A new index to help Britain’s private landlords and investors ‘benchmark the performance of their residential property investments’ has been created by property investment specialists BondMason.
It found that, despite seeing strong returns for the last few decades, most private landlords would have fared better if they had sold their properties three years ago, as tax changes started to bite, and invested in listed corporate landlords instead.
While the average private landlord has gained a post-tax return of +16.9% over the last three years (relating to higher-rate tax payers, assuming a 65% LTV mortgage, 3% p.a. interest and a 4.5% rental yield), investors in corporate residential landlords have seen a return of +37.7% over the same time period.
The research also found that house prices have increased by a total of +6.0% over the past three years.
BondMason will be updating the new index – known as BRIX, and comprising Britain’s biggest residential property investment listed companies and funds – on a monthly basis to track the financial performance of listed corporate landlords in the UK, enabling private landlords to compare the performance of their own buy-to-let portfolios.
The latest versions can be seen here: www.bondmason.com/bondmason-brix.
“Britain has around 2.5 million private landlords,” Stephen Findlay, chief executive of BondMason, said. “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.”
He added: “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.”
Findlay said that, looking ahead, BondMason’s research predicts worse is still to come, with many private landlords potentially starting to struggle to balance the annual costs of owning a rental property with the post-tax rental income received, particularly in areas of lower rental yield. This comes as the allowable mortgage tax deductions continue to decline.
This month the phasing out of mortgage interest tax relief continues (with allowable deductions falling to 25%), and by next year landlords will be restricted to claiming a basic rate of income tax (20%) on their mortgage interest costs, while having to pay their full tax rate on the rental income.
“In some cases, landlords will have seen their tax bills double or even treble over the last few years,” Findlay continued. “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.”
Despite this, BondMason still believes there is money that can be generated from investing in Britain’s residential property market. It said that the declining post-tax returns generated by private landlords is in stark contrast with the strong growth and surge in value of the growing number of corporate residential landlords, some of which are listed on the stock market.
Corporate residential landlords are able to benefit from lower tax charges than individual landlords, and a full tax deduction of debt interest costs, not to mention the recent £4.5 billion injection from the government to support the Build to Rent sector.
“Historically the UK rental market has been dominated by private landlords, but that is now changing following the increased tax burden and new regulations which make it harder to generate a positive income each year,” Findlay said.
“These companies are filling the gap left by smaller private landlords exiting the market, satisfying the strong demand for rental properties, particularly from first-time buyers continuing to be priced out of the housing market in many areas.”
Findlay said that BondMason’s expectation was that we may soon reach the peak in terms of the proportion of houses owned by individual private landlords, with that proportion starting to decline unless tax legislation is changed or reversed.
“But the good news is that the growth in number of listed corporate landlords means a greater number of people can get exposure to good investment returns from the residential property market by investing in these companies, with the added benefit of being able to do so within a tax efficient wrapper such as an ISA or SIPP.”