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New Kids on the Block
By Nic Paton for Property Magazine
December 2023
Almost three-quarters of landlord sales in 2022 were from landlords retiring, so who are the new generation of property professionals?
In March, estate agency chain Hamptons International, in its regular lettings index' report, highlighted how, two decades on from the birth of the buy-to-let (BTL) mortgage in the late 1990s, that decade's pioneers are now starting to retire and/or sell up. With the average landlord turning 60, older investors are leaving the market - 140,000 landlords retired in 2022, in the process accounting for nearly three-quarters (73 per cent) of all landlord sales last year. A further 96,000 were due to turn 65 this year, while 924,000 were already over 65, the report highlighted.
Who, then, will be replacing this generation? Will it simply be a case of demographic 'churn' where eager young 'Generation Y' or 'millennial' landlords seamlessly step up in their place? Or, given the past decade of rising house prices, tax and regulatory reform plus, now, the fact we're in a much more challenging market, might we see a more profound shake-up of the private rented sector?
"When you look at the bigger picture, it is clear that it is harder for younger people to buy their first home, let alone purchase a buy-to-let portfolio on top of all of that," agrees Hamptons' head of lettings, Catherine Westerling.
Limited Company Landlords
Even where younger individual landlords do have the resources and wherewithal to step up, it is now likely to be through more corporate structures, forecasts her colleague, head of research Aneisha Beveridge.
"The big change is the fact that landlords who own in their personal name can now no longer offset their mortgage interest before they pay tax. Whereas you can still do that if you operate through a limited company," she points out.
"So, I think they [individual landlords entering the market] will probably be older than today's landlords were when they started. They are probably going to be in it as more of a professional business. And they are more likely to be actively building and managing a BTL portfolio; I think we will see a very, very large chunk of them operating as limited companies”, she predicts.
As well as Section 24 changing the tax treatment of private rentals, the ending of Section 21 'no-fault evictions, as proposed within the Renters (Reform) Bill, could well be the straw that breaks the camel's back for many older landlords, perhaps already considering their options, suggests Jo Young, senior associate and solicitor at law firm Tozers.
In fact, she points to a widespread suspicion in the market that the Government, through its regulatory reforms, is almost deliberately trying to get rid of the smaller, individual landlord.
"Being a landlord has to be more of a business nowadays. We are still seeing landlords who are running their portfolios as a business, perhaps with 40 or 50 properties, and they are still continuing to buy; there are landlords who are still in it for the long term. But to do that, to self-manage and keep on top of all of the necessary administration that comes with being a landlord, realistically, it now has to be your business," Jo points out.
What’s stopping investors?
We can see these trends clearly in the experience of Devon Parker, who manages and develops a portfolio of predominantly two- to three-bedroom properties across the North East of England through limited company Classhouse Property. Yet, she is also from a multigenerational family of 'traditional' landlords, some of whom are now exiting.
"My grandad, Ernie, my uncle, Gary, and my dad, Tony, were all landlords, and in fact have all just sold off an entire portfolio to a mix of owner-occupiers and other landlords," she explains.
"In this country, we are very property-centric, owning property is seen as a good thing. So I would think the sentiment is that a lot of people still want to own property, and younger professional people do want to invest in it. But there are a lot more barriers to entry today than there were, say, in my dad's or grandad's era."
So, who then does Devon believe will be the residential landlord of, say, 2034?
"I think we will have a lot of institutional investors. I think landlords of today, who have set up properly and have put systems and processes in place and mitigated their financial risk, will weather the storm quite well," she predicts.
"But those who have just approached it from the point of view of 'oh, it's just an investment to give us a return' will, I think, struggle. I'd like to think more people my age and younger will enter the market to replace those older generations of landlords who are exiting. But I worry that is an optimistic hope.
"Moreover, if all the older landlords are not replaced, I think this is something that is potentially really going to impact supply. So, I think the Government needs to incentivise more people to invest in the sector, because we have got such a massive issue with supply across the country," she adds.
Article pages from Property Magazine by the National Residential Landlord Association.
More Institutional Investment
In an echo of Devon's prediction, research by property consultancy Knight Frank last year forecast that institutional investment into residential assets was going to increase by 65 per cent during 2022 compared with the year before.
