LONDON They have pocketed some of the most lucrative returns available to investors in recent decades and been a staple of newspapers' personal finance pages, but tougher times now lie ahead for Britain's army of small-time landlords.
So-called buy-to-let investors -- who usually own at most a handful of properties -- have enjoyed 20 years of surging house price growth and rents, and annual returns of nearly 10 percent.
They accounted for almost one in four house purchases funded by a mortgage last year, a chunk of the market unseen in other big economies. Overall, there are nearly 2 million private landlords in Britain, owning almost 20 percent of homes.
Their power is politically sensitive in a country where house prices border on a national obsession, reflecting the fact most people have the vast bulk of their assets tied up in their home. Critics argue buy-to-let distorts the market and makes it even harder for ordinary people to get on the housing ladder.
Now the landlords face a double threat. Finance minister George Osborne is squeezing more tax from buy-to-let (BTL) investments, partly to help fund incentives for new homeowners, while the Bank of England is seeking powers to limit the size of BTL mortgages in order to reduce risky lending.
A few economists say the changes could even push the overall housing market down later this year.
One landlord who fears he will have to sell is Chris Cooper. The 54 year-old airline steward must retire at 60, and started acquiring buy-to-let properties over 14 years ago in order to boost his pension. "I'm fuming, to be perfectly honest," he said in his own one-bedroom flat in Windsor, a historic town near London which is dominated by Queen Elizabeth's 1,000-room castle. "I will either have to raise rents by a ridiculous amount which tenants won't be able to afford, or sell my properties."
Cooper owns 15 properties in northern England and around London worth 2.4 million pounds ($3.5 million), financed by loans totalling 1.6 million pounds. Tenants pay him over 100,000 pounds in rent a year and, after running costs, interest and tax, Cooper makes 12,400 pounds. But Osborne's cut to the amount of mortgage interest that can be offset against tax, which Cooper plans to challenge in court, will reduce that to 1,000 pounds. When interest rates rise, which could happen this year, profits will be even thinner.
HEIRS OF THATCHER
Helping new buyers to enter the housing market is a stated priority of Prime Minister David Cameron, whose Conservative Party enjoyed electoral success in the 1980s under Margaret Thatcher by making it easier for renters to buy their own homes. Home ownership rates in Britain are now the lowest in 30 years at 65 percent, below the EU average of 70 percent. Many Britons blame property investors for making it harder for young people to buy, even if experts say a chronic lack of new home-building is really the main factor.
In a new headache for landlords like Cooper, the Bank of England said last month that buy-to-let borrowers could be more vulnerable to higher interest rates than normal borrowers. It wants powers to cap the size of BTL mortgages relative to a property's price and rental income, similar to those it already has over residential mortgages. On the other hand, the squeeze on small landlords could help ventures like Property Partner, which launched in 2014 to offer alternatives to traditional buy-to-let.
"Buy-to-let as a cottage industry is dead," said chief executive Dan Gandesha. The start-up enables would-be landlords to buy, sell and trade fractions of BTL properties and take advantage of tax benefits available to big investors, as well as spreading their bets across a wider range of properties.
"I don't think the returns on that are quite as good, but those are the sort of options that would make my life easier," said Ramzi Hajaj, 26, a technology worker whose family gave him two London investment flats in 2013 which are now each worth about 500,000 pounds.
He may invest 700,000 pounds more, but is put off by a 3 percentage point increase in property sales tax on for buy-to-let purchases from April, in addition to other changes that will make it more onerous for landlords to get tax relief on the cost of maintenance and repairs.
Upfront returns on buy-to-let property have already fallen. Property Partner estimates net rental yields in London are 2.5 percent now, compared with nearly 8 percent when buy-to-let got going in the late 1990s.
But returns on other assets are lower too. Ten-year British government bonds yield around 1.8 percent now, down from 7 percent in 1997. Small investors are betting instead on more of the house price rises which allowed buy-to-let in England to show average annual returns of over 9 percent for the past 20 years.
However, low rental yields are putting off major investors such as Grainger, Britain's largest specialist residential landlord. Speaking at an industry conference last month, one of its managing directors, Derek Gorman, said new investment in London was hard. "It is very difficult to get into the London market at prices that are reasonable. So we are looking at the regions," he said.
Shortages of construction workers and rising costs, the slow speed of planning approval and the difficulty of building higher-density housing in London also delayed construction. Lack of supply means most economists predict house prices will keep rising -- by 5 percent this year and 4 percent in 2017, according to a Reuters poll -- even if some such as Morgan Stanley see buy-to-let triggering a brief dip.
"My hunch is that demand will rise first before supply catches up," said Simon Rubinsohn, chief UK economist at the Royal Institution of Chartered Surveyors. "Living costs are going to get dearer."
(Editing by William Schomberg and Mark Trevelyan)