The Covid-19 pandemic has pushed landlords to broaden the types of property and locations they are looking to invest in, according to analysis from Leeds Building Society.
The mutual noted that industry data suggested that the volume of applications for buy-to-let mortgages held up better than for residential loans between March and the middle of July.
Matt Bartle, director of products at Leeds Building Society, said: “In terms of the volume of applications over this period, the buy-to-let market fell less steeply and recovered more quickly than residential.
“We’ve also seen increased purchase activity; suggesting landlords are taking advantage of a combination of factors, including stamp duty relief, low interest rates and tenant demand.”
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The society’s own research with landlords, as part of its ‘lockdown learnings’ series, supports this, with 79% of landlords who were considering purchasing a buy-to-let property before the pandemic saying their plans had changed. This doesn’t mean they are withdrawing though, with half saying they still want to buy but are taking a fresh look at their plans.
Of those surveyed, almost a third (29%) are reconsidering the type of property they want to invest in, while the same proportion are also looking at new locations. Around one in five (20%) of landlords are reassessing precisely how much they are willing to invest, with almost a quarter (22%) rethinking their timings.
However, half of the landlords surveyed saying they hadn’t been planning to buy before lockdown, and still have no plans to do so.
Bartle added: “Bearing in mind the changes that coronavirus has brought to all our lives it’s not surprising to see landlords reviewing future plans for their property portfolios as tenants’ needs and priorities are also affected by the pandemic.
“The recent Government announcement on stamp duty appears to be spurring prospective purchasers into action, including buy-to-let landlords.”
Buy to Let landlords in England should be assessing the energy efficiency works that their properties require in advance of the opening of online applications for the Green Homes Grant in September, say tax and advisory firm, Blick Rothenberg.
Heather Powell, Property partner at the firm said:
“The applications for the grant will open in just over a months’ time so Buy to Let landlords need to assess their properties now and get their applications in as fast as possible because thousands of people will apply.
“It is also likely that the Government will tighten energy efficiency regulations still further in 2021, making these works essential for many rental properties.”
“The grant scheme will fund £2 of every £3 spent by a landlord, up to a maximum of £5,000, to improve the energy efficiency of their properties.
“Works can include wall and loft insulation, draught proofing and double glazing, all works that should improve the Energy Performance Rating (“EPC”) of a property.
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“Landlords cannot let properties with an energy performance rating of F or G (unless they qualify for an exemption) so they should be planning to undertake works that can be done with the grant funding that is being made available. Their tenants will also benefit as they will get a reduction in their annual fuel bills.”
“The 27 million homes in the UK, which generate up to 25% of the greenhouse gas emissions and energy demand in the UK, are some of the least heat efficient homes in Europe.
“The Government hopes the grants will improve these statistics and help the UK to meet the commitment to have net zero greenhouse gas emissions by 2050.
“Online applications by landlords will be passed to “registered local tradesmen” to do the necessary works – which the Chancellor expects to help generate a further 100,000 jobs in the “Green Sector.”
“There are c2.2m landlords in England, with an average of 1.8 properties each – a total of 3.96m buy to let properties.
“If landlords applied for grants to improve the energy efficiency of just 25% of their properties, and got an average grant of £3,300 for insulation, the Green Homes Grant funding would be £3.27bn, and 990,000 homes would have been improved.
“The Chancellor announced £2bn to fund grants in 2020/21, and stated he hopes 600,000 homes to be improved, but he made it clear that his funding was based on estimates of take up of the funding, and indicated it is not capped, which is good news for BTL landlords.”
“The full details of the Green Homes Grants has not been published, but given the Grant funding announced was only for one year it is important that Landlords start reviewing their housing, assessing what work should be done that is eligible for the grant, so that that they can apply for the funding.
“This is one of the few measures announced by the Government in the last three months that assists landlords, and they should make sure that they take advantage of the funding, and at the same time help the UK achieve net zero greenhouse gas emissions by 2050.”
Four out of 10 BTL brokers expect to write more business in the next 12 months, Paragon Bank’s Financial Adviser Confidence Tracker (FACT) Index has revealed.
The survey of more than 200 intermediaries showed that 41% of advisors said they expect more buy-to-let business, a slight dip on the 43% recorded in the first quarter of 2020, but up on the 38% from the final quarter of last year.
Just over a quarter (28%) of intermediaries expect buy-to-let mortgage levels to remain stable.
Richard Rowntree, Paragon Bank Managing Director of Mortgages, said: “Despite the buffeting that coronavirus has caused to the mortgage market, and housing sector more broadly, there is clearly still strong and stable demand for buy-to-let via intermediaries, which is reflected in the results of this survey.
