The press has been full of doom-laden prophesies again about the future prospects for the buy-to-let market. Speaking both as a landlord and as a former letting agent, I don’t believe any of them. So why do I say this?

Well, in short, I believe that whatever the problem is, the market will, given time, find a solution to it. Let’s look at some of the current threats to landlords using the example of a buy-to-let property worth £240,000 bringing in a rent of £1,000 per calendar month and a gross yield of 5%.

Let’s start by looking at the impact of the new minimum energy efficiency rules. Let’s assume that the property in question is an older property and that the cost of carrying out the necessary works to achieve an acceptable EPC rating is £12,000. Some commentators have predicted that the cost of complying with MEES is so great that landlords will be forced to sell their properties, but this is nonsense.

In most cases, what will happen is that the landlord will spend the £12,000 on improving the energy efficiency of their property and would then expect a five per cent return on this investment which comes to £600 per annum. This means that the rent will have to rise by £50 pcm. Many will think that this is an unfair burden to place on a tenant on a low income but market forces are based on fact, not sentiment and a rent rise to pay for MEES is inevitable.

COST OF EVICTIONS

Let’s look next at the increased costs of evicting a tenant. These now run into many thousands of pounds and the Government shows no sign of improving the court system in order to reduce these costs. The solution is an insurance policy that protects the landlord against the legal costs of an eviction, the lost rent and any malicious damage to the property. The cost of a good policy might be up to three per cent of the rent which means a rent rise of £360 per year which is another £30 a month on the rent. Again, many will see this as being unfair on the tenant, but the market does not care about fairness.

The market does not care about fairness…

A third threat is the continual increases in taxation for landlords. In addition to limiting the tax relief on interest payments, we now have the threat of higher taxes on the capital gain that is made when a property is sold. For some landlords the solution will be to put their buy-to-let properties into a limited company. For others, it will be to increase the rent by enough to maintain the net yield on their investment.

COMPLIANCE LEGISLATION

A fourth threat is the ever-increasing complexity of compliance legislation and the savage fines that are levied for tiny mistakes. For most landlords, the only practical solution to this problem will be to allow a professional letting agent to manage their properties. At the moment, 50 per cent of all landlords manage their own properties and this situation cannot continue. The cost of professional management will be up to 15 per cent of the rent per annum which is another £1,800 per annum or £150 per calendar month on the rent.

HOLIDAY LETS

The final threat is the conversion of buy-to-let properties into holiday lets. In some areas of the country such as Devon and Cornwall, this has been a huge problem but in most areas the difference in the net yield between short lets and long lets is not as great as people think. By the time you have deducted the higher short let agency fees, cleaning costs, linen, maintenance, wear and tear on the furniture, business rates for multiple landlords, utilities, increased insurance costs, higher mortgage rates and the cost of void periods, the attractive gross returns are soon reduced to a net yield that is below the level achieved by a long let. In this case, market forces will often work in favour of the tenant. It has often been said that the market will not stand such dramatic rent increases but recent events have proved this to be untrue. As a consequence of Covid and the unexpected boom in the housing market, rents have risen by up to 25 per cent in many areas of the country and yet void periods are exceptionally low. What has happened is that tenants who cannot afford the rent increases have moved to smaller properties in cheaper areas or have even switched from a flat rental to a room let. Unfair, but again, market forces at work.

RENT CONTROLS

The only thing that could break the link between market forces and rents is rent controls. However, the consequences of such legislation for both tenants and landlords would be catastrophic. It is impossible to imagine that rent controls could be imposed retrospectively on existing tenancies as this sort of legislation could only be enacted by a communist dictatorship. If rent controls only applied to new tenancies, the supply of properties to rent would cease immediately and tenants would have nowhere to live.

I started my career in 1980 so I remember working in a rent-controlled market. It was almost impossible for private tenants to find a home to rent. For most people, the options were to wait for years on a council housing list, to live with relatives or to take bed and breakfast accommodation which could be operated outside the law. The landlords could evict any tenant at any time for any reason. This uncertainty forced me to buy my own flat at the age of just 21 which turned out to be a wonderful decision, but not a solution for most people.

The market often gets things wrong and continually overreacts to short-term events but, in the longer term, the market always finds its own level and that is why I am sure that the buy-to-let market has a secure and long-term future.

Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than forty years.
www.adamjwalker.co.uk