Why PCL investors could look to the rental market to protect their portfolios
Alpa Bhakta is the CEO of Butterfield Mortgages, a London-based prime property mortgage provider with a focus on the needs of UK and international HNWIs
It’s fair to say that the last 19 months have been something of a challenge for the UK’s property markets. High inflation has devastated buying power, the Bank of England’s interest rate hiking cycle has increased the cost of borrowing substantially, and the mainstream mortgage markets have experienced a significant amount of turbulence.
Even the prime central London (PCL) property market has not been spared from these financial and economic crosshairs. Indeed, the Office for National Statistics (ONS) most recent House Price Index (HPI) showed that values in the capital have experienced a modest decline of 0.8% year-on-year.
This is hardly surprising; prospective buyers have put their plans on hold, activity levels have shrunk, and we have seen house prices soften nationwide. Halifax’s recent HPI, for example, showed the value of an average UK home fell 4.6% year-on-year in August.
With the economic landscape still shifting unpredictably, many landlords and investors will be searching for ways to maximise the power of their PCL portfolios.
Prospects look optimistic for the PCL rental market
Encouragingly, due to the substantial growth of the rental sector, investors looking to add rental properties to their portfolio could find attractive returns.
London currently sits comfortably at the top of the UK market, with the capital’s rental prices growing 0.5% more than the rest of the UK at 5.9% in the 12 months to August 2023, according to the ONS’s most recent Index of Private Housing Rental Prices. This should give investors confidence for the coming months and years.
In addition, Knight Frank has forecast that the average rent in London will grow by 23.3% over the next five years. Compare this to the expected 22.2% rise across the rest of the country, and it is clear why adding a PCL rental to a portfolio could be more profitable to investors.
Short-term and holiday lets are another area of the PCL rental market that could prove fruitful. Landlords may want to occupy their properties at certain times of the year, but letting them out when they are not there could be a great way to maintain profits. After all, data provided by AirDNA shows that Airbnb’s enjoy an occupancy rate of close to 75% with an average daily rate of £277 in the capital.
At a time when property values are decreasing and the sales market is quietening, any revenues stemming from rental properties could provide investors with a safety net against further price drops. If nothing else, building a wide-ranging and diverse property portfolio that includes both rental and investment properties is always a smart move.
Things to be conscious of when switching attention to the PCL rental sector
That said, shifting focus to the PCL rental market may be out of the comfort zone of many investors as, historically, the high level of demand for PCL properties and their subsequent performance has meant buying properties for capital appreciation was the obvious investment decision. As such, there are a few things that investors should be conscious of if considering a segue into the rental space.
In the UK, for instance, investors face limitations on how many nights their properties can be let out each year. The cap is 90 nights per calendar year, and they are still required to pay Council Tax on the property – even though they do not reside there full-time. This could pose a challenge in terms of profitability, as a vacant property may result in a loss of rental income, while landlords could also be taking on an additional tax burden.
Moreover, the UK requires any investor who wants to convert an investment property into rental accommodation to obtain an Energy Performance Certificate (EPC). To do so, the property must meet the minimum energy standards. Therefore, if the property fails to secure an EPC rating of A-E, it could result in a hefty bill for renovations and upgrades. This is a particularly pertinent consideration to make in the PCL property market, which boasts large numbers of old or historic buildings.
Additionally, rental properties inherently involve a higher number of tenants or guests using the property, necessitating investors to factor in potential spikes in maintenance costs or minor damage that could influence the property’s overall value over time.
Financing a move into the rental market
For investors looking to venture into the world of rental property, it is imperative that they have the correct finance in place. Therefore, working with a broker with experience in the rental market and finding a lender who can provide bespoke products – such as buy-to-let (BTL) mortgages – is of the utmost importance.
Indeed, the PCL market tends to attract a greater concentration of high-net-worth (HNW) or international investors with complicated financial backgrounds compared to the broader UK market. Therefore, it is crucial that PCL investors looking to rent out their properties can access a lender that can consider their overall financial situation, including their range of assets or portfolio’s potential rental income, and provide a high degree of flexibility.
In summary, adding a rental investment to a pre-existing PCL portfolio could provide increased profitability for investors in the coming months and years and presents an exciting alternative to investing in a property’s capital growth. However, investors must ensure they understand the complexities and risks involved, especially in today’s ever-changing property market.