In the wake of government policies clearly designed to restrict its expansion, the buy-to-let sector has been described by UK Finance as weak, subdued and unlikely to recover in either 2018 or 2019.
Buy-to-let is shrinking, and specialist broker Mortgages For Business (MFB) predicts the total lending figure for 2017 will be about £35bn, down 14 per cent from 2016, before falling a further 11 per cent to £31bn in 2018. But lenders, brokers and landlords seem far from discouraged.
A survey of landlords conducted by MFB finds that 44 per cent of respondents plan to expand their portfolios in the next six months, despite acknowledgement that the sector is contracting. Of these, 60 per cent were ‘portfolio landlords’, a category of buy-to-let borrowers identified by the Prudential Regulatory Authority (PRA), which as of October 2017 required lenders to apply specialist underwriting to such borrowers.
The PRA states a portfolio landlord is “a residential landlord with four or more distinct, mortgaged, buy-to-let properties”. MFB reports that 61 per cent of respondents fall into this category. The optimism is further underlined by the fact that 25 per cent think the sector will grow, 57 per cent think it will be flat and only 18 per cent believe it will decline. As MFB points out, most experts expect the sector to reduce in size thanks to government policy.
Their positive outlook may also be due to the types of landlords involved in the survey. MFB describes itself as catering for the more specialist end of the market, dealing with landlords with more complex borrowing requirements. Thus these are likely to be sophisticated and experienced property investors who are in it for the long haul.
Curbing growth
The restrictions designed to curb the growth of the sector were partly born out of a fear that landlords would compound any fall in the housing market by cutting their losses and selling, leading to a colossal drop in the housing market. Given the financial and regulatory hurdles in place, those who are less serious about investing in the sector will be looking elsewhere in any case.
Just over three quarters of respondents said they owned four or more properties, suggesting they are likely to have considerable experience in the sector. Some 47 per cent of respondents plan to remortgage within the next six months, roughly in line with the previous quarter’s survey findings. But although nearly 45 per cent plan to expand their portfolios, 15 per cent intend to reduce the number of properties in their portfolios over the next six months, up from 9 per cent in the previous survey in May. As Chart 1 shows, that is the highest percentage since November 2015, when the first income tax changes were announced. MFB suggests this pessimism may be due to the introduction of the specialist underwriting guidelines at the end of September, and that the rise may not be maintained in the next survey due in May 2018.
The number of landlords purchasing property via a limited company structure continues to grow, with 46 per cent of respondents holding at least one property in a corporate structure, up from 42 per cent in May 2017 and 32 per cent in November 2016.
Many landlords are aware of the tax and regulatory changes that have taken place in the sector, and nearly 75 per cent believe they will be affected. But landlords still need to be reminded of the importance of taking professional advice before committing to further borrowing. MFB was alarmed to see that 54 per cent of respondents had not sought professional advice regarding exactly how they might be affected.
As the report says, the past couple of years or so have delivered uncomfortable changes to property investors, the full impact of which has yet to be felt. While some landlords have adopted a wait-and-see approach, the sector has not seen the “mass exodus” of investors that was widely predicted by some.
MFB adds that while it is early days, landlords have proved themselves to be “robust” and are likely to continue adjusting their investment strategies to the new landscape.
