Landlords: time for a re-brand
While life as a home renter may not exactly be nirvana, life as a residential landlord has just got decidedly worse.
Before 2017, a landlord’s mortgage interest was 100% deductible against rent earned, encouraging interest-only mortgages (never a good idea). Now that tax break has effectively been removed.
Before 2022, the interest rates charged for these landlord’s mortgages (if variable rather than fixed) was around 3%; now it’s more likely to be round 5.5%.
In combination these two changes — plus inflation in management and repair costs — have been enough to convert what was a monthly profit to monthly loss for many investors. If, like my solicitor, you have a large portfolio of these buy-to-let houses, you may now be losing money every month and forced to liquidate some or all of your properties at a discount in a very weak market. Your pre-tax rents may have gone up 20%, but your post tax net income has not gone up at all while your mortgage interest charge may have nearly doubled.
And that’s not all. The Renters (Reform) Bill introduced by the Government in May 2023 is designed to bring in a better deal for renters, including abolishing ‘no fault’ evictions so that landlords can only evict on fault-based grounds and in reasonable circumstances. Now the Leasehold and Freehold Reform Bill introduced in November 2023 is designed to limit freeholders’ rights, making it cheaper and easier for leaseholder tenants to extend their lease or buy the freehold.
It’s interesting that this decidedly more hostile environment for landlords comes during a Conservative government, illustrating how big is the accumulated pile of grievances against this group. While much of the animus is earned by the transfer of wealth from have-nots to haves during the low interest rate/high asset value period after the global financial crisis, I wonder how much is just bad PR, starting with the staggeringly outdated name for this group.
Landlord still implies a male, privileged inheritor. Meanwhile the tenant sounds like an exploited labourer, growing potatoes that he mainly has to give away in lieu of rent, surviving on a few chips.
Governments (right and left) have never really liked this system. How else can we explain the creation of tax-exempt property owning companies called REITs? Governments would much prefer regulated, well-managed companies to own and manage real estate for those who prefer (or are forced) to rent. Sadly, recent examples suggest that these companies are not always as well managed and benign as governments would prefer, but they have the potential to offer an appropriate solution for smaller investors.
Meanwhile, there are many large well-regulated and benign investors who are very keen to own this asset class. Globally, pension funds and insurance companies have around 19% of their real estate assets in residential real estate. It is a near perfect liability match for many such investors, and delivers the positive social impact they strive for. Historically, however, pension funds have been wary of the reputational damage that can accompany the extraction of rent from tenants, and sometimes eviction. The future, as always, requires technology-based innovation.
Meanwhile, occupiers of residential property need choice (of tenure, as well as of property), and, like any consumer, good customer service. So residential property is becoming highly attractive as an investment asset, but is management-intensive, leading to opportunities for sub-contracting operators and considerable room for technology-based streamlining of headcount and cost.
The concept of space-as-a-service has developed in the office sector and we are about to see a significant improvement in the quality of management of rental housing. The landlord concept will at last be made redundant by increasing ownership in the hands of appropriate owners who in turn employ good operators. A good operator focusses on customer care, using appropriate software with economies of scale justifying heavy investment in high quality UI/UX (the user interface/user experience). That’s very different from stealing his potatoes.
In 2023, the Pi Labs team authored over 100,000 words of original thought leadership on the technological transformation of the built environment. You can view our work at pilabs.vc/insights
