The UK housing market is navigating a seismic shift. Once a dependable bedrock of personal investment, the buy-to-let sector is now experiencing an exodus of small landlords, driven to the door by a confluence of rising costs, punitive tax regimes, and a regulatory environment that seems increasingly hostile.

One question looms large…

Is this departure a win for tenants, or are we increasing the rental market crisis for all?

The Numbers Behind the Exodus

To truly grasp the gravity of this trend, let’s first consider some numbers:

Since 2016, 400,000 rental properties have vanished from the UK market. This isn’t just a trickle but a full-blown haemorrhage. The catalyst? A series of financial and legislative decisions that have incrementally squeezed small landlords out of the game.

It all began with the introduction of the 3% stamp duty surcharge on second homes in 2016. This was followed by the phased removal of mortgage interest tax relief, a policy change that has fundamentally altered the economics of renting out properties. These measures have significantly increased the tax burden on buy-to-let (BTL) investments, making them less viable for many.

Interest Rates

More recently, the rapid rise in interest rates has compounded pressures.

Since the start of 2022, the Bank of England’s base rate has surged from 0.25% to 5%, with CBRE forecasting a further increase to 5.75% by the end of the year.

For landlords, this has translated into sharply higher mortgage costs. For example, the interest payments on a new BTL mortgage of £150,000 have more than doubled from around £300 per month in January 2022 to over £640 per month today.

Such drastic increases have forced many landlords to reassess the sustainability of their rental properties.

It Continues

These cost pressures have driven many BTL landlords out of the sector.

Analysis of UK Finance data suggests that, on a net basis, approximately 273,500 rental properties were sold between 2016 and 2021. Since the start of 2022, when the Bank of England began increasing the base rate, an estimated further 126,500 rental properties have been sold.

This means that, since 2016, a total of 400,000 rental homes have been lost.

If sales continue on a similar trajectory, it could equate to a loss of almost 10% of the UK’s private rented households by the end of this year.

Regulatory Uncertainty: A Double-Edged Sword

The regulatory landscape has added yet another layer of complexity.

The long-promised Renters Reform Bill which aimed to end no-fault evictions among other tenant protections has been mired in delays and uncertainty. This legislative limbo has done little to inspire confidence among landlords, many of whom are choosing to exit rather than grapple with the unknowns of future regulation.

An Uncertain Future

It’s certainly not just the current legislative environment that is causing concern.

CBRE highlights that even the anticipation of future prohibitive regulations can deter investment. The unpredictable nature of these potential changes has left landlords feeling like they’re on shaky ground, further accelerating their departure from the market.

Better Rentals

But is this tightening of rules necessarily a bad thing?

There’s an argument to be made that fewer small landlords could pave the way for a more professional rental market, one less plagued by the whims of those unwilling or unable to comply with heightened standards.

When I was working alongside the ULI on bringing Build To Rent to the UK, part of the vision was to improve standards and benchmarks across the UK rental market.

However, the flip side of the coin is deeply concerning:

As rental stock diminishes, the pressure on remaining properties increases, inevitably pushing rents higher.

The Result

Tenants, it seems, are caught in a vicious cycle where initially well-intended reforms inadvertently make housing even less affordable.

The exodus of smaller landlords doesn’t just reduce the quantity of available homes; it also disrupts the delicate balance of supply and demand, with the potential to send rents spiraling upwards.

The UK, surely, sorely needs the Government to build and back the production of real social housing to lessen the pressure at the lower of the market.

The Figures Won’t Work

As interest rates continue to rise, BTL landlords may soon struggle to meet banks' lending criteria.

Interest coverage ratios, which stipulate that the rent from a property must cover 125% to 145% of the interest on the loan, are becoming increasingly difficult to achieve. For example, in early 2022, a rent of £435 per month was needed to cover 145% of a £300 interest cost.

In the current environment, an interest payment of £640 now requires a rent of almost £930 per month to meet the higher coverage ratio.

This economic strain is yet another reason why landlords are being forced to reconsider their positions.

Who's Filling the Gap?

In the wake of this exodus, it’s worth asking:

Who, if anyone, is stepping in to fill the void?

The answer lies, in part, with institutional investors and a new generation of landlords.

These new entrants are not the typical small-time landlords of yore. They are younger, often under 40, and more willing to invest in high-yield areas outside of traditional property hotspots.

Regions such as Stoke-on-Trent and Crewe are seeing an influx of investment, driven by yields that can reach up to 9%—a figure that would make any seasoned investor’s mouth water.

These new landlords are spreading their risk across larger portfolios, strategically choosing locations where the potential for growth remains strong, despite the broader market uncertainties.

Yet, while this might offer some hope for replenishing the rental stock, it’s important to note that these shifts are far from a panacea. The properties being snapped up by institutional investors and younger landlords often differ in character from those being sold off by their predecessors. The focus is on maximizing returns, which could mean more small units, fewer family homes, and a continued squeeze on affordability.

A Growing Chasm

Additionally, the surge in Build-to-Rent (BtR) investments is not even attempting to bridge the gap left by smaller landlords.

According to CBRE, a total of £26.5 billion has been invested in BtR since 2014, with this sector now forming a vital part of the UK’s private rented market. BtR properties, typically large-scale developments by institutional investors, offer high-quality rental homes with a 98% occupancy rate as recorded by CBRE’s Multifamily Index.

