Landlord investors’ net profits fell below 4.0 per cent in Q1 2023, marking a dramatic shift in finances for mortgaged buy to let buyers, according to the latest research by property firm Savills.

This is according to lettings agency Savills.

Average net profits for landlords are now at their lowest since 2007, due to the impact of 12 successive increases to the Bank base rate, exacerbated by restricted tax relief.

“Following a boom period for buy-to-let landlords, 2023 marks a turning point for Britain’s private rented sector. Between 2014 and 2021, landlords on average were making ‘year 1’ cash profits of 23% of rental income, but successive interest rate hikes have seen this figure plummet to under 4.0 per cent this year” comments Lucian Cook, head of residential research at Savills.

“The incoming Renters Reform Bill, abolition of the Assured Shorthold Tenancy, and increasing EPC regulations, are expected to add to investors’ caution as landlords now face the prospect of having to invest to bring their properties up to a minimum EPC, further eating into profits

“There is a very real risk that landlords will exit the sector, particularly those with high levels of borrowing, putting increased pressure on a sector where demand significantly outweighs supply in many locations.”

Despite growing tenant demand, landlords’ ability to continue to make a margin will depend on debt exposure.

“Debt exposure of mortgaged buy-to-let landlords will play a critical role in the future shape of the private rented sector. Viability will be a real issue for smaller landlords with higher levels of debt who are coming to the end of their fixed rate, while larger, wealthier landlords are in a much better position to benefit from the rental growth seen in the period post pandemic.

According to Savills research, three in four mortgaged buy-to-let properties have a Loan-to-Value (LTV) of less than 60 per cent, while one in three have an LTV of less than 50 per cent.

“Future investment is now likely to be dominated by cash buyers and those with low borrowing requirements. Even landlords with modest gearing are now more likely to enter the sector or expand existing portfolios in areas furthest from London, with a greater focus on smaller properties which offer bigger returns.”

Added to this, many landlords who have been active since buy-to-let took off in the early 2000s are now nearing or in retirement, which risks limiting the future supply of rental stock..

Savills research reveals 1,911,000 properties are currently owned by 620,000 landlords aged over 65, with a further 1,982,000 properties owned by landlords aged between 55 to 64.