Roma Finance predicts the death knell for the small landlord

25 June 2018

Roma Finance, the specialist bridging finance and development lender, reports that the private rental sector of the future will be dominated by larger institutional landlords as the number of hobbyist landlords decreases.

Landlords are evolving in many different ways, from the legal structure of their holdings, the make-up of their portfolios, the quality requirements they will have to adhere to and the way they will finance properties going forward.

Roma is already seeing more and more landlords using limited companies to maximise tax efficiencies on their investments and this is set to continue. Those landlords with fewer than five properties will disappear as the cost of managing their properties and keeping up with ever-changing legislation will prove to be prohibitive.

However, with the number of landlords reducing this won’t affect the number of buy to let properties available for rent, but extra administration costs could ultimately increase the rents charged to tenants.

An area of concern is the impact of the new HMO regulations coming into force on 1st October, whereby the number of storeys will be removed from the definition and minimum room sizes come into force. Those landlords with one or two storey HMOs will be subject to mandatory licencing requirements by their local council. It is estimated that in the UK this will affect an extra 177,000* properties. We expect that there will be some casualties in terms of compliance with the new HMO rules and there are likely to be a period of adjustment in the shared facilities housing sector, for example in London some landlords are moving into Airbnb letting instead.

The new EPC ratings which came into force on 1st April mean that rental properties need to be rated as E or above, those rated F and G can’t be let to new tenants or have tenancies extended.

This provides bridging lenders with a new opportunity to back professional landlords to acquire ‘un-rentable’ properties with a view to improving their EPC rating, which in turn will make them eligible for longer term buy to let mortgages.

With the new legislation on room sizes and EPC efficiencies, there is also the argument that once the market has settled, the benefits to tenants will be seen, as ultimately the aim of the legislation is to drive up the quality of rental stock for tenants.

From a lending perspective, we will see new product types to cope, more individual considerations on portfolios, with more lenders opting for unique or tailored rates and criteria for each transaction. There are big opportunities for innovative lenders willing to look at how they can provide funding for more complex cases and update their underwriting requirements to take the new legislation requirements into account, while at the same time maintain service standards.

Scott Marshall, managing director of Roma Finance, commented: “Clearly a barrage of regulation and legislation is moulding a new breed of landlords. The days of the hobbyist landlord are numbered as the upkeep and management of rental properties becomes more onerous. The private rental sector is due for another shake up in 2018, and beyond, and only the larger players will be able to cope, as they can benefit from their scale of operation. With the HMO rules coming into force in October, maybe more affordable housing is needed more than ever as an alternative.

“However, as a lender we’re still experiencing a high level of finance demand for rental property, and in the wider market there are many product updates being introduced as lenders seek to adjust criteria to keep pace with a changing market. But it seems clear that the future will be driven by professional landlords rather than the armchair investors of the past.”