Is now the time for professional portfolio landlords to thrive?
With recent figures suggesting that professional portfolio landlords are taking up a larger share of the buy-to-let market, is this demographic better equipped to cope with the challenges posed by the PRS?
Professional landlords with multiple properties are increasingly becoming the backbone of buy-to-let mortgage lending, according to Paragon, the specialist banking group and lender. This suggests that amateur or individual landlords are no longer as widespread as they once were due to the bite of regulatory and tax changes. Paragon recorded a 16% rise in first half mortgage lending to £834 million, up from £721 million in the same period last year, while buy-to-let business dominated new mortgage lending, up by 17% to £788 million, with the lender shifting its products towards professional landlords with larger portfolios.
This demographic, Paragon said, is ‘becoming increasingly important to the supply of private rented property in the UK’. The shift towards professional portfolio landlords was further shown by the proportion of ‘complex’ buy-to-let completions in Paragon’s latest trading statement. Complex completions, made up by customers operating through corporate structures or running large portfolios, rose from 72% to 88% of the total during the first half 0f 2018 and represented 92% of the pipeline of future business at the end of March this year.
John Heron, managing director of mortgages at Paragon, commented: “Complexity around the PRS resulting from fiscal changes and increased regulation has resulted in a shift in balance with professional landlords providing a greater proportion of the supply of rented homes.”
Better set to deal with challenges?
No-one can deny that those operating in the buy-to-let sector have faced some serious challenges in recent years, with many accusing the government of a deliberate campaign to destroy or at the very least dampen the sector significantly.
Not only have landlords had to contend with chronic Brexit uncertainty and near-constant political instability in the last few years, there has also been the introduction of the extra 3% stamp duty surcharge, the phasing out of mortgage interest tax relief, changes to the Wear and Tear Allowance, stricter lending tests and affordability checks and, most recently, the introduction of the Tenant Fees Act.
There has also been a range of new legislation to come to terms with – from the Homes (Fitness for Human Habitation) Act 2019 to stricter energy efficiency regulations in the form of Minimum Energy Efficiency Standards.
As such, it's perhaps not surprising that professional portfolio landlords are currently thriving, as they have the means and capacity to deal with greater stresses, financial pressures and higher compliance thresholds in a way that a one property landlord, or an accidental landlord, might not.
What's more, Incorporation – the act by which landlords can transfer their portfolios into a limited company structure to avoid being hit by the changes to mortgage interest tax relief can be a costly, lengthy and complex process, which again may put professional portfolio landlords at an advantage over those with fewer properties.
What does the future of the PRS look like?
One of the biggest trends in the private rented sector of recent years has been Build to Rent, where institutional investors put money in to purpose-built, professionally managed rental developments specifically designed for tenants. Rather than each unit being sold off individually to landlords, the rental homes are let direct to tenants themselves with the returns going to the institutional landlords. It's a rapidly growing phenomenon, with Knight Frank suggesting that £75 billion of investment will be committed to Build to Rent by 2025. Meanwhile, according to the British Property Federation's quarterly Build to Rent map, there are currently 140,090 units either completed or planned across the UK.
London has a total of 73,974 units, while outside London there are 66,116 units, with Manchester, Leeds, Salford and Birmingham the main Build to Rent hotspots outside the capital. But is this type of renting, as well as the dominance of professional portfolio landlords, the future?
According to the most recent official figures, the English Private Landlord Survey 2018, released by the Ministry of Housing, Communities and Local Government in January this year, the vast majority of landlords (94%) operate as private individual landlords rather than as part of a company or organisation. However, while nearly half of landlords own just one property, half of the tenancies in the private rented sector are let by the 17% of landlords with five or more properties – showcasing the key role portfolio landlords play in housing tenants.
Additionally, since 2010, the number of landlords with just one property has fallen from 78% to 45%, or down from 40% to 21% of the sector. By contrast, the proportion of landlords with five or more properties grew from 5% to 17% in the same time period, or up from 39% to 48% of the sector.