Why you shouldn’t hate the little guys who buy-to-let

    25 May 2019

    Most industries have long since been seized by the big guys. Look at coffee shops, once a tapestry of micro businesses, now dominated by the likes of Pret and Costa; or the funeral business, once controlled by family firms but now in the hands of Dignity and the Co-op. Yet there is one industry where it is the small guy who has gained the upper hand in recent decades: rental property.

    If you are renting your home, the chances are that you are inhabiting a property that is owned by a small-time investor. They may be very small-time indeed. According to the Council of Mortgage Lenders (CML), 63 per cent of landlords let just one property, and in some cases it may be their main source of income. It is easy to sympathise with tenants and see landlords as villains — a role they have fulfilled in popular culture since at least Victorian times — but many tenants in London might be surprised to find they have an income that their landlord would envy.

    Where small-time buy-to-let investors are to be envied, however, is in the capital growth they have enjoyed over the past 20 years. Institutional investors, by contrast, missed out on the great residential property party that followed the early 1990s slump. Most of them sold out of the sector in the 1970s and 1980s, thanks to rent controls, and did not return once these were abolished in 1989. For the past 30 years there have been few funds or investment trusts that offer exposure to the residential property market: in order to join in the spoils investors have had to own property directly. One attempt to set up a residential property real estate investment trust (REIT), Mill Residential in 2014, ended when the company wound itself up a year later, complaining it had not been able to raise sufficient funds to build up a portfolio.

    But things are changing in the residential lettings market. Buy-to-let is now in retreat, under attack from tax changes targeted to make life difficult for small-time investors. Buy a rental property now and you will be subjected to an extra 3 per cent stamp duty on top of what the property would have incurred for an owner-occupier. Moreover, the right to offset mortgage repayments against rental income is steadily being eroded. These were changes set in train by George Osborne as chancellor, with the open purpose of tilting the housing market back in favour of owner-occupiers.

    Yet at the same time as discouraging small investors, the government and the Mayor of London are trying their hardest to encourage ‘build-to-rent’. This is where large developers build purpose-built rental blocks designed to be let and managed by a single owner. These institutional owners are exempt from the extra 3 per cent stamp duty on rental properties. Tweaks to planning policy in London, too, have favoured build to rent. At the beginning of last year, one in five properties under construction in the capital was in the build-to-rent sector. Among the biggest players are Qatari, APG, Delancey and L&Q. Legal and General has set up a £600 million fund to invest in build to rent all over the country.

    The obvious question is: if small-time buy-to-let investors are to be discouraged, what, then, is the justification for encouraging build to rent? Several explanations have been advanced for this. Large institutional investors are more likely to offer longer tenancies, giving tenants more security than they get renting from small-time landlords (although changes to tenancy laws could achieve the same objective). Build to rent is also being encouraged on the basis that it stimulates housebuilding. But perhaps above all, build-to-rent can be used to help enforce a new, lighter-touch form of rent control. London planning rules favour build-to-rent developments where a certain proportion of the units will be let at ‘affordable rent’, i.e. capped at 80 per cent of local market rent. This is relatively easy to enforce in a building where all 200 flats are owned by the same company; it would be much harder to impose if those 200 flats had been sold off to individual investors, each of whom would expect to let their property at a market rent.

    But there are other ways to ensure that people of limited means can afford a home: build more social housing, and stop selling off what we have. Rent controls, by contrast, have a miserable record for destroying housing markets. The way that small-time investors are being discouraged while corporate ones are encouraged looks like another case of government being lobbied by powerful vested interests. It is easy to see why corporate investors would rather have the private rental market to themselves,; it is harder to see why a government should want to help them out.

    The only consolation for the small guy is that the huge capital gains of the past two decades are surely not going to be repeated over the next 20 years. The institutional investors are arriving just at a time when the property market seems to be settling down to an era of far more meagre profits.