Good vibes in professional buy-to-let sector

Jon Hall, Group Managing Director, Mortgages & Savings, OSB Group


Once the Christmas carols have faded away, the mood music in the UK mortgage market is likely to be pretty subdued. Business levels in 2023 will certainly be lower than this year, and as lenders and advisers we must prepare to help borrowers facing a range of financial challenges.

But it’s also important to identify and support those sectors where the vibe is more upbeat – and certain parts of the buy-to-let market fall into that category.

According to figures from Hamptons, during the first 11 months of 2022, 12.2% of UK homes were bought by an investor, the highest level since 2016 and slightly up on the 11.7% recorded in 2021. It attributes this rise to sellers being more open to negotiating on price, giving investors the opportunity to pick up deals they could not have stuck six months ago. As a result, the number of landlords registering with estate agents increased by 9% in 2022 compared with a year earlier. It seems that investors are seizing the opportunities offered by a softening housing market - in November, 37% of offers were from landlords on properties with no competing offers, up from 11% in January 2022.

Admittedly, landlord purchases remain below their 15.5% peak in 2015, the year before the 3% stamp duty surcharge was introduced. And despite the proportion of buy-to-let acquisitions rising between 2021 and 2022, with fewer property transactions in total this year the overall number of investor purchases is likely to be around 30,000 down on last year.

The latest statistics are nevertheless significant, suggesting a hunger to acquire property at odds with the prevailing sentiment, which holds that rising interest rates coupled with the ever-increasing cost of living means tougher times ahead, likely to force more landlords out of the buy-to-let sector in 2023.

In fact, these statistics chime with our Landlord Leaders research 2022, which revealed that 68% of all landlords had or were planning to buy more property, breaking down into 40% of part-time landlords but 80% of professional landlords, who derive their main income from their buy-to-let business, looking to increase their portfolios.

Many of these buy-to-let investors are pro-actively seeking opportunities to enhance their returns, and selecting their purchase properties with care and deliberation. So far this year, 56% of buy-to-let acquisitions were in locations with average yields of more than 6%, compared with 40% a decade ago. The top 10 regions for rental yield were all based in Northern England and Wales. Such geographically strategic purchasing also indicates a move towards professionalism in the buy-to-let sector, with portfolio landlords more likely than their part-time counterparts to buy where the sums add up most favourably, rather than in areas that might be convenient or familiar - again in line with the Landlord Leader research.

The overall picture is of professional investors continuing to look for opportunities – albeit in a challenging market. Those landlords coming off fixed rates are facing higher borrowing costs, but in many cases, these are at least partly offset by the ability to charge higher rents, due to the ongoing imbalance between supply and demand. Ironically, that asymmetry has been exacerbated by the tighter tax regime forcing more part-time landlords out of the market over the last five years, and current falling house prices encouraging more would-be first-time buyers to remain in the rental sector.

According to Hamptons data, average rents increased annually by 7.9% to November 2022, passing £1200 for the first time. Outer London experienced 8.9% growth, while Inner London saw a rise of 20.4%

But price elasticity can only stretch so far before tenant affordability snaps. Landlords are alive to their tenants’ concerns: 72% of our respondents said they were thinking about the tenant experience. They understand the immediate financial pressure their tenants face, particularly the impact of soaring energy costs. They are looking to the longer term and acting now to increase the energy efficiency of their rental stock, with 68% of Landlord Leaders saying they already have or plan to invest in upgrading their property.

This willingness to invest in environmentally-friendly property improvements flies in the face of an entrenched narrative which claims that buy-to-let landlords are reluctant to embrace sustainability – or certainly to spend money on it. The reality, it seems, is very different.

As mortgage lenders and brokers, we need to be attuned to the way our buy-to-let customers are thinking, and shape our strategy to support landlords, as they seek to expand their portfolios and strive to provide rental homes suitable for an increasingly energy-aware audience.

This article first appeared in Mortgage Strategy – December 2022.