Two-speed market emerges as private rented sector climbs to £1.4 trillion

A cocktail of tax reform and tighter regulation for landlords is slowing the growth of the private rented sector (PRS), despite its value hitting a new high, according to the seventh edition of Kent Reliance’s Buy to Let Britain report.

The value of the PRS in Great Britain currently stands at nearly £1.4trn, a rise of 6.4% or £82.6bn in the last year. Rising house prices have been the key driver in this increase, with the average rental property climbing in value by 4.2% in the last year. 

The total number of households in rented accommodation is growing much more slowly. There are nearly 5.6m households across Great Britain in the private rented sector, just 2.2% more than a year ago. This is less than a third of the rate of increase seen in 2014. 

Slower growth reflects landlords’ fragile confidence in the sector, with only 41% of landlords confident in the prospects for their portfolios. Confidence has been hit by tax reform reducing the amount of mortgage interest that can be offset against tax, rising costs, and new mortgage rules that have tightened criteria.

Tenant demand is growing more slowly too. Just 5% more landlords reported rising tenant demand than those who reported it fall, the lowest balance in at least five years.

This has been reflected in easing in rental inflation. Average rents per property now stand at £895 per month across Great Britain. Although this is another new high, the typical rent increased by 1.5% annually, down from 2.4% a year ago, with sluggish growth in London weighing on the national average. Rents are likely to continue to climb as 29% of landlords expect to increase rents over the next six months, 10 times the number who expect to reduce them. As taxation rises over each of the next three years, buy to let landlords could look to pass on rising costs to tenants where possible. 

Where supply is expanding, it is being driven by larger-scale landlords. In a survey of 856 landlords, run in association with BDRC Continental, among those who bought or sold properties in the last three months, investors with more than 10 properties made a net addition of one property. There is no growth among those with less than five properties. Given that investors with just a single property comprise 62% of the landlord community, a lack of growth in this segment of the market is dragging on the expansion of supply.

Those landlords still buying properties are increasingly doing so as a limited company, rather than as an individual, allowing them to continue to offset mortgage interest costs against tax. Kent Reliance’s data shows that in the first three quarters of 2017, more than seven in ten buy to let applications for house purchase were via limited companies, up from 45% in 2016. 

Professionalisation is also being driven by the PRA’s recent intervention in the market. Since the end of September, for those with four or more mortgaged properties, lenders must account for much more detail about their portfolio, their experience and track record, assets and liabilities, and business plan. For many landlords, this means creating business plans for the first time, and considering longer-term planning for their portfolios.

Andy Golding, Chief Executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy to let, commented:

“Landlords are swallowing the unpleasant cocktail of higher taxation and tighter regulation, and this is undermining the expansion of the private rented sector. A fundamental shift in the landlord population is now under way, as buy to let moves from being a pastime for hundreds of thousands of British amateur landlords, to the preserve of committed long-term investors. 

“Creating a more professional sector is no bad thing, but there is a limit to the amount of change the sector can absorb before we see a damaging reduction in supply – an outcome that would see rents increase for tenants and reduce their ability to save for a deposit for house purchase. Landlords’ confidence is better but still clearly fragile, and as the new tax reforms gradually come into force, any further financial burdens may prove to be a tipping point.”


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