Landlords’ net profits slipped below 4% in Q1 this year, marking a significant shift in finances for mortgaged buy-to-let (BTL) buyers, according to research from property firm, Savills.

Average net profits for landlords are now at their lowest level since 2007, as a result of 12 successive increases to the Bank of England (BoE) base rate.

Interest rates were as low as 0.1% in December 2021 but now stand at 4.5%, with another potential increase to be announced by the central bank next week.

Savills suggested that following a “boom period” for BTL landlords, 2023 is marking a turning point for the UK’s private rented sector. Between 2014 and 2021, landlords, on average, were making year-one cash profits of 23% of rental income. The successive hiking of interest rates, however, have seen this figure plummet to below 4% this year.

Head of residential research at Savills, Lucian Cook, said: “The incoming Renters Reform Bill, abolition of the Assured Shorthold Tenancy, and increasing Energy Performance Certificate (EPC) regulations, are expected to add to investors’ caution as landlords now face the prospect of having to invest to bring their properties up to a minimum EPC, further eating into profits.

“There is a very real risk that landlords will exit the sector, particularly those with high levels of borrowing, putting increased pressure on a sector where demand significantly outweighs supply in many locations.”

Despite growing tenant demand, Cook also highlighted that the ability of landlords to continue to make a margin will depend on debt exposure.

“Viability will be a real issue for smaller landlords with higher levels of debt who are coming to the end of their fixed rate, while larger, wealthier landlords are in a much better position to benefit from the rental growth seen in the period post pandemic,” Cook added.

According to research by Savills, three in four mortgaged BTL properties have a loan-to-value (LTV) of less than 60%, while one in three have an LTV of less than 50%.

In Q1 2023, those with an LTV of 60% were able to generate an average profit of 10.2% while those with an LTV of 50% generated 16.5%. In the same period, landlords leveraged at 80% saw profits move into negative territory, at -2.4%.

Furthermore, many landlords who have been active since the BTL market took off in the early 2000s are now nearing or in retirement, which Savills warned could risk limiting the future supply of rental stock. The property firm’s research has also shown that 1.91 million properties are currently owned by 620,000 landlords aged over 65, with a further 1.98 million properties owned by landlords aged between 55 and 64.

“While existing tenants will benefit from greater security, a combination of factors means there is a risk that new tenants will have less choice,” Cook said.

“With fewer properties available, stock is more likely to be let out to tenants who are better paid, and in more secure employment, inadvertently hitting less affluent households unless measures are taken to increase rental supply.”

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