Welcome to the New Year. What’s shaping up for 2023 looks fairly challenging wherever you sit. Even the unencumbered, 3-recession veteran landlord will be concerned over the affordability of rent for their tenants in the ongoing cost of living crisis; those using leverage to any reasonable extent will have an eye on the end of the fixed-rate terms on their current mortgages before worrying about all of the rest of the noise at the moment.
Portfolio building is my speciality and I’ve always said, since I started taking it seriously in 2011, that I would carry on buying while the numbers still worked. I must have, at some point along the way, taken some inspiration from Judith and Fergus Wilson, I’m sure - not on tenancy management, or PR strategies, I’m pleased to say, but on the underlying numbers involved in the rental sector. It worked so very well with 3% mortgages - superb cashflows, able to buy well with an element of skill and good contacts, turning around refurbs at manageable prices - the rose-tinted specs really are on! However, the one truly objective factor here will always be the numbers. They just don’t lie.
The relevant numbers are firstly the inflation rate - because that keeps the interest rates on the higher side. We are still around 10% and not falling quickly enough, with more in the pipeline for April when the energy price cap of £2,500 for the average household gets lifted to £3,000. This will mean anyone on a variable rate who does NOT make savings in April (and most will, of course, because the gas will go off) gains another 20% on their energy bills that are already up 90% in the past 15 months or so. This all filters through to the 5-year limited company fixed rate, which is accounting for the majority of new transactions into the system - and those still holding in their personal name, if using leverage to any reasonable extent, have seen their margins crushed over the past 12 months if they are on base rate tracker mortgages, which many pre-2008 landlords are.
The next relevant number is specifically maintenance and construction inflation, which has calmed down significantly, but is not yet falling in a meaningful way (yes, some materials are a fair percentage off their absolute peak, but the construction slowdown has not yet led to more reasonable labour quotes, that I have seen). Then we have insurance inflation, 15% or so has been added to the average premium as the market has gone from a soft market with prices falling to a hard market.
Ah - but surely the counter to this is rent inflation? Yes, indeed it is - although those who have raised rents across the board by over 15% in the past 12 months please speak now, or forever hold your peace. On new units yes. On existing tenancies - my group hasn’t. We’ve stuck to the higher end of the range (0-7% based on a whole number of factors, annually). I know we are well organised compared to the average when it comes to rent increases - many haven’t bothered because they don’t see it as purely a transactional business, and they prefer to try and maintain a relationship with the tenant and a degree of humanity. However, if mortgage costs are up 100% from pre-covid (from an average of 3% to an average of 6%) on new loans, maintenance/construction is up say 40%, and insurance is up 15% - then simple mathematics tells you if rents are up less than 15%, margins have fallen.