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“We have seen a solid rebound in buy-to-let business since the housing market reopened in mid-May and landlords have been unlocking capital to invest and grow their portfolios further. We expect to see increased demand for rented property underpinning growth in the coming months as people delay house purchase or cannot obtain a mortgage with the removal of higher loan to value products in the residential market.”
Of those intermediaries forecasting an increase in buy-to-let business, confidence was stronger amongst directly authorised firms (46%) than appointed representatives (36%). Confidence was also firmer in sole adviser organisations (47%) than firms with between two to three advisers (34%) and four or more advisers (37%).
Richard added: “Coronavirus has had a clear and damaging impact on the economy and the UK as a whole, but the long-term fundamentals underpinning demand for buy-to-let remain unchanged. The UK has a growing population with increasing numbers of households and the private rented sector will provide a good quality home for many of them.”
New research has identified Liverpool as one of the best places in the UK for buy-to-let investors, with yields as high as 10.30%.
The findings are from analysis by Mojo Mortgages using the UK Land Registry, Zoopla, On The Market and property data portal, PropertyData.co.uk in a bid to find where the current investment hotspots are.
Mojo said: “From our analysis, the North West is one of the top regions for strong buy-to-let yields. As well as a number of profitable areas in Liverpool, the area of M14 in Manchester, which covers Fallowfield, has a yield of 7.60%.
“Both these cities have a solid student population, plus property prices are relatively low.”
In the UK there are an estimated 2.6 million buy-to-let landlords, and despite the pandemic, those who do have the cash to invest believe investment opportunities will emerge, with lenders cutting rates on buy-to-let products and raising affordability thresholds.
There’s also market sentiment which is leaning towards limiting competition from other buyers and even pushing up demand for rental property.
From its analysis, Mojo found that Liverpool is currently the best place to consider.
The city’s L7 postcode tops the buy-to-let yield table, generating yields of 10.30% and an average asking price of £95,000.
The postcode covers the area of Edge Hill and is in close proximity to Liverpool city centre.
Five more Liverpool postcodes feature in the top 20 list of best places to invest, with yield returns ranging from 7.40% to 10.30%.
Birkenhead’s CH41 postcode came in at 17th in the list, with a return of 7.10% and an average asking price of £84,000.
Eight of the top 10 worst places to invest were in London or the South East, topped by Kensington and Chelsea, with an average yield of 2.1% and an average asking price of £1,612,797.
Rents in the North West are growing faster than any other region in the UK, with rental growth in London continuing to slow over the past few months.
That is the claim by high-yielding student buy-to-let investment specialist Mistoria Group.
It said rental values in the North East, North West, East Midlands, Scotland, Yorkshire & Humberside, Northern Ireland and Wales all rose at a rate faster than the UK average. (Source: The HomeLet Rental Index, March 2020).
Average rents across the UK rose by 1.8% in March 2020 year-on-year, with the average monthly rent sitting at £959 per month.
When London is excluded, the average UK rental value was £793 in March 2020, up 1.4% on last year.
The data also reveals that rents rose from last year in nine out of 12 of the regions covered in the research.
Data from The Mistoria Group shows that rent prices in the cities and towns in the Northern Powerhouse have risen by an average of 17%, with rental cash yields of nine per cent in Salford, and seven per cent in Liverpool and Bolton.
With a capital appreciation of five per cent, investors are looking at total yields between 12-14%, which is extremely attractive. The group said if geared, the returns could be between 20% to as high as 35%.
The resilient property market in the North West is helped by the highly-successful regeneration of the area which has brought new jobs, transport links and a range of large housing projects, proving the strength of the economy as a whole in the region.
According to Mish Liyanage, managing director of The Mistoria Group, there is growing demand for high-end HMO (homes of multiple occupancy) accommodation among young professionals and students across the Salford, Bolton, Manchester and Liverpool areas
He said: “BTL (buy to let) investors can buy a luxury HMOs in the North West from £120k upwards. The return on investment is very attractive, too, with an average 13% yield (eight per cent cash rental and five per cent capital growth).”
Average UK rental yield currently sits at 3.5%, a marginal decline from the 3.6% registered prior to the COVID-19 pandemic, according to research by lettings management platform Howsy.
Even with the obstacles facing the current market, there are still buy-to-let (BTL) pockets providing strong returns for landlords.
Bradford has the highest average yield at 10%, with Gwynedd (6.2%) and North Down (6%) following behind.
Other areas that rank highly are Glasgow, Liverpool, Preston, West Dunbartonshire, North Lanarkshire, Forest Heath and Manchester.
