Returns for Britain’s private landlords drop, while strong returns have instead come from investing in corporate residential landlords

Property investment specialist BondMason has created a new index to help Britain’s private landlords and investors benchmark the performance of their residential property investments.

It makes compelling reading for private landlords; despite seeing strong returns for the last few decades, most private landlords would have done better if they had sold their properties three years ago, as tax changes started to bite, and invested in listed corporate landlords instead.

The key figures from BondMason’s research are:

  • The average private landlord has gained a post-tax return of +16.9% over the last three years (from 1 April 2016 to 1 April 2019 – source BondMason analysis; for higher-rate tax payers, assuming 65% loan to value mortgage, 3% p.a. interest; and a 4.5% rental yield)
  • Meanwhile, BondMason’s BRIX shows investors in corporate residential landlords have seen a return of +37.7% (BondMason BRIX is the Residential Property Investment Index, comprising Britain’s biggest residential property investment listed companies and funds – also from 1 April 2016 to 1 April 2019)
  • House prices have grown by total of +6.0% over the past three years (from March 2016 to 2019 – source Nationwide house price index).

BondMason will be updating this new index monthly 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.

Stephen Findlay, the CEO of BondMason, says: “Britain has around 2.5 million private landlords[1]. 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.

“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.

“Looking ahead, our research also predicts worse is yet to come. Many private landlords may start 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, as the allowable mortgage tax deductions continue to decline. This month the Mortgage Interest Relief continues to phase in, 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. 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.”

BondMason believes nonetheless there is still money that can be generated from investing in Britain’s residential property market. The declining post-tax returns generated by private landlords contrasts with the strong growth and surge in the value of the growing number of corporate residential landlords; some of which are listed on the stock market.

This is because they are able to benefit from lower tax charges than individual landlords, and a full tax deduction of debt interest costs, as well as a £4.5bn injection from the government to support the Build-to-Rent sector.

Stephen Findlay adds: “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.

“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.

“Our expectation is that we may soon see the peak in terms of the proportion of houses owned by individual private landlords, and that proportion will start 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.”