Kent Reliance has reported that landlords’ confidence has fallen as investors face the prospect of higher tax costs and weakening house prices.

Kent Reliance’s latest Buy to Let Britain report found that only 41% of landlords are confident about the prospects for their portfolios, following the recent taxation and regulatory changes. This represents a fall from 44% in the previous quarter, and compares to 67% seen three years ago. Political and economic uncertainty will only add to landlords’ concerns.

The value of the sector has risen by £68bn in the last year, climbing to a record of £1.3 trn. However, this annual rate of increase (5.5%) is just half the level seen a year ago. Lower confidence amongst landlords mirrors this slower growth in the value of the PRS. The slowdown in house price inflation has been a key driver, with the annual average increase slowing to 3.2% in the last year. Indeed, in the last two quarters, prices actually fell.

There are now 5.5 million households in the sector, but annual growth of 2.3% is now only a third of the level seen three years ago. Tenant demand is still growing, albeit more slowly. 27% of landlords saw tenant demand increase in the last quarter, more than saw it decrease, but this was down from 39% a year ago, as first time buyer numbers continue to recover. On the supply side, there is a noticeable change too. In the first three months of 2017, the number of landlords expanding portfolios only slightly outnumbered those reducing them. 19% of landlords now expect to reduce their portfolios, compared to 13% increasing, as amateur landlords leave the market in response to the new tax rules affecting higher rate taxpayers.

Additional pressure on supply has come from the Bank of England’s Prudential Regulation Authority’s new underwriting standards, introduced in January. A quarter of landlords (24%) who have sought mortgage finance this year have found doing so more difficult, with a further 6% seeing their application rejected altogether.

Kent Reliance said that while there is likely to be consolidation in the market as tax costs rise, property investors are also taking action to mitigate the impact of government intervention through rent rises and incorporation.

Running properties via limited companies means landlords are taxed as a company, rather than an individual, and can continue to offset all finance costs against rental profits. Kent Reliance’s data shows six in 10 applications for buy-to-let mortgages were via limited companies in 2016. Demand for limited company lending has not yet hit the heights seen last year, but limited company applications have still accounted for more than four in 10 loans so far in 2017. With one in four landlords (24%) considering transferring their portfolio to a limited company or a partner or spouse, demand will strengthen in the long-term, the lender claimed.

Landlords are also increasing rents to cover higher costs. Average rents per property now stand at £889 per month across Great Britain. Even though the rise was less steep than a year ago, the typical rent increased 1.9% annually. This is likely to continue as the mortgage tax changes bite, Kent Reliance said. One third of landlords expect to raise rents in the next six months, compared to just 3% who expect them to fall. With rents rising, and house prices falling in the past two quarters, yields have edged up to 4.5%. Across the PRS, steady growth in the number of households and monthly rents means landlords are collecting a record £4.9bn per month in rent.

Andy Golding, chief executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy-to-let, said: “A perfect storm of weakening house prices, higher taxes and lending restrictions have knocked investors’ confidence. On top of this, investors are now being buffeted by the winds of political uncertainty following the election, and its impact on the economy.

“Uncertainty will pass, but the impact of changes to mortgage tax relief and underwriting standards will leave a more indelible mark on the sector. We believe these changes will alter the mix of landlords, creating a more professional and stable sector in the long-term. There are already some signs of consolidation, with highly geared amateur landlords most likely to leave, and we are also seeing investors take action to protect their margins.

“The fundamentals supporting the PRS have not drastically changed. Yes, first-time buyer numbers have been recovering, but there is still an underlying supply and demand gap across the country. Given the inability of any party to win a clear majority in the election, the implementation of a strategy to create a necessary housing boom seems unlikely. Affordability issues will therefore remain, and rental accommodation will retain its importance to those unable to take their first step onto the property ladder.”