At the other end of the scale, Malvern Hills, Kensington and Chelsea and Chiltern have the worst average yields at 2.3%.
The largest increase in average yields has been in North West Leicestershire, up 1.4% during the pandemic.
Arun, Corby and West Norfolk have also seen increases of 0.8%, while North Dorest and Newark and Sherwood have had an uplift of 0.7%.
Kettering, Derby, Breckland and Falkirk are also among the top 10 for largest rental yield uplifts during the pandemic.
Rhondda Cynon Taf, York, Gedling, Chiltern and the Vale of Glamorgan, however, have seen the largest declines, between 1% and 3.5%.
Calum Brannan, founder and CEO of Howsy, said: “The current lockdown has seen the government introduce measures such as buy-to-let mortgage holidays and a ban on tenant evictions and this has understandably caused many buy-to-let investors to hesitate.
“But despite this overall air of market uncertainty, tenants still need to find rental properties and so it continues to be business as usual for many landlords and those agents who have adapted to a more digital mode of operations.
“There’s also still a large number of areas where potential and existing landlords can secure favourable yields much higher than the national average, with some areas still seeing an uplift in yields despite the spread of the coronavirus.
“As the nationwide lockdown continues to drag on, there may be another silver lining for buy-to-let investors.
“Should the property market see prices fall, the cost of investing will be lower, boosting profit margins in a sector that has had it tough of late due to government squeezes on profitability.”
Online buy-to-let mortgage broker, Property Master, has warned that landlords will struggle to get mortgages as lenders pull product ranges, tighten lending criteria and widen margins, due to the impact of the coronavirus.
Some lenders have chosen to exit the buy-to-let mortgage market altogether for the foreseeable future.
These include Saffron Building Society, which offered a range of mortgages including for portfolio and limited company landlords, The Melton Mowbray Building Society and Barclays has withdrawn all products for portfolio landlords.
Together Money and Vida Homeloans have suspended lending in both the buy-to-let and residential products.
Tracker buy-to-let mortgages are being taken off the market. In recent days The Mortgage Works and HSBC have both withdrawn their tracker mortgages for the foreseeable future.
Lending criteria are being tightened
In recent times some lenders have been prepared to lend up to 85% of the value of a buy-to-let property. Fewer are prepared to do so now as fears grow of falling property prices.
Kensington Mortgages, for example, is one of those lenders that has reduced maximum loan-to-value lending criteria down from 85% to 75%.
Whilst landlords might expect a lower Bank of England base rate will lead to lower mortgage rates this is not always proving to be the case.Lenders concerned about the increased risk of tenants defaulting on rents and falling property prices may well choose to widen their margins and increase the cost of borrowing.
Some lenders have increased rates despite the 0.65% fall in base rate where margins as a result have increased by about 1%.
Angus Stewart, Property Master’s chief executive, said: “The competitive and attractive buy-to-let mortgage market appears to be going into reverse as the impact of the coronavirus begins to bite.
“Landlords are finding that their borrowing options are being drastically reduced as lenders respond to this new record low base rate environment and fears of falling house prices by withdrawing entire product ranges.
“We have had clients mid-way through a mortgage application only to find the process is halted and the product withdrawn before they can reach completion and the release of funds.”
“We can well imagine the difficulties lenders are facing when it comes to valuing properties and properly pricing risk. But we would urge them to continue to support landlord customers, especially those who were moving successfully through the mortgage application process and would otherwise have expected to be shortly in receipt of a loan.
“Similarly, we would urge banks to stand by the commitment made by the Government to provide payment holidays to landlord customers struggling as the current crisis impacts on the ability of tenants to pay their rent.”
The government has announced a raft of measures to protect renters and landlords during the Covid-19 crisis, including extending the three-month mortgage payment holiday to buy to let investors and stopping evictions.
Last night (March 18), the government confirmed that landlords will also be able to apply for a three-month payment holiday on buy to let mortgages under emergency coronavirus legislation.
This move has been welcomed by landlord organisations, the Residential Landlords Association and the National Landlords Association, which said the payment holiday “will take a lot of pressure off landlords enabling them to be as flexible as possible with tenants facing difficulties with their rent payments”.
As part of the legislation housing secretary Robert Jenrick also announced that private tenants could not be evicted from their homes for at least three months if they are struggling to pay their rent.
At the end of this three-month period, the government expects landlords and tenants to work together to “establish an affordable repayment plan” which takes into account tenants’ individual circumstances.
Mr Jenrick MP said: “The government is clear – no renter who has lost income due to coronavirus will be forced out of their home, nor will any landlord face unmanageable debts.
