UK landlords are facing a perfect storm as buy-to-let property returns continue to lag behind diversified equity portfolios, according to a damning report from wealth management firm Rathbones. The company's 'Don't Bet the House' analysis reveals that since 2016, residential property investment has become increasingly unappealing compared to a mix of financial assets.
The research highlights three key factors contributing to this trend: a slowdown in house price appreciation, a significant rise in borrowing costs, and a less favourable regulatory environment for landlords. While the average UK home value has risen by 3.7% annually since 2016, a rate aligned with inflation, London properties have seen even weaker growth, increasing by just 1.3% per year – 2.2 percentage points below inflation over the same period.
Rising interest rates are having a crushing effect on landlords, with typical two-year fixed-rate buy-to-let mortgages now priced above 5%, more than double what they were just a few years ago. This increase in borrowing costs is set to render many business models unviable, squeezing profitability and increasing financial pressure for those heavily reliant on mortgage financing.
Rathbones' analysis shows that a diversified investment portfolio, comprising 25% UK equities and 75% international equities, has outperformed property by a significant margin. Since 2016, such a portfolio has reportedly delivered returns 3.4 percentage points annually above inflation. Regulatory changes have further exacerbated the challenges for landlords, including higher stamp duty on additional properties, phased reduction of mortgage interest tax relief, and increasing regulation – all contributing to tighter margins.
As the UK property market shows signs of reduced activity, these findings are set against a backdrop of wider discussions about the future health and viability of the private rental sector. Rathbones suggests there is 'little prospect of a return to the conditions that drove strong property returns in previous decades,' concluding that 'the golden age of investing in UK residential property is over.' The company advises investors seeking robust returns should consider diversified financial portfolios rather than concentrating their capital solely in residential property assets, acknowledging individual circumstances where property ownership may serve purposes beyond pure investment returns.