2021.

Buy-to-Let Exodus Accelerating

In the first half of 2022, over 61,000 landlords sold their properties, setting a new record in terms of the pace of sell-off. This trend is not limited to a particular region, as rental properties are becoming scarce in most areas. 

The primary reason for this exodus is a combination of factors that are making it increasingly difficult for small-scale individual investors, who make up the majority of the private rented market, to sustain their businesses.

A Bank of England² survey also shows net outflow of properties from landlord to owner-occupier, suggesting another reason why rental property availability issues may arise. 

Key Factors Influencing Landlord Decisions to Sell

The UK property market has been facing several challenges that are impacting the profitability of landlords.

Landlords are expressing concern over significant hikes in interest rates, which affect their mortgage affordability and erode their incomes³. When rental income is not sufficient to meet interest cost and further costs such as taxes, letting agent fees, insurance costs, service charges and maintenance costs, financial pressure on landlords grows, ultimately forcing them to sell their properties.

Tax changes, including the phasing out of mortgage interest relief, have further incentivized landlords to sell their properties. Even where rental income is not sufficient to meet interest costs, landlords are still required to pay tax on the majority of their income (less other deductible costs such as letting agent fees, service charges and insurance and maintenance costs).

The upgrades required to meet proposed future energy efficiency standards are also a significant concern for landlords, as they will require significant investments and may disincentivize ownership.

The government's proposed potential imposition of caps on rent increases and restrictions on "no-fault" evictions might make it challenging for landlords to manage their properties effectively. These proposed regulations could further reduce landlords' ability to generate profits from their investments and contribute to a shift towards selling properties rather than retaining them.

Moreover, portfolio landlords are selling off poorly performing properties to shift their resources towards more strategic assets, in a process called portfolio optimization. This approach aims to maximize the return on investment by selecting properties that are likely to generate higher profits in the future.

Rental Trends Driving Landlord Decisions

England's median monthly rent hit a record £850 between October 2022-September 2023 according to Office for National Statistics⁴ data. But regional variances are great, spanning from £1,625 in London to just £550 in the North East.

This growing polarization incentivizes landlords to retain properties in areas where rental yields are higher, while selling in areas where rental yields are lower. Seeking to maximize returns, landlords may reduce rental stock in lower-yield areas, further squeezing supply.

Impact on Rental Availability

Rental prices for new tenancies have increased by 9.9%, marking 27 consecutive months of over 5% annual growth, with the average rent now 28% higher than at the start of the pandemic. 

The number of landlords leaving the buy-to-let market is increasing, which means there will be fewer homes available for private rent in the future. This has already led to a significant drop in new landlord registrations. As a result, competition for rental properties will become more intense, making it harder for many renters to find a suitable place to live. This, in turn, will push rents higher and make it even more difficult for renters to afford their homes.

Moreover, there are concerns about tenant displacement and instability if more landlords decide to sell their properties to owner-occupiers or tourism operators. Frequent moves can have a detrimental effect on tenants' socioeconomic status, leading to even more long-term problems.

Cloudy Skies Ahead

In the wake of ongoing economic uncertainty, high interest rates and significant regulatory and tax changes, landlords may keep leaving the Buy-to-Let (BTL) market. To prevent a worsening of the housing crisis and related issues of social stability, equity, and quality of life, prompt policy responses are required to stabilize the availability of housing.

FAQs:

Q: Why are so many landlords selling up their properties in the UK?

A: Landlords in the UK are selling their properties due to a combination of factors, including mortgage interest rate hikes, tax changes, such as the phasing out of mortgage interest relief, and increased regulation.

Q: What are the potential consequences of a large number of landlords exiting the market?

A: A significant exit of landlords from the market could lead to a reduction in the supply of rental properties and an increase in rental levels. In turn, affordability issues could arise, exacerbating the housing crisis.

Q: What factors might influence landlords' decisions to sell or hold onto their properties?

A: Landlords may decide to sell or hold their properties based on the profitability of their rental business, changes in the tax regime, changes in regulation, their personal financial goals, the location of their property, and expectations about future rental property market trends.

References:

1. Buy To Let Sell Off - agency reports hundreds of thousands sold | Released on : 13 November 2023 | Letting Agent Today

2. Has the private rental sector been shrinking? | Published on 12 September 2023 | Bank of England

3. Number of landlords selling up in UK grows as mortgage rates surge | Released on : 14 August 2023 | The Guardian

4. Private rental market summary statistics in England: October 2022 to September 2023 | Release date: 20 December 2023 | ONS