BtR alone cannot fully compensate for the mass exodus of small landlords. Even with the rapid expansion of BtR, the overall rental stock is still facing a net reduction.

With over 250,000 BtR homes across the UK, and new builds struggling to keep pace due to economic headwinds (new starts in BtR developments were down 45% year-on-year in Q2 2023), the supply of rental homes is still projected to shrink significantly.

CBRE estimates this could result in a net fall of 310,000 rental homes, exacerbating the housing crisis rather than alleviating it.

The Impact on Tenants

The knock-on effects of this market upheaval are most keenly felt by tenants.

As smaller landlords retreat from the sector, the scarcity of available rental properties is driving up prices, often beyond the reach of many.

Tenants renewing their existing contracts saw rent increases averaging 8.3% last year, with the average rent now sitting at a hefty £1,151 per month. For those looking to move into a new home, the situation is even more dire, with new rents averaging £1,329 per month.

London and the South has seen the biggest uplift.

As an example I compared a few prices last month in North London and found that prices have often moved upwards by 40%-50% in a 3 year period. Tenants do not have a choice but to move to smaller accommodation.

This disparity between what existing tenants are paying and the current market rates has created a significant disincentive for tenants to move. Aneisha Beveridge from Hamptons highlights that tenants are increasingly opting to stay put, knowing that moving could mean getting less home for more money.

This has led to a 17% drop in tenant mobility compared to pre-pandemic levels, locking many into situations that may not suit their long-term needs.

Affordability

Moreover, the strain on affordability isn’t just a matter of rising rents. The reduction in rental stock exacerbates the competition for what’s left, making it harder for those on lower incomes or with less-than-perfect credit histories to secure housing.

The irony is palpable: policies intended to protect tenants will ultimately leave them with fewer choices and higher costs.

The affordability issue is particularly acute in London, where according to CBRE tenants now spend an average of 37% of their salary on rent.

With industry guidelines suggesting tenants should spend no more than 40% of their gross salary on rent, this leaves very little room for further rent increases, particularly in the capital. And 37% is an average.

The prospect of landlords raising rents to meet the demands of higher interest coverage ratios is increasingly limited by tenants' capacity to pay, which may lead to even more properties being sold as landlords find the situation untenable.

The Future Outlook: A Balanced Market or Greater Instability?

As we peer into the future, the question arises…

Where does this leave the UK housing market?

The departure of smaller landlords might, on the surface, suggest a move towards a more regulated, professional rental sector.

The reduction in rogue landlords and the shift towards institutional investors could indeed lead to better quality accommodation and more reliable tenancy agreements.

There’s an undeniable risk that this shift could bring greater instability.

The exodus of small landlords, who’ve traditionally provided much-needed flexibility in the market, could lead to a rental environment dominated by larger players who prioritise profit margins over tenant welfare. This could mean a continued upward trajectory in rent prices, particularly in areas where demand far outstrips supply.

Additionally, the concentration of rental properties in the hands of fewer, larger landlords may result in less competition, potentially leading to less favourable conditions for tenants.

A market dominated by institutional investors could also see a shift in the types of properties available, with a focus on high-density, small-unit developments that may not meet the diverse needs of the population.

Balance

Policymakers have a delicate balancing act ahead.

The Labour government’s approach to the rental market, particularly its emphasis on tenant safety and stricter regulations, is undoubtedly well-intentioned. But without measures that also incentivise investment and maintain a healthy level of rental stock and most importantly social housing, the risk is that these reforms could do more harm than good.

Some potential solutions suggested by CBRE, could include the reintroduction of mortgage interest relief or a temporary/permanent exemption from additional stamp duty for BTL homes. These measures could help alleviate some of the financial pressures on landlords, encouraging them to stay in the market and maintain their rental properties. But I don’t see these providing relief at the bottom end.

The Crossroads

The UK rental market stands at a crossroads.

The exodus of smaller landlords, driven by financial pressures and an increasingly uncertain regulatory environment, has profound implications for both tenants and the broader housing market.

While there is potential for a more professional and regulated sector to emerge, the immediate impact is likely to be increased rents and reduced availability.

Is this really a recipe for solving the housing crisis?

It is crucial for both landlords and tenants to remain vigilant and engaged in the ongoing policy discussions.

The path forward must strike a balance between protecting tenant rights and ensuring that landlords, particularly those who operate responsibly, have the confidence to remain in the market.

For now, the departure of small landlords may well lead to higher costs and fewer options for tenants, a trend that policymakers must address with both urgency and nuance.

The housing market, much like a finely tuned orchestra, requires careful coordination to maintain harmony. Without it, the discord between supply and demand will only grow louder, to the detriment of all.

The Shifting Landscape

The landscape for small landlords has indeed shifted dramatically.

Once a sector largely inhabited by stability and long-term investment, albeit with some bad actors making headlines, the buy-to-let market now feels more like navigating a series of increasingly treacherous slopes, each with its own set of risks and challenges. And yet we are steering away from the quality rental housing that is so very needed.

As we move forward, the key will be finding that elusive balance, ensuring that both landlords and tenants can thrive in a fair and sustainable market.

If you want to dive deeper into these issues and discuss the future of the sector or how you should adapt for them, I invite you to connect with me.

Ed Fowkes

January 2024

*Data provided by: British Property Federation, CBRE, Savills, Hamptons, Spicerhaart, Shelter, Bank of England, Financial Times, Guardian, HomeLet, HomeViews and the National Landlords Association.