Buy-to-let review

Many questions coming to the fore in the BTL and PRS sectors

Steve Cox,

chief commercial officer, Fleet Mortgages

Understandably, there is a lot of emotion around the buy-to-let market and the private rented sector (PRS) currently.

It will feel for a significant number of landlord borrowers like they are somewhere between a rock and a hard place currently when it comes to both the here and now and weighing up what their future holds.

Politically volatile times are, of course, not helping. The PRS and buy-to-let landlords’ place within it have been used as a political football for as long as I can remember – but this appears to have moved up a level in recent months, not helped by the turmoil ongoing at the heart of Westminster.

As I wrote this, Boris Johnson had just announced his resignation and the first candidates to be the new Conservative Party leader/PM were emerging. I appreciate that by the time this article is published we will be in mid-August, and there should be a far greater degree of clarity around who that individual will be, so you’ll forgive me if I don’t make any predictions in that area.

However, what we currently have is a new man at the helm of UK housing. With Michael Gove sacked by Johnson, Greg Clark is now in the post – although, again, that might well have changed by the time you read this.

All this upheaval clearly doesn’t help landlords, who are already looking at a significant amount of change and potential cost in the future. Some have suggested that renter reforms could be put on hold, and that we might get a resetting of housing policy under a new PM – and that certainly would not be out of keeping with how new leaders often want to put their stamp on an administration.

Will housing strategy stay on the same trajectory, then? One would have to say hopefully not, because at some point, someone in a position of power is going to have to acknowledge the importance of the PRS in filling the housing gap, and the importance of keeping landlords engaged in the sector.

Will the ‘new’ government – when it is formed – be able to see the wood and the trees of our marketplace and set a course that understands that a lack of supply in the PRS is not being helped by the policies previously pursued? We shall have to wait and see.

What we do know is that landlords will have to take the emotion out of their existing investments and be hardnosed about what they are achieving now and what they can deliver in the future. That might well provide them with the confidence they need to keep on acquiring property where possible.

Currently, supply is low, tenant demand is high, rental yields are therefore strong, and landlords who have held their properties over the last couple of years will have benefited from an increase in house values.

Many landlord borrowers will be coming off five-year deals this year, and while, of course, product pricing is currently fluctuating, we believe this will calm down, particularly as lenders get a hold of resource and service issues. It may take the summer months to get to that point, but the anticipation is that from autumn onward we will be swimming in calmer waters, and prices will reflect that.

It means that, for landlord borrowers coming to the end of deals and thinking about their next moves, there could be an opportunity to remortgage and access some of the capital growth in their properties in order to make further acquisitions.

Again, I appreciate that this may be easier said than done. There is a lack of housing supply for sale in the wider UK property market; however, that may also be shifting. Just recently, according to TwentyCI, data has suggested that all UK regions have seen at least a two per cent increase in property supply for sale, and we anticipate that this will continue, particularly as some of the demand in the sector is being diminished by a combination of factors, including the rising cost of living and increased interest rates.

It may well leave landlords in a much stronger position in terms of being able to access property and being able to inject greater levels of supply into the PRS, which it undoubtedly requires.

Now, of course, all this is predicated on making the numbers work, and there also needs to be an acknowledgement of what is coming over the horizon from an EPC point of view. But buying a property with an EPC rating of D or E, conducting the work to get it up to C and above now – future-proofing that asset and probably raising its value as a result – and accessing strong tenant demand are certainly both doable and clearly advantageous for landlords looking at the long term.

And that is the big, overwhelming message that advisers should now be offering their clients. Yes, the current situation is not ideal, but looking at the PRS, property investment, borrowing, etc, in the context of the long term will give landlords a much better idea of what is achievable.

Certainly, the need for mortgage advice is still huge, and advisers should act as landlords’ trusted allies, helping them through the current environment in order to place them in a very strong position in the future. M I

Snapshot of the landlord’s landscape

Grant Hendry

director of sales, Foundation Home Loans

As a specialist lender who has dealt with a significant number of portfolio landlords, we know how different the needs of every single one of these landlords are and the support required from them, and from advisers, in meeting these needs.

A portfolio landlord is defined as someone with four or more mortgaged properties. An important factor to remember here is that among those mortgaged properties, those held within a limited company also count. So if a landlord holds two mortgaged properties in their own name and two within a limited company structure, then they are officially classed as a portfolio landlord.

This represents a clear definition, but – as we previously highlighted – portfolio landlords do come in all shapes and sizes, with many portfolios extending far beyond four mortgaged properties. In this respect, the words typical and average are not always representative, but it’s certainly beneficial for advisers to form a strong understanding of the characteristics of such landlords and how ‘average’ portfolios stack up in terms of size, value, and structure.

The quarterly BVA BDRC Landlord Panel research provides a good barometer for how portfolios are evolving, so here’s a round-up of its Q2 2022 insights into what a ‘typical’ portfolio looks like.  The average portfolio size has remained stable at around eight properties in Q2, with the typical landlord having

9.8 tenancies.  Just over four in 10 properties in the average portfolio are owned outright, with the same proportion owned using BTL borrowing.  More than six in 10 landlords fund at least part of their portfolio through BTL borrowing. Single-property landlords are most likely to own their property outright (65 per cent), while borrowing is more common amongst those with 11+ properties, indicating that mortgage debt is being used strategically to leverage and expand the more professional portfolios.  The typical landlord owes £442k in

BTL borrowing. This is up by about £60k from Q1 and is primarily driven by an increase in borrowing amongst those with 11+ properties, again indicating a continued confidence amongst ‘professional’ landlords in property portfolio growth at this time. Looking only at those who have a BTL mortgage, the total average amount borrowed rises to £695k, which equates to around £129k per loan, although that varies considerably by region.  Terraced houses remain the most commonly owned type of rental property. Almost six in 10 landlords have at least one terraced house in their portfolio. Interestingly, terraced houses have far outrun other property types for many years in terms of which type landlords intend to buy next, but recently, semi-detached houses are scoring nearly as highly (43 per cent) for the next desired purchase versus terraced houses (45 per cent).  Landlords with the largest portfolios continue to have a more diverse portfolio, understandably, and are considerably more likely to own HMOs, detached houses, and/or whole blocks of flats.  On a regional basis, landlords operating in Yorkshire and the Humber currently have the largest portfolios, with an average of 15.5 properties, whilst the typical portfolio in the North East and East Midlands is also in excess of 10 properties.

The increased amount of BTL borrowing represents an interesting point and helps demonstrate how active landlords with larger portfolios have been in recent times – and this certainly mirrors our lending experience, especially from a limited-company perspective.

This was also reflected within the research, which found that six in 10 landlords (62 per cent) intend to purchase their next BTL property within a limited-company structure – the highest proportion for three years and up from 50 per cent in Q1. This number has been consistently growing, reflecting the increasing popularity of the limited-company structure.

Those with larger portfolios (six properties or more) are significantly more likely to purchase in a limited-company structure – 78 per cent versus 47 per cent.

I appreciate that this is a lot of data to take in, but I hope it offers some valuable insight into the world of portfolio landlords. The many variables help outline just how important it is for advisers to work with lenders who are fully immersed in this area and who fully understand such clients’ specific – and often complex – needs.

Being in a position to access specialist support and the solutions to meet these ever-shifting demands remains key in helping to develop, diversify, and grow portfolios at a time when the value of the advice process and the reliance on specialist lenders has never been so apparent. These are important factors that are unlikely to diminish any time soon. M I