Guide to specialist BTL
in association with
Guide to specialist BTL
Welcome to the Bridging & Commercial Magazine supplement guide to specialist BTL, in association with Hampshire Trust Bank
Contents 4-5 6-7 8-11 12-14
I love this industry Holiday lets Non-standard BTL opportunities In conversation: Marcus Dussard
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Guide to specialist BTL
I love this industry T
he property sector is the furnace of the UK economy and the specialist lending market is the spark that lights the fire. It is us—the developers, investors, brokers, surveyors, conveyancers, and lenders—who keep the flames alive. The economy is in for a rough ride; unemployment will rise and property prices may fall. But it is our duty to continue to hunt out opportunities to support the market—and there are still so many. At HTB, we are well capitalised and have buckets of funds. We are itching to lend to the right borrowers on the right properties, and have continued to lend throughout the crisis. We have completed loans and issued offers every day since the middle of March. Our criteria are almost back to where they were pre-Covid, and we have returned to lending up to £15m and 75% LTV. I know that I am an optimist, but I’m also a realist. It’s not going to be easy and disappointments are going to be more frequent, but our success will come from our ability to move from disappointment to disappointment without a loss of enthusiasm. We have been dealt a rubbish hand—but life isn’t just about holding great cards, it’s also about playing a poor hand well. I hope you enjoy what I and the team at HTB have to say about the specialist BTL sector in this guide and wish you all the best for the remainder of 2020. Alex Upton, commercial director of specialist mortgages
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Guide to specialist BTL
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Guide to specialist BTL
Holiday lets— an interesting area of the market…
Given the stress and level of uncertainty for these business models during lockdown, we pulled back our appetite for lending on short-term let assets—but we’re back. It’s clear that there is going to be increased demand for holiday lets following Covid and, provided we can get comfortable with the shortto medium-term affordability, then we can lend. Given where we are in the ever-changing cycle brought about by the pandemic, people are still nervous about travelling abroad, so we expect more to choose to take a holiday within the UK this year—making now a great time to get back into that market. Even without Covid, ‘staycations’ were on the rise, and letting out a property on a short-term basis was a great way of diversifying income within a portfolio. The much higher potential for yield in a shorter period of time is what makes this an attractive option. Holiday lets can earn in a week what a standard BTL on AST does in a month. High returns and demand is great, but it’s important for investors to remember that performance can be seasonal and the amount of effort to manage the property is significant. Our borrowers need to be homeowners and experienced property investors, in addition to having strong household income to give us comfort that an increase in voids is manageable. We lend up to £1m with a maximum of 75% LTV for holiday lets. 6
When deciding on investing in this asset class, borrowers should get tax advice because it is different to standard BTLs and can be a real positive to the return of the investment. To achieve the preferential tax treatment, a holiday let must be available for letting to guests for at least 210 days (30 weeks) per year, and the property must be rented out as holiday accommodation to the public for at least 105 days (15 weeks) of the 210 days available. As a specialist bank, we have to constantly monitor these short-term letting business models. But, in general, it’s a great way for a borrower to diversify and, therefore, this makes it an area of the market we are excited to support.
Guide to specialist BTL
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Guide to specialist BTL
Weighing up the investment in non-standard BTL opportunities
Speaking at a recent online forum on BTL, HTB’s managing director of specialist mortgages, Charles McDowell, delivered information on property investors’ activity and strategies for success in the current climate. Published in April this year, HTB commissioned a survey of 800 landlords to find out more about the make-up of their portfolios. It transpires that one in three are involved in non-standard property investments, ie anything other than standard BTLs. HMOs, unsurprisingly, being the most common other investment, with 20% of landlords holding an HMO within their portfolio. Refurbishment projects, short-term lets and student accommodation are the next most popular types of other investment— all of which came in for around 10% of 8
landlords. Only 4% of landlords have commercial units in their wider portfolio. There was a direct correlation between the overall portfolio size and the level of involvement landlords have in these alternative asset types, ie as portfolios get bigger it is much more likely that these investors will branch out. For landlords with more than 10 properties in their portfolio, the use of HMO grows to one in four. Commercial remains the lowest, however it increases to 13% of landlords. Digging deeper into why landlords might have a spread of property types, Charles presents the differences in yield. The target yields in each of these categories are significantly higher than that of a standard BTL (5.8%), with landlords selecting HMOs to fetch up to 8%. Student accommodation has a
Guide to specialist BTL
