Challenges Faced by Residential Landlords with Multiple Property Ownership in Scotland

The landscape of residential property ownership in Scotland has undergone significant shifts in recent years, giving rise to a new set of obstacles for landlords. In particular, the confluence of rising interest rates and the government cap on rent increases has cast a shadow on the once lucrative buy to let marketplace. The multifaceted challenges facing this sector are now becoming apparent, ranging from cash flow constraints, the cost of living crisis, inflationary pressures, rising interest rates and the downside of prolonged void periods.

Rising Interest Rates: Landlords struggle for Cash Flow

In a climate where UK monetary policy is evolving, landlords with multiple properties are grappling with the implications of increasing borrowing costs. The historic low-interest rates which enabled landlords to finance their portfolios with favourable terms are giving way to a new reality, where higher rates demolish profit margins. There have been thirteen consecutive increases in interest rates since Feb 2022 to date, and this is having a significant detrimental impact on finances and interest /debt serviceability.

According to Landlord News, it’s worth noting that more than sixty percent of landlords have mortgages on the properties they let. Of those, around half have mortgages amounting to more than 50% of the property value and will be most affected by interest rate hikes.

This financial juggling act necessitates a careful re-evaluation of investment strategies, prompting landlords to weigh the long-term viability of their property holdings against the immediate financial strain of increased interest payments.

I am personally aware of one particular situation where the landlord owns around 50 properties. The debt is on a variable rate, the net effect of which has seen the interest burden rise from £158k p/a (May 2020) at 4.5% over base (base was then 0.1%) to £335k today (9.75%). An eye watering rise of £177k over the period.

Government Cap

3% Cap on Rent Increases: Landlords Balancing Profitability and Fairness

The Scottish Government’s intervention in the form of a cap on rent increases has further complicated the equation for residential landlords. While the cap seeks to ensure fair treatment of tenants by preventing exorbitant rent hikes, it inadvertently introduces challenges for landlords who must contend with the dichotomy between commerciality, viability and social responsibility.

The Cost of Living (Tenant Protection) Act dictates that with effect from 1 April 2023:

1. If a private landlord chooses to increase a tenant’s rent mid-tenancy, the increase will be capped at 3%
2. Private landlords will alternatively be able to apply for a rent increase of up to 6% to help cover certain increases in costs in defined and limited circumstances
3. Enforcement of evictions will continue to be paused for up to six months from 1st April 2023 except in a number of specified circumstances
4. Increased damages for unlawful evictions of up to 36 months’ worth of rent will continue to apply

These measures are in force until 30 September 2023 at least, with the option to extend for another six-month period if deemed necessary. The cap constrains the potential to optimize rental income according to market demand. This constraint, coupled with rising costs associated with property maintenance, taxation, and other expenses, has led to an erosion of profit margins at best. Or, at worst, consideration of insolvency as landlords are confronted with the unsettling scenario of interest costs surpassing the revenue generated from their properties. This scenario is creating a downward spiral for some, as the very properties which were meant to be sources of income turn into a financial nightmare.

Inflation

That said, once the government manages to get inflation back down closer to the 2% target, interest rates should follow suit, which will dictate a return to more favourable market conditions. In early August 2023 The Bank of England said “It’s our job to make sure inflation comes down to our 2% target. We can’t always stop inflation from going higher or lower than that, but we can make sure it comes back to that target. Putting up interest rates is how the Bank of England can make sure inflation in the UK comes down. That’s why we’ve been raising interest rates since the end of 2021. It takes time for this to work. Usually, between 18 months to two years”.

Void rentals

Periods during which properties remain unoccupied—are a perennial concern for landlords. However, with the current challenges facing the residential property market in Scotland, lengthy void periods take on new dimensions of urgency. As tenants become more cautious about rental costs and as landlords grapple with the cap on rent increases, the potential for properties to remain vacant for extended periods increases.

Prolonged void periods can deal a severe blow to landlords with multiple properties, disrupting cash flow and exacerbating the negative effects of rising interest rates. To counter this, landlords must invest in strategies which enhance the attractiveness of their properties to potential tenants, such as offering competitive rents, maintaining high standards of property upkeep, and adapting to changing tenant preferences. This of course all comes at a cost.

Other considerations for landlords

How do you find ways to bridge the gap between income and expenses. Some landlords may be forced to dip into personal funds, while others might consider divestment to mitigate losses. Consider re-financing, but then more professional fees and little or no cost benefit. As mentioned, many may be facing an insolvency event as they struggle to keep their heads above water. This precarious situation underscores the importance of thorough financial planning and risk assessment in a changing property market.

Industry experts have said that if the trend persists, fewer homes would be available to rent, pushing up already high rental payments for tenants. We have seen plenty of recent evidence to support this, including a recently commissioned survey by the BBC which said competition among renters is so intense that there are twenty requests to view each available property.

Rising interest rates is also having a further indirect impact on the rental market. By making property ownership less affordable, more people will make the decision to rent, piling further demand pressure on an already limited supply of rental properties. Tenants are staying longer, and landlords who are feeling financial pressure, and concerned about new legislation, are reassessing their future in the sector.

Conclusion

The challenges faced by residential landlords with multiple properties in Scotland paint a complex picture of a shifting landscape. The convergence of rising interest rates, government rent increase caps, rising interest rates, and void periods has cast a spotlight on the need for adaptable and robust strategies. As landlords navigate this challenging terrain, they must strike a delicate balance between profitability, social responsibility, and financial resilience.

The key lies in proactive financial planning, embracing innovation, and fostering open dialogues between landlords, tenants, lenders and policymakers. While the road ahead may be fraught with obstacles, it also presents an opportunity for property owners to reimagine their investment approaches and contribute to a more sustainable and equitable housing market in Scotland.

If you are a landlord that is looking for professional advice, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.

AUTHOR

This guidance article was written by our Insolvency Practitioner, George Dale, Partner at the Opus Edinburgh Office.