2020: The options set to reinvigorate the buy-to-let market
Nakul Sharma is chief executive at Hostmaker
The buy-to-let market has experienced dramatic change over the past couple of decades. In the 2000s, buy-to-let was undoubtedly king – in 2008 alone, more than a million homes were acquired with a buy-to-let mortgage, and 2013 saw more than £20bn being loaned to prospective landlords. However, upon entering the 2010s, the tectonic plates underpinning the sector began to shift.
Changing priorities from those in power led to the legislation of several controversial reforms. These measures were introduced to dampen the rapid growth seen in the sector, as some believed that it posed a potential risk to the wider economy.
Perhaps the most notable move may have been the withdrawal of mortgage interest tax relief – landlords were formerly able to subtract the interest from their mortgage payments from their rental income – but equally, the introduction of stricter buy-to let mortgage standards by the Prudential Regulation Authority and the 3% stamp duty charge on second homes played a significant part in restructuring the market.
These changes had a clear effect on many landlords, shrinking their margins or in some cases causing them to completely leave the market. A recent study found that approximately a quarter of landlords were looking to sell at least one property. Even worse, around 33% reported that their yields declined in 2019, with one in four avowing that this pattern would continue into 2020.
The effect of this has been to force the dinner-party landlord – those retaining smaller portfolios amounting to two or less properties, while making their living from another full-time career – out of the market. This is reflected within market data. The average landlord retained an average of 1.93 properties within their portfolio, an increase on the previous year and the highest that this figure has been since the end of the last decade. Furthermore, the percentage of landlords owning more than one home grew by 9% since 2016, representing a ‘professionalisation’ of the sector.
While the market is perceived to be not as favourable as it once was – with the reforms impacting the business operations of many – there are still opportunities ripe for the picking. More than half a million new rental homes will be needed by 2023 just to satisfy demand, so dedicated landlords will still be able to find areas of growth as long as they’re willing to adopt a more efficient and sophisticated approach.
Our wider society has also changed, providing a more positive environment for buy to-let growth. While recent political instability will have prevented many from looking towards portfolio expansion, this past December’s resounding election result should go some way towards providing the socio-political surety needed to drive investment.
Furthermore, historically low central bank interest rates have had the knock-on effect of nudging investors towards five-year fixed-rate mortgages as they seek to lock themselves into the low costs. As such, with competition and opportunity in the mortgage market drastically diminishing, specialist mortgage providers have engaged in a price war, slashing interest rates in an attempt to win over buy-to let investors.
Taking advantage in the new buy-to-let marketplace
While the days of investing, sitting back and waiting for the returns to roll in are certainly over, there still remains a few approaches which can help to ensure that landlords attain optimum returns.
Looking beyond the M25
London has historically enjoyed a buoyant lettings market, driven by strong rental demand. However, the stagnation experienced in recent years has now caused many a successful landlord to explore opportunities further afield.
Many regional cities are currently hotbeds of development and regeneration, as city leaders look to attract businesses and employees alike with the promise of cheaper living costs without sacrificing on quality of life. Landlords will be able to capitalise on this coming tide of demand through expansion into the regions. Locations like Manchester, Birmingham, Cardiff and Leeds are all showing positive signs for the future.
Houses in Multiple Occupation (HMOs)
For some landlords, HMOs have become a particularly appealing option. The risk of a complete void period is offset by having multiple tenants in the property, and HMO landlords can qualify for some special tax deductions.
However, landlords interested in pursuing this option should take special care to ensure that they comply with the local authorities’ regulation regarding HMOs.
Utilising property management companies
The property market as a whole continues to grow in complexity, which in turn should encourage landlords to leverage the benefits of using a property management service. Having a dedicated team of property management experts on hand will enable landlords to prepare for and cater to regulatory changes without fear of being caught out. Property managers will also work on a strategy to align your pricing and listing that will enhance yields and work towards diminishing void periods where properties may be left vacant.
These changes within the buy-to-let sector should not put landlords off with those willing to adapt set to reap the rewards on offer for landlords that are opting to embrace these changes.