target of 6.7% but is noted as very location specific. Short-term lets are at 7.3%—also with large geographic variances—but the national rule of thumb is that you get three times the return, but have four times the number of voids. Property refurbishment tops the list with a target yield of 9.1%. However attractive the yields, Charles highlights that each of these types of investment requires increased management effort and involves greater risk. Consider the pros of investing in HMOs as an example; this part of the market enjoys less voids and higher income resilience—indeed Charles shares that the HTB HMO book has demanded comparatively less support in terms of payment holidays. It is also expected that appetite for this asset class will remain strong and grow post Covid-19, and that, overall, HMOs have evolved massively in terms of standards and calibre of tenant. On the other hand, HMOs carry more legislation in the form of planning and licencing, and have higher management costs in relation to finding and vetting tenants and maintaining the property—often to a higher specification than standard BTLs. A lower rate of capital appreciation is also a downside, as well as the fact that it is typically more difficult to raise finance from a smaller pool of lenders in this area, and which generally have stricter underwriting. Further stats indicate that those invested in HMOs are, in the main, looking to keep their investment the same or increase it, representing a significant opportunity for the specialist finance sector. The survey also asked how many days landlords spend maintaining, administrating and financially managing their assets. It was revealed that HMOs require four times the amount of time, compared to standard BTLs (20 days per year, on average). This breaks down into: three times the time spent
on maintenance (often related to communal areas); six times the admin burden (licencing, applying for planning, certificates); and four times the financial management (collections, deposits, rent, mortgage). Similar increases reflect across the various types, with refurbishments requiring, on average, 123 days a year—a commitment that perhaps needs a team behind it. HTB supports refurbishment projects, however, as part of its underwriting, it seeks to understand the associated execution risk; if it takes over three months, there is always the possibility that things don’t go exactly as planned. The reliability of contractors and the requirement of finance feature among landlords’ top three factors influencing the time and cost of refurb projects, which speaks to a) the risk assessment expected by lenders, and b) the opportunity presented for brokers to advise these investor clients. The survey showed that the admin side of things climbed the most when it came to semi-commercial units, accounting for time spent on leases, business rates, and curbside admin etc. HTB is seeing more residential landlords move into commercial for the first time and urges them to consider what it entails and to truly understand the differences. While the average radius that investors are willing to travel in pursuit of opportunities was less than 60 miles across all niches, HTB is certainly seeing more investors look further afield. Charles points out that, while having the right property is of course a good thing, the disadvantage is a loss of local knowledge and the ability to quickly fix issues that arise—something that is pertinent in today’s economic environment. He believes the looming recession will be very location specific. Charles recommends that now is the perfect time for advisers to remain close to their investor clients and their strategies to cement long-term relationships, working towards the success of everyone involved. 9
Guide to specialist BTL
HMO Investment sector HMO’S (%) Target yield (%)
19%
8.6%
Future plans for investment (%) Reduce investment
15
Undecided
72
0-50 miles 57
Keep the same Increase investment
Future plans for investment (%)
51-100 miles
4
100+ miles
6
11 17
Mean
28 miles
Over 1 in 3 landlords are involved
HMOs are the most common investment sector. In all cases, involv
19
HMO 12
Property refurbishments
11
Short-term lets
10
Student accomodation Semi commercial None of these
10
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Guide to specialist BTL
Target yield
Comments
BTL
5.8%
From 2% - !0%
HMO
8.6%
Up to 10%
Student accomodation
6.7%
Significant overlap with HMO. Very location specific
Short-term lets
7.3%
Significant geographic variances. x3 return but x4 void periods
Refurbishments
9.1%
-
Semi commercial
7.6%
-
d in non-standard properties
vement increases in line with portfolio size.
1-5
6-10
10+
15
24
27
7
15
26
9
9
15
8
11
14
2
3
13
70
60
50
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Guide to specialist BTL
IN CONVERSATION
with Marcus Dussard, sales director at HTB What does a typical day in the life of a sales director look like? First thing to do, and I mean before brushing my teeth, is check the numbers from the previous day. I know it’s a cliché, but seeing how we’re doing against the monthly or quarterly targets always gives me motivation and focus. If things are going well, there’s the urge to see how far we can push it; if things are going badly, there’s the drive to fix it. I look after our team of BDMs and, while communication with them has always been key to my role, in this working-from-home world, it’s about over communicating—texting, emailing, video calling. I strive to be clear on what I expect and constantly push them to bring their best selves to the job of helping their brokers. In terms of what I focus on each day, I maintain to-do lists but, as each day progresses, new things always pop up and I end up following my gut; it is certainly not whoever shouts loudest that gets my attention… unless that happens to be Alex!