“These are extraordinary times and renters and landlords alike are of course worried about paying their rent and mortgage. Which is why we are urgently introducing emergency legislation to protect tenants in social and private accommodation from an eviction process being started.
“These changes will protect all renters and private landlords ensuring everyone gets the support they need at this very difficult time.”
There will also be no new possession proceedings through applications to the court starting during the crisis.
During prime minister’s questions yesterday, Boris Johnson said the government was prepared to bring forward emergency legislation to protect private renters from eviction.
At the time he said: “We will be bringing forward legislation to protect private renters from eviction, that is one thing we will do but it is also important as we legislate that we do not pass on the problem so we will also be taking steps to protect other actors in the economy.”
Marc von Grundherr, director of letting agent Benham and Reeves, said: “We’re all for state support at a time of crisis however there’s a significant unintended consequence of this announcement and that is the fact tenants now have nothing to lose if they simply stop paying their rent.
“It will simply be used as a literal get out of jail free card for all of the UK’s 16m or so private and social housing tenants and this could leave a path of destruction within the rental market if not correctly implemented and monitored.
“Let’s see what the details reveal but at first glance, this perhaps goes too far unless there are specific criteria that must be met and proven before tenants stop paying and landlords claim their mortgage holiday.
“Ultimately, landlords will still have to pay as this approach is a deferral, not a let off. How will they recoup the rent if tenants are unable or simply refuse to pay it?”
The developments come after chancellor Rishi Sunak announced on Tuesday a £330bn war chest of loans to protect businesses against the financial difficulties caused by the coronavirus.
He also announced mortgage lenders would be forced to provide up to three months’ relief from mortgage payments to consumers who needed it.
This dwarfed the £30bn of government funds announced at the Budget last week.
Meanwhile the spreading coronavirus crisis has caused global markets to tumble as governments across the world shut their borders, locked down domestic travel and closed sports and leisure facilities.
The prime minister has urged everyone to avoid unnecessary social contact, to work from home where possible, and to stay away from pubs and restaurants.
Schools will be shut from Friday afternoon onwards and will remain closed until further notice except for children of key workers and vulnerable children.
Examples of these workers include NHS staff, police and supermarket delivery drivers who need to be able to go to work to support the country’s fight to tackle coronavirus.
The latest research by Deposit Replacement Scheme, Ome, has found that the impact of the Coronavirus could cost buy to let landlords nearly £14.9bn should tenants be unable to pay rent during the three month support period announced by the government yesterday.
Last night the government announced that they would suspend new evictions and halt new possessions proceedings to the court while the Coronavirus crisis persists. They have also protected landlords as well as tenants with a three-month mortgage payment holiday on buy to let mortgages.
However, if tenants simply can’t pay, this holiday will do little to help landlords who will still have to pay once the three months is up, with or without the rental income from their tenants.
Ome’s research shows that there are 5.2m households currently within the private rental sector alone and without the ability to work and pay their rent, the buy to let sector could see a loss of £4.97bn every month based on the average monthly rent of £955 alone. Over three months this climbs to a huge £14.9bn.
Nationally, this lost income is highest in England with potentially £11.6bn lost in rental income, while London is home to the biggest sum regionally with a potential £4.9bn lost in three months alone.
What does this mean for the average landlord?
There are some 2.6m landlords operating within the UK buy to let sector meaning the average landlord has a portfolio of two rental properties. With an average rent of £955 and a loss of three months’ rental revenue across both properties, they could be facing an individual £5,730 shortfall in rental income.
With a ratio of 2.1 properties per landlord in Scotland, the loss is at its greatest at £6,146 over three months with Northern Ireland also high at £6,083.
Not only does this huge sum have implications on a sector that has already seen its financial return stretched by the government, but it could see tenants out of pocket even further should landlords look to keep their tenancy deposit to account for lost rental income.
Co-founder of Ome, Matthew Hooker, commented:
“It’s great news that the government are providing some financial respite for the nation’s landlords, however, it’s more of a weekend away than a holiday and once expired, UK landlords are still facing the cost of a buy to let mortgage without the rental income to pay it.
It’s by no means the fault of the tenant if they are unable to pay but there is a very real chance that landlords will turn to the rental deposits at the end of a tenancy in order to recoup this lost rent. While this would be unfair on a tenant who has otherwise kept the property in good order, it may well be the case that landlords are simply left with no choice.
The silver lining at least is that hopefully, not all tenants will be unable to pay their rent and so this sum of lost rental income should reduce, but whichever way you look at it, the UK rental sector is in for a tough few months.”
Recent research reveals thousands of landlords have switched from long-term to holiday letting, but will they be better off financially?