This trend is only likely to continue, and will be part of the changing ownership mix we see within the market going forward, forecasts partner Jonny Stevenson. But it has to be remembered that this growth will be from a relatively small base in the context of the overall market.
"Where will we be in 10 years' time? It is very hard to forecast what of the total rental market will be institutional. It is sub two per cent at the moment. Where can it get to? Maybe in a mature market it could be 25-30 per cent of the total rental market. So, there is a lot of room to grow, but it is still going to be just one part of the mix. It will still be Joe public and/or others owning 70-75 per cent of the market," Jonny emphasises.
This caveat is important, agrees National Residential Landlords Association director of policy and campaigns Chris Norris. "We shouldn't overdo doom-and-gloom predictions of the end of the private residential landlord. The market, and market demographics, may, yes, be changing, but the underlying fundamentals remain robust” he says.
"There is an awfully long way to go for the larger corporates to take over the market share. Ultimately, I think there is still - and will still be a decade from now - a role for the whole spectrum of landlords," Chris points out.
"For larger corporates, there is actually an awful lot they can learn from the market as it currently exists, particularly when it comes to customer service, the way you communicate and engage with tenants, for example. Equally, individual landlords can learn a lot from the more businesslike end of the market. I suspect we may be seeing more of a coming together of the two parts of the market.
"For me, the mix may have changed and be changing but, if we're looking 10 years down the line, I don't think it will have changed that much. There will still be room for smaller landlords, aspirational portfolio landlords and corporate landlords. This isn't going to be a revolution. I think things will change, but it will be an evolution over the course of decades," Chris forecasts.
“A Corporate is not going to bend over backwards to help a tenant”
Surrey-based landlord Margaret Melrose turned 70 in October but, she laughs, "I feel like I'm still 20!" Nevertheless, with her husband now in poor health and frustration at the changing regulatory and taxation landscape for landlords, Margaret is in the process of winding up at least part of her nine-strong portfolio of properties, predominantly located in Greenwich, southeast London.
She has recently put the property she co-owns with her husband on the market; another will come to market next March and she is in the process of selling a further property to the long-term tenant. She's also recently sold a property she co-owned with her daughter. "Taxation is the main issue for me [for exiting], in particular Section 24, which, to my mind, creates unfairness between corporate and private landlords, in that corporates do not get taxed in the same draconian way now as private landlords,” Margaret says.
“The government keeps adding to the small landlord's burden with more and more requirements, which are expensive and time-consuming," she adds. As to who she feels is likely to replace her, while she does believe younger generations will follow (her daughter, for example, will carry on letting some properties, she points out), she predicts corporate investors will become a bigger presence.
"That might be a big corporation or somebody who started off as an individual landlord and now has 100 properties and has incorporated. And I think that is to the complete detriment of the tenant. "A corporate is not going to bend over backwards to help a tenant who is struggling with whatever it might be. They are going to be losing that individual touch," she says.
“A small-time landlord might not have the time or resources for all this stuff”
With a portfolio of 55 properties, mostly in London, plus his own estate agency business, Deshal Raja is witnessing first-hand some of the demographic changes in the residential property market.
"From the older-generation landlords I know, they're pretty much looking to pass their properties on to their kids. But what I see is that most young adults do not actually want to take it on," says Deshal.
"They're of the view, 'give it to an agent, let them deal with it, we just want the income coming in'. They're not proactive, as my brother and I are, in terms of seeing it as a proper business or a full-time job. But as they get older, they might well become more engaged with it, see it less as a passive income. They may see it more as a retirement nest egg, that sort of thing."
Nevertheless, Deshal agrees that we will see more institutional and corporate investors entering the market. "I think that is going to be the way forward. They have the staff and the cash to invest in a lot more properties than the 'accidental' landlord. They can hire people to do all the jobs to satisfy the regulations and service the properties for them, whereas a small-time landlord might not have time or resources for all this stuff.
"For those selling up, too, if they haven't got family to pass their portfolio on to, it can be an attractive option to sell up to a corporate or institutional investor. However, I think many landlords are also still putting properties into auction to facilitate their exit. There is still quite a strong market of people who are bidding for properties and paying quite a high price,” he adds.
