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The aphorism “landlords get rich in their sleep”, may be true for the most part, but Britain’s landlords could have to contend with some sleepless nights ahead… the end of the furlough scheme and more potential redundancies and tenants out of pocket, dire economic forecasts, potential mortgage rate rises, extension on the eviction ban, and of course the dreaded spectre of Brexit are all hanging over the residential buy-to-let market. All these factors conspire to create the same conditions, less people able to pay high rents, if any, and less demand in the market.
Investment carries risk and returns are not guaranteed…
Property and talking about house prices are almost a national pastime in Britain, and we think of the housing market as effectively being this entirely safe haven for investment and one where the value only ever goes one way – up – true in the long term… However, investment property is exactly that, an investment, and therefore people need to remember it carries risk as well as reward, partly why mortgage rates for these types of properties are higher to factor in this risk. Of course, most landlords would usually be concerned about a leaky roof or boiler breaking, but these are unusual times and a pandemic is now simply another risk to investment that they will need to contend with over the coming months and years. Landlords who are struggling with tenants who are not paying their rent are of course going to be put in a difficult position by the fact the government has extended the ban on evictions and therefore potentially dramatically increasing their rental void. However, decrying the fact that they cannot evict people, including families, in the midst of a pandemic is not going to garner much sympathy and we think the press this receive will put off new entrants to the market, especially when combined with other factors including the size of deposit required for a mortgage… in fact, we saw a decrease of over 40% in consumer buy-to-let products in July compared to June.
The BTL Mortgage Market
The mortgage market as a whole is operating as a market of two halves currently – those with larger deposits or larger equity positions stand to benefit greatly from hugely reduced rates, where as the higher loan-to-value end of the BTL market (>80%) rates are high – an eye-watering 4.79 on a 2-year fixed at 85% LTV and the there is only one lender operating in this space currently. For comparison, a landlord able to raise 50% deposit could get a rate of 1.19%… a very significant difference. This is indicative of the uncertainty in the market and lenders not wanting to take risks with potentially falling prices and potentially having to repossess in the future. Despite this the Bank of England base rate is unlikely to increase any time soon, swap rates are a rock bottom and mortgage rates are likely to remain low for the forseeable future.
An inverted property market
News emerged recently the 50 of the biggest UK employers have no plans to return all staff to the office full-time in the near future (BBC News). The draw of urban areas, is primarily work, social and cultural and if you now work from home and primarily socialise locally, it does beg the question as to why you would pay thousands of pounds in rent to be in a city centre location… It is these landlords that could stand to lose the most, falling rents, especially in London, and falling property prices especially for flats without outside space. This also includes the difficulties faced by those operating short lets in cities for travellers.
New areas of demand: A silver lining?
We speak to a huge number of people with portfolios of properties across the UK and while central London may be a difficult place to let currently, landlords in rural areas and those who own holiday lets will tell you a very different story… and may actually be benefitting from these shifts. Coronavirus has also created new areas of demand, in particular we have seen a large increase in buyers purchasing second homes in the country, holiday lets, and in let-to-buy mortgages, where borrowers let their main residence and raise capital to purchase another property, and invariably these have been people looking to move out of cities. Landlords may need to rethink their next purchase, taking these socio-economic changes into account, and a holiday let or investment property in the country could prove to be better investment going forward, but it depends what is important to you as investor, capital growth or higher yields.
Predicting the unpredictable
It is impossible to say with any certainty what is going to happen to the BTL market over the coming months, there are simply too many variables. The economy and the housing market are on a knife edge at the minute and any further economic shocks, like a second Coronavirus wave, could be devastating.
What we do know is mortgage rates are likely to remain low and the housing market is resilient and is best viewed in the longer term, prices may drop, but will likely recover much in the same way that the economy does. And as with all markets, there will be winners in the coming months those who successfully weather the storm and are able to benefit when the time comes from lower prices and the Stamp Duty Holiday and increase the size of their portfolio for instance, but also losers and it will be a very difficult time for some landlords.
What can landlords do?
It may be prudent for portfolio landlords to consider moving their portfolios into limited company structures given the Stamp Duty Holiday for long-term tax savings which may help them better weather this storm, however you should seek advice from an independent regulated advisor.
Lots of people are struggling at present and if you are, it is best to speak to your lender if you have a mortgage and explain the situation before it is too late and also there is no harm in speaking to your tenants, while the tenant(s) may not be able to cover the full rent they may be able to make small contributions.