What impact will the government’s new deal for renters have on Buy to Let?

Buy to Let landlords have had a lot to contend with in recent years, with the abolition of Mortgage Interest Relief, new energy efficiency minimum standards for rental properties and a surcharge on stamp duty for second homes. Now Michael Gove, Secretary of State for Levelling Up, Housing and Communities has thrown down the gauntlet with his ‘New Deal for Renters’.

The recently published White Paper, ‘A Fairer Private Rented Sector’ aims to ‘empower tenants … [to] raise concerns and challenge unfair rent hikes without fear of repercussion’.

Key proposals include:

• Abolishing Section 21 ‘no fault’ evictions, thereby making it harder for landlords to evict a tenant without having to prove tenant wrongdoing.
• Limiting rent increases to once per year and ending the use of rent review clauses.
• Moving all tenants on to ‘periodic’ tenancies with no fixed end date; tenancies will only end when the tenant decides, or if the landlord has a valid reason.
• Making it illegal for landlords to refuse to rent to families with children or people on benefits.
• Creating a Private Renters’ Ombudsman to that rent disputes can be settled without having to go to court.

To address landlords’ concerns, the White Paper also includes new protections for landlords, such as eviction becoming mandatory where a tenant has been in at least two months’ arrears, three times within the previous three years. Under current rules, however, a landlord would be able to repossess a property from a defaulting tenant without having to wait three years for them to miss six months’ rental payments.

Plus, Buy to Let yields are at a record low

Gross rental yields in the UK are at a record low of 4.38%. With rising interest rates eating into rental income and increasing the cost of mortgage payments, experts are predicting a new low of 4.26% by the end of the year. According to Hamptons, if the base rate climbs from 1.25% currently to just 2%, the average higher-rate landlord will see their profits more than halve. Capital Economics is forecasting that the base rate will hit 3% next year. At 3%, a typical landlord in London would lose a staggering £2,180 per year; even at 2% they would be out of pocket to the tune of £501 per year.

While demand for rental property is at an all-time high, rent growth is capped by tenant affordability and can’t simply keep rising to offset the cost of higher mortgage payments. In addition, when the proposed reforms become law, rent reviews will be limited to once per year, regardless of rising mortgage rates.

Will Buy to Let landlords weather the storm?

With rental yields so low and obligatory energy efficiency improvements eating into profits, many commentators are viewing the proposed reduction in landlord protections as the straw that will break the back of Buy to Let. Given that property prices are at an all-time high, selling up would certainly seem an attractive option for many landlords.

But property is a highly inflation-resistant asset, and those landlords that can afford to do so will want to hold on to their investment. In five years’ time, the current market uncertainty will have passed, the Renters Reform Bill and other legislation relating to second-home ownership, such as Making Tax Digital will be widely understood, and rental yields will have returned to more normal levels. And with the Government reportedly considering Capital Gains tax breaks on second-home sales as a way of releasing housing stock on to the market, landlords who hold on will likely be glad they did so.

Since the cost of energy efficiency improvements can run into thousands of pounds, and since rental properties with regulation-compliant EPC ratings are already able to command a premium, investing in a new-build property that already conforms to current regulations can remove one layer of stress and uncertainty for landlords.

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