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Buy to let Britain: a divided nation

3 Sep 2018

Britain’s buy-to-let landlords are divided over their future, in light of tax and market changes – according to latest research from property-backed P2P lending product, Octopus Choice. While three in five buy to let investors (56%) want to keep or buy more rental properties, two in five (44%) are looking to sell. The majority of UK landlords still view it as a money-making asset class but think it will be on the decline in the future. As the market consolidates, buy to let owners are polarized across the country, with tough decisions to make on whether to stay or leave the sector. 

Fight or flight: British landlords at a crossroads

For those looking to exit the market, nearly a quarter blame falling yields (24%) and tax changes (23%), while a fifth blame cooling house prices (19%). Three in five (60%) say that property management had become a burden and 61% undervalued the costs involved.

But despite the hassle, are Brits still obsessed with property? Certainly, some who are planning to sell their portfolio still want exposure to it as an asset class: over a quarter (27%) for example plan to invest the money into their main property compared to a third re-investing in another asset class (37%) or in cash (30%).

“Brits still have an incessant love affair with bricks and mortar – but the hassle and cost of buy-to-let is a source of growing frustration, and some landlords may find that their once-reliable day-to-day income is becoming harder and harder to come by”, said Sam Handfield-Jones, Head of Octopus Choice. “But this isn’t the case across all parts of the market, with money still to be made from the right property in the right region.”

Location, location, location – the UK’s buy-to-let hotspots

There are still profits to be made, but there is a significant regional divide when it comes to the best performing areas for buy-to-let.  London landlords face the toughest choice, with falling yields and slowing house price growth set to reduce profits. Analysis by Octopus Choice reveals that typical buy-to-let properties in London cost landlords over £1,250 per annum for the first five years (2). And an average London house worth £475,000 would have to be sold for £590,000 eight years later, just to break even (3) – even taking into account the income over that eight-year period. While London hotspots can still be found – Tower Hamlets, Barnet and Hackney – three-quarters of landlords in the capital think investing in buy-to-let will be less worthwhile in five years’ time: more than any other area. In Scotland and the East Midlands, it’s a different story – with Scottish landlords already enjoying average annual returns of 8.8% on their investment over an eight-year period, while those in the East Midlands return 8.2%. 

 London and UK buy-to-let returns map.

Generational gap – millennials more likely to sell up than older landlords

Millennial landlords are more inclined to sell than stay with two thirds (65%) planning to sell one or more of their properties. This compares to less than a third (29%) of the over 55s. Younger landlords are also more likely to admit that managing a buy-to-let has become a hassle (81%) compared to 39% for investors over 55. The biggest annoyance cited by millennials is dealing with onerous tax returns, while older generations blame high one-off costs. Millennials also confessed they underestimated the costs involved (87%) including repairs and upkeep, insurance and initial legal and conveyancing fees, compared to just a third for those over 55.

Sam Handfield-Jones, Head of Octopus Choice, adds:

“Against this backdrop, it’s not surprising that some investors are seeking alternative ways to indirectly invest in the property market. For those looking to leave, there are growing numbers of ways to keep one foot in the door. Property-backed P2P lending products like Octopus Choice allow investors to target an attractive return by lending to property professionals and buy-to-let landlords. This means you benefit from the security of property, without the cost and hassle of actually being a landlord yourself. As with any investment, your capital is at risk and you may get back less than you put in.”



 Notes to editors  

  1. Opinium Research carried out an online survey of 1,002 UK buy-to-let investors – all adults aged 18 or over – from 06 to 14 July 2018.

2. Octopus built a model to analyse the income and costs associated with buying, running and selling an additional property over an eight-year period. It used the 2017 average UK house price growth statistics (source: Land Registry) and rental yield figures (source: LiveYield) and incorporated the gradual removal of the ability to offset interest repayments against any income tax bill which a property may generate.

The model assumes that the property is held for eight years and then sold, so as to account for the potential capital growth associated with holding a buy-to-let property as well as the day-to-day income.

This allowed Octopus to create two different metrics: the overall annual return (‘internal rate of return’ or IRR), which assesses the overall performance over the whole eight years including the value of the sale; and the annual cash flow, which looks at the income and costs associated simply with running a buy-to-let on a yearly basis.

Overall return after eight years, by region

London -2.46%
Wales 0.26%
North East 1.72%
East 2.19%
South East 2.29%
Yorkshire & Humber 3.36%
South West 3.91%
North West 3.96%
West Midlands 6.47%
East Midlands  8.18%
Scotland 8.82%

Our assumptions:

  • Average loan-to-value (LTV) of a buy-to-let mortgage – 70% (Source: Council of Mortgage Lenders, ‘The black and white of buy-to-let: what does the data show?, March 2016)
  • Property value – £300,000 outside of London (the UK average is £243,583. Source: Land Registry ‘House Price Statistics, June 2017-June 2018); £475,000 in London (Source: Land Registry)
  • Mortgage arrangement fee – £1000 (Source: Moneysupermarket, July 2018)
  • Interest rate (assuming interest-only mortgage) – 4.5% (a low average based on the mortgage size and LTV. Source: Moneysupermarket, July 2018)
  • Early repayment charge – 1% (the lower end of the Money Advice Service’s 1-5% estimation. Source: Money Advice Service, ‘A guide to mortgage fees and costs’, July 2018)
  • Exit fees (estate agents & solicitors) – 1.5% (Source: Which?, ‘The cost of selling a house’, June 2018)
  • Maintenance & estate agent fees – 15% of rent (Source: Which? ‘Using a letting agent, May 2018)
  • Repairs and Upkeep – 0.2% (Source: The Property Voice, ‘Buy-to-let slush fund – what’s the right level?’, September 2014)
  • Tax band – we have assumed that the landlord is a higher rate (40%), taxpayer

           3. This would achieve a 2.5% return, which is 0% in real terms, assuming present inflation rates of 2.5% (Source: ONS, Consumer price inflation, UK, July 2018)

For journalists in their professional capacity only. The value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Money invested through Octopus Choice is concentrated in loans backed by property and could be affected by market conditions. For the same reason, instant access to investors’ money cannot be guaranteed. Investments in peer-to-peer lending aren’t covered by the Financial Services Compensation Scheme (FSCS).Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. Investors should read the product brochure before deciding to invest. This is available at octopusinvestments.com. Octopus Choice is provided by Octopus Co-Lend Limited, which is fully authorised and regulated by the Financial Conduct Authority (reference number 722801). Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: August 2018.