Landlord confidence slides

Landlord confidence has taken a hit in the last three months, according to a survey, but 42% of landlords still think now is a good time to invest.

Increasing tenant demand has fuelled optimism and cushioned slower capital gains, said property services giant LSL, with 37% of landlords reporting increased interest.

However, the LSL survey shows 6% of landlords are considering selling off some of their properties, with 2% ready to reduce portfolios.

The average annual return made by landlords fell from 13.2% in April to 10.1% in July, according to the LSL index.

Due to the leveling off of house prices, an investor buying property now could expect a total annual return of 3.5%, the equivalent of £5,838, if conditions stay the same the next year.

"Rising rents and house prices offered landlords bumper annual returns at the start of the year, and this was reflected in the surge in confidence. This has fallen slightly following the slowdown in house prices and the capital gains tax hike," said David Brown, managing director of LSL corporate client department.

Landlords report a slight improvement in buy-to-let lending in the past quarter and according to the latest CML statistics, the number of buy-to-let loans increased 13% in the three months to the end of June, compared to Q1.

However, the number of loans is still 72% lower than the same quarter in 2007.

David Brown said: "Mortgage finance remains a daunting obstacle for those looking to get a foot on the property ladder. This is keeping thousands of frustrated buyers in rented accommodation, pushing up tenant demand and rents. But borrowing remains a thorn in the side of potential investors too.

"Despite a slight easing in lending in the last quarter, mortgage finance constraints are hitting landlords. Funding conditions remain tight for lenders, and lending to landlords won't loosen significantly in the next two years."

The introduction of increased Capital Gains Tax for higher band taxpayers in May this year was a driving factor behind the slight fall in landlord confidence, said Brown.

For example, the average property investor owns three properties, and has seen capital gains of £152,219 since they bought their properties. If they sold their properties today, they would face a capital gains tax bill of £39,793 - an increase of £11,369 from the previous tax regime, since the rate rose from 18% to 28%.

David Brown said:"The increased CGT hit many property investors' confidence. And it will hit many more in the pocket over the next few years. But the hike wasn't as steep as first feared, and we're already seeing landlords adapt their disposal strategies for their portfolios, planning to spread sales over several tax years to mitigate their exposure to the higher rate."