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As buy-to-let investors see their profit margins squeezed, the growing number of landlords leaving the private rented sector (PRS), largely as a result of increased regulation and taxes, is a major cause for concern and one that the government cannot ignore.

The Buy-to-Let Rental Barometer from Fleet Mortgages indicates that annual buy-to-let yields have dropped in eight out of 10 regions of the UK, which is why more landlords are expected to exit the sector.

On average, yields have decreased by 0.8% year-over-year, from 6.2% to 5.4%, as rising mortgage costs and tenant affordability issues continue to negatively impact the sector.           

Average Rental Yields  

2022 Q3

Region 2021 Q3 y/y change
North East 8.0% 7.2% -0.8%
Wales 6.6% 6.8% 0.2%
Yorkshire and Humberside 7.1% 6.5% -0.6%
North West 7.7% 6.5% -1.2%
West Midlands 6.7% 5.8% -0.9%
East Midlands 6.6% 5.8% -0.8%
South West 5.3% 5.6% 0.3%
East Anglia 5.6% 5.1% -0.5%
South East 5.4% 5.0% -0.4%
Greater London 4.8% 4.6% -0.2%
England & Wales (Total) 6.2% 5.4% -0.8%

Steve Cox, chief commercial officer at Fleet Mortgages, said: “It’s an obvious point to make that the cost of buy-to-let mortgages has increased, and landlords will need to factor that into their profitability and what they might charge for rent in order to cover these increased costs.

“This is not an easy task given the cost-of-living crisis and there is a need to marry up the need of the landlord to cover the mortgage, with the struggles being faced by many tenants.

“This, at least in the short-term, is likely to have something of a dampening effect in terms of purchase activity.

“Even though many portfolio and professional landlords do want to add to portfolios, and add to the supply available to tenants, the cost of funding those purchases has increased significantly, as it has done for those existing borrowers who are now coming off special rates and require a remortgage or product transfer.”

Meanwhile, despite the intervention by the new chancellor Jeremy Hunt earlier this week, designed to calm the financial markets, the National Association of Property Buyers (NAPB) warns that this will not be sufficient to prevent a devastating chain of events.

Jonathan Rolande, from the NAPB, said: “The grim reality is that tenants are set to face eviction, or huge rent rises because increasing numbers of landlords are looking for a solution to the latest chapter of the housing crisis that now is affecting them.

“Despite a steadier hand on the wheel, the economic ship is far from calm waters even if, for now, the iceberg has been avoided. Landlords were already reeling from legislation and tax increases that hit profits hard. Now they are facing the prospect of huge rises in their mortgage repayments at a time when their asset – the property – looks set to drop in value.”

The NAPB is now calling for a new set of measures.

Explaining what they would like to see introduced, Rolande continued: “The government could now look to dilute this mass sale off by increasing capital gains tax for profits on sale as a temporary measure, deterring all but the most desperate from selling up.

“Rewarding those landlords who offer longer-term letting with fixed, sensible increases with tax breaks would be a popular move too.

“Landlords are set to experience difficulties ahead. But tenants have been paying the price through the good times and the bad. It’s time to use the existing tax system tactically, to redress the balance.”

Rolande said the NAPB had been warning for many years that “without capital growth through rising house prices, buy-to-let as an investment was pointless other than for the lucky few who do not need to borrow the money to buy”.

He continued: “Even before the recent turmoil, a yield of 5% was considered good. And that’s before expenses of a managing agent, repairs, annual safety checks, redecorating between tenancies – the list goes on and on. Now with interest rates on borrowing doubling, and rates on cash in the bank increasing, an income of 5% before costs is looking dire.”

Predicting what will come next, he added: “Many landlords are considering their options. Some will look to move out the tenant and try to sell or sit tight, hope for the best and ratchet up the rent to make the figures work.

“Either way, many tenants face paying the price for the state we’re in.

“It seems especially unfair as, when times were better and interest rates fell – down to 0.1% in 2020 – how many landlords called their tenants to share the good news and reduce rents accordingly? Not many. Rents continued to rise as demand soared and supply dwindled.

 “Just as we thought things couldn’t get any more unbalanced, a mass exodus of landlords will lead to higher rents, justifying increases to those staying put in their homes.”