Over the past three years, landlords have gradually lost the ability to deduct mortgage interest costs from their turnover before calculating their tax bill.
From April, they will not be able to deduct any finance costs from their property earnings and will instead receive only basic-rate tax relief on these costs.
The tax change, together with a number of regulatory changes in the sector, including the Tenant Fees Act, has led many landlords to consider selling their properties.
Others, however, are instead looking to switch strategy with holiday or short-term letting becoming one of the key areas of interest.
According to a report by letting agent professional body ARLA Propertymark earlier this year, nearly 50,000 properties have been changed from long-term letting to short-term letting.
Its research, which was carried out by Capital Economics, found that a further 10% of landlords were considering offering short-term lets in the future.
What’s the appeal?
There are several reasons landlords may be thinking about holiday lets but a big one is tax.
Subject to meeting certain criteria, properties used as holiday lets are still able to deduct all of their mortgage interest and other finance costs from their turnover before calculating the tax liability, which used to be the case with buy-to-let properties.
Bev Dumbleton, chief operating officer at Sykes Holiday Cottages, says the holiday rental agency is seeing a growing number of landlords move into holiday letting for this reason.
“Stringent tax rules on buy-to-lets, phased in from 2017, have made it increasingly difficult to turn a profit,” says Dumbleton.
“This is only going to get worst for landlords.”
Nick Morrey, product technical manager at broker John Charcol, believes those switching to holiday letting are also motivated by the growing staycation trend.
“Thanks to Brexit, the UK is becoming a more popular holiday destination and demand for holiday lets is likely to increase and already has been since the referendum,” says Morrey.
Another factor driving landlords to change strategy is the Government’s plan to abolish Section 21 evictions.
Many landlords are concerned they will be stuck with difficult tenants for long periods of time once this change comes into force.
“With longer term lets, it can be riskier taking on tenants if they don’t turn out to be quite what you hoped,” says Dumbleton.
“Landlords may find themselves stuck in a binding contract when things aren’t ideal.”
Although frequently dubbed ‘no-fault’ evictions, landlord groups such as the National Landlords Association (NLA) have warned that landlords are typically using Section 21 to evict tenants who are not paying the rent or causing damage.
There is another process that can be used in these circumstances – a Section 8 eviction – but NLA research has shown landlords do not believe this process works.
How do the numbers stack up?
In many areas, it tends to be more lucrative from a rental income point of view to rent properties out on a short-term basis.
But costs and managing agent fees also tend to be higher for holiday lets, so the overall financial picture in many cases was not different enough to warrant the extra hassle for many landlords.
With the tax disparity added into the mix, this may no longer be true, especially for higher rate taxpayers.
Example one: a holiday hotspot
We crunched the numbers on a two-bedroom holiday let in popular seaside town Whitby to see whether a landlord would end up with more money in their pocket via buy-to-let or holiday let.
Rental income figures for buy-to-let taken from home.co.uk; for holiday let provided by Sykes Cottages.
Mortgage rates provided by John Charcol – 2% for buy-to-let; 3.3% for holiday let, based on a five-year fix at 75% loan-to-value (LTV) on an interest-only basis. Figures based on the average flat value in Whitby of £118,643, taken from home.co.uk.
Commission rate estimated at 12% including VAT for buy-to-let; 24% including VAT for holiday let.
Other running costs estimated at 10% for buy-to-let; 20% for holiday let. Based on a tax rate of 40%.
Example two: a city centre pad
We also crunched the numbers on a city short-let in Fairfield, Liverpool, using data provided by short-term letting agent Portico Host.
In this example, we used Portico’s rental income and average house price data for this area (£126,779), which was based on AirDNA, Rightmove and Land Registry data.
We made the same mortgage, commission, running costs and tax assumptions as in the Whitby example.
The bottom line
As it can be seen in the scenarios, in both cases, a landlord would be better off renting a property on a short-term basis rather than on a long-term one, albeit only slightly in the Whitby example.
But while a city-centre property might be more lucrative, a seaside hotspot might be more appealing for those looking to use the property themselves or retire there in the future.
It’s worth pointing out there are lots of other considerations to take into account if you’re pondering moving from long-term to short-term lets.
In some areas – London, for example – there are rules prohibiting short lets for more than 90 days per year unless you’ve applied for planning permission.
There are also far fewer lenders offering mortgages for holiday lets so obtaining finance is likely to be more difficult than for buy-to-let.
If you own a leasehold property, you’ll also need to seek the permission of your freeholder and this may not be granted.
There’s a lot to consider if you’re thinking about changing strategy, but the numbers suggest it could be a worthwhile move for some landlords.