Buy-to-let landlords ‘should have sold three years ago’ as returns drop
BUY-TO-LET landlords have seen their returns decline in recent years and would fare better from investing in listed corporate landlords instead, new research has found.
A new index from direct lending investment manager BondMason has recorded the performance of residential property investments. It showed that, after strong returns for decades, most private landlords will now be suffering the impact of tax changes.
Read more: Landlords lean on accountants to navigate tax changes in BTL sector
The average private landlord has gained a post-tax return of 16.9 per cent over the last three years (assuming a higher rate taxpayer with a 65 per cent loan-to-value mortgage, three per cent interest per annum and a 4.5 per cent rental yield).
In contrast, investors in corporate residential landlords have seen a return of 37.7 per cent over a three-year period, benefitting from more favourable tax positions and the injection of £4.5bn of government money into build-to-rent, BondMason said.
“Britain has around 2.5 million private landlords,” said Stephen Findlay, BondMason’s chief executive. “Their number has grown for decades, but recent tax changes and increasing regulations have left many wondering if the financial gain is worth the cost and hassle to maintain the property, do the administration and deal with tenants.
Read more: First-time homebuyers soar while buy-to-let purchases slump
“Our calculations show over the past few years the likely post-tax gain for the typical private landlord has declined substantially, concluding that for most private landlords the hassle is no longer worth it. With hindsight, many would have been better off selling up a few years ago, ending the time-consuming activity of dealing with tenants, and instead investing their money with listed corporate landlords.”
He predicted that there is “worse to come” as landlords will likely struggle to balance the annual costs of owning a rental property with the rental income they can get after tax, especially in some areas of the country.
“This month the Mortgage Interest Relief continues to phase in, and by next year landlords will be restricted to claiming a basic rate of income tax (20 per cent) on their mortgage interest costs, while having to pay their full tax rate on the rental income,” Findlay added.
“In some cases, landlords will have seen their tax bills double or even treble over the last few years. I would not be surprised to see many private landlords making no income or even a loss next year as this change takes effect. This may lead to more and more landlords thinking again about their buy to let investment portfolios.”
Read more: Landlords report tax bill shocks as BTL reforms bite
He expects listed corporate residential landlords will step in to fill the gap left by smaller private landlords exiting the market.
BondMason BRIX is a market-capitalisation weighted index of listed companies and funds that
own UK residential property for letting. From a review of over 300 listed companies and funds,
those that have been selected own a majority of UK residential property, for letting and not for
resale. They must have a minimum market capitalisation of £50m, be listed in the UK and at
least 75 per cent of their balance sheet must consist of rental properties.