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Guide to specialist BTL
Alex Upton is our commercial director, who I report into, and we are always in contact. We brainstorm on an almost daily basis, getting marketing and the rest of the business involved if needed. This includes what’s coming down the line in terms of products/criteria changes, what’s working well, and what we can improve—we go through it all. Current market conditions make this constant review a necessity to try and stay ahead and foresee any potential issues or opportunities. I love the fast-paced nature of this role, but always make sure I find the time to sit down to have lunch with my wife and two kids. This period has been stressful for my wife in a lot of ways that it hasn’t been for me, because at least I get to lock myself away from the rest of the house (including the home school) for several hours a day. You’ve worked with some of the leadership team at HTB before; what do you enjoy most about the group and its dynamics? Matthew (Wyles, CEO) gave me my introductory opportunity in mortgages. The first thing he said to me was, “You’re either on the bus or off the bus”. That sums Matthew up for me; he’s tough but fair, and if you’re on board, you can go places. A chance to work with Alex again was a tough thing to turn down. We’re different in a lot of ways, which means we tend to complement each other, but we are always on the same page in our desire to add value and make deals work, looking at a case in its entirety. And when we do hit targets, there’s no harm in celebrating a little (we’re good at that, too)! The mentality at HTB is to solve problems and deliver for our brokers—and this runs throughout the bank. This is led by Charles (McDowell, MD) and, although it’s not been that long, I see that he has very similar traits to Matthew. The exciting part about working with this leadership team is that no one rests on their laurels. We all know that there is room for improvement and I’m really looking forward to the coming months and years. In a nutshell, what would you say HTB stands for and has come to represent as a specialist lender? From the outside looking in, the vision for the bank was clear: a specialist lender with creative solutions, innovative products and criteria. Now that I’m on the inside, I see a business that puts brokers at the forefront of everything we do. That dedication to provide high quality service is what ultimately sets us apart, and you only get that with teamwork and every department pulling in the same direction. We have to say ‘no’ occasionally, but it’s great to know that when we do, all avenues can and will be explored. Which products do you anticipate will really resonate with brokers and borrowers in the coming months and why? We offer a range of different solutions, some of which we’ve had to step away from in the short to medium term, which is unfortunate, but the long-term success
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Guide to specialist BTL
of the business depends on us being very fluid with criteria. Semi-commercial is an area of the market with obvious pitfalls, but we’ve taken a pragmatic approach with how we deal with these cases, which has meant we can continue to lend to the right borrowers, on the right properties. Anyone who can demonstrate that they have navigated their way through the crisis is someone we should give serious consideration to. We’re back in the large loan space with loans up to £15m. Borrowers at this end of the market who (again) have come out unscathed and have a diversified portfolio, are people we want to be lending to. Holiday lets is another area we stepped away from but have since returned to. Staycations are on the rise and this will be an area where many investors will jump on this asset class after seeing the potential yields. Location, flexibility to adapt/change, experience, and income are all considerations which will be taken into account when lending on a holiday let. What is your impression of the overall specialist finance market and what changes or developments do you anticipate for the rest of 2020? This is a pretty loaded question for me. I could say something about resilient markets and adapting—but I won’t; the biggest change needs to be about diversity. This isn’t about name-calling—although that’s a big part of being a ‘black man from south east London’—this is about unconscious bias and institutional racism. It plagues our society and, unfortunately, our industry. Having someone judge me because of the colour of my skin is what we need to tackle. I am black, but this is not a black problem—it is a problem for everyone. It is statistically proven that diverse companies perform better; different backgrounds and experiences lead to different thought processes and more solutions. We all do better—and get richer—by having a more diverse workforce. Simply, I don’t think there are enough black people in our industry. There is no pride in me saying this. Black people are far more likely to be working in lowpaid, low-skilled jobs, struggling to make ends meet. I’m not saying we are still sharecropping in the delta, but the uncomfortable truth is that we haven’t come as far as we like to think we have. Education and representation, at all levels, is where we can do our bit as an industry. The momentum is here now and, unlike many failed attempts before, there will be significant change that we can all be proud to say we were part of— generations to come will thank us for fighting for a better world for all. And, finally, any pearls of wisdom to impart after your many years in the industry? The cases that come to us with the full story upfront have a much greater chance of completing than ones which come in piecemeal. As a specialist bank, we revel in complex and difficult cases, and can adapt when we know what we’re working with. Any notion that some issue won’t come out during the process is wrong.
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Guide to specialist BTL
Get in touch www.htb.co.uk
Alex Upton
Commercial Director, Specialist Mortgages t. 07823 556 500 e. alex.upton@htb.co.uk
Charles McDowell
Managing Director, Specialist Mortgages m. 07785 576 554 e. charles.mcdowell@htb.co.uk
Marcus Dussard
Sales Director, Specialist Mortgages t. 07497 381 256 e. marcus.dussard@htb.co.uk
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