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What’s the future of Buy-to-Let?

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Making big predictions about the housing market investments is something of an annual sport. But with the property market, the mortgage markets, and what landlords are likely to do in 2021 and beyond, it will be almost impossible to get predictions right. Given an economy that’s shrinking and with people worried about their jobs and businesses, times have never been more uncertain, but there are of course some property trends and forecasts we can always rely on.

When it comes down to it, in a fast-changing environment – and today things seem to change faster than ever they did, even without the turmoil of the pandemic and Brexit – we still like to look into our crystal ball to try and see what might happen next.

The Covid-19 pandemic is having a big impact on the UK housing market one way or another: transaction levels, house prices, changes are occupier requirements, urban to regional movement, changing fortunes for some cities, regions and towns, lending activity, and of course rental demand; but whether some of these changes are tactical and short term or long-term structural, remains to be seen.

We’ve never lived through stranger times, not in most people’s lifetimes, so with major parts of the economy shutting down and then opening up at random, some people and businesses are suffering terribly, but the housing sales market, egged on by a stamp duty moratorium, is currently booming.

Landlords’ Survival

Residential landlords fall basically into two camps: there are those with sufficient resources to comfortably see this period through; they are generally taking a magnanimous approach with their tenants, helping those that are struggling, reducing rents by up to 50%, deferring rent payments, or telling their tenants to “pay what you can”. These landlords are looking to the longer term and returning the loyalty shown to them in the past by their good tenants.

In the main, the so-called “professional” landlords, those with portfolios of properties, often owned through a limited company, are fairing better. There are fewer requests from this cohort for mortgage payment referrals, that’s according to the mortgage lenders.

There’s also the landlord who buys outright or is mortgage free and in the comfortable position of not relying on their rental income to live on or pay a mortgage every month.

Into the other camp fall those landlords who have borrowed heavily and/or are relying on their rental income to live on. Of these, and there are many – the statistics show that around 60% of rental housing in the UK is provided by landlords with no more than two or three rentals – some will be in trouble. A large proportion of them are mortgaged and have bought the properties for their retirement income. It then comes down to luck as to whether they have tenants who are able to pay full rent or at least a good proportion of it.

So by no means, all buy-to-let landlords are in a position to help out their tenants. After successive chancellors have squeezed their incomes through punitive tax and regulatory changes, the effect on their income, and the uncertain outlook, has prompted some to look to sell up.

But to use the old hackneyed phrase, “it’s an ill wind that blows no good”: out of adversity comes opportunity. Landlords and others with cash to invest believe there are investment opportunities that could yet emerge. This movement could even result in increasing demand for rental property next year, given that the pandemic could result in still greater demand from tenants for renting.

Generally, the impact on viewings and house moves, whether by owner-occupiers or renters, has been less than feared back in April. This is largely because the shut-downs have still allowed this activity, with agents working relatively normally, despite the delays in dealing with house sale searches and legals.

The government’s furlough and business support schemes have been generous, some think too generous with money flowing so freely it’s created opportunities for fraud. Lenders have been flexible with mortgage payments. It has been welcome and all this support goes to help people get through this crisis. The question on everyone’s mind though, as we approach the Christmas holiday is: how long can this go on before the money runs out, and will the vaccines kick in quickly enough to present third and fourth waves of the virus?

Lenders are finding that those landlords most likely to come through this unscathed are those who have become more professional and businesslike in the way they approach buy-to-let: there are far fewer “dinner party” landlords says one mortgage lender and far more landlords who take the business of letting seriously; they manage tenancies well and have built-up a financial safety cushion.

Zoopla monitors demand for lettings and finds that following a drop off in demand during the early part of the first lock-down, it has made up for that in spades since, with people looking for the short-term flexibility the rental market offers. The short term surge in activity is likely to continue as pent-up demand is released by the partial relaxation of lockdowns. But the longer-term effect will not become clear until we see the impact of the ending of the furlough scheme. If even a proportion of the 7.5m or so people currently on furlough find themselves out of work when it comes to an end next April, it could have a big effect on the supply-demand balance in the rental market and therefore on rents levels.

Future Investment?

The idea that property is a good strong, long-term investment has not changed. It’s a hedge against inflation and provides a good income yield of 4% and upwards, at a time when you are lucky to get more than 0.5% on deposit.

As we see the exit and decline in the reign of the so called “amateur landlord”, gradually being replaced by those who see landlording as a serious business, we find that these people can see past the present crisis; they have a long term investment horizon mindset.

Jeff Knight, director of marketing at Foundation Home Loans, writing for the FT, says:

“It may well be that come the middle of 2021, circumstances will have changed significantly, and it will be at this point that borrowers will appreciate their ability to perhaps remortgage without any charges being attached.

“Overall, landlords are acutely aware that demand for quality private rental sector properties is only likely to grow as a result of the pandemic; they also know that demand currently outstrips supply, that house prices may be subdued during the rest of this year, and therefore there are opportunities to garner both stronger rental yield and grow capital values by investing now.

“Coupled with a responsible approach to their tenants and a long-term outlook, the prospects for buy-to-let remaining a good investment for the foreseeable future look assured.”