Buy To Let Bradford
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If this is your first investment, there are a few things to consider. After all, owning a buy to let property is very different to owning your own home.
As soon as you become a landlord, you take on a number of legal responsibilities. Not to mention the new rules, regulations and taxes that have been imposed on buy to let investors in the last few years.
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The future of buy to let Bradford in a shrinking economy. Still want to become a Landlord?
“Pay what you can.” That was the response of one landlord to his tenants in the days following the coronavirus lockdown, as requests rolled in for rent reductions of up to 50 per cent.
In messages and phone calls, tenants related how their income had dried up, with business put in cold storage, and jobs furloughed or cut.
With a small portfolio of buy-to-let properties spread across north London, the long-term landlord-investor, who did not wish to be named, told the FT he sympathised with his tenants who had all been reliable payers in the past.
“You have to be fair with people and let them get back on their feet,” he says, acknowledging that he is fortunate in not being heavily leveraged or dependent on their rents to sustain him.
However, not all of the UK’s estimated 2.6m buy-to-let landlords can afford to be as magnanimous. After a sustained tax and regulatory squeeze on the sector from successive chancellors, the hit to income combined with an uncertain outlook for rental growth and property prices could prompt some smaller landlords to sell up.
Landlords with cash to invest nonetheless believe investment opportunities could yet emerge, with jittery market sentiment limiting competition from other buyers and even pushing up demand for rental property.
Here, FT Money explores the outlook for buy-to-let in a shrinking economy as landlords assess the challenges that lie ahead.
The outlook for rents
The impact of coronavirus on the buy-to-let sector is a tale in two parts — the immediate effect on rental yields, and the longer term picture.
Since lockdown, activity in the rental market has diverged from the residential sales market. Until last week, government-imposed restrictions had made it very difficult to buy or sell a property. However, the lettings market has been able to function more freely — providing properties were empty and renters who were content with a virtual viewing followed social distancing and hygiene guidelines as they moved in.
Some data suggest landlords have been quicker to return to market than tenants, following the initial shock of lockdown. Property analysts TwentyCi found that the supply of rental properties dropped in April, but has since rebounded to 99 per cent of the norm in 2019. Demand from tenants in the form of agreed lets, however, has come back only partially, to 58 per cent of the 2019 average and 64 per cent of its pre-lockdown mean in February and March.
“Supply is outstripping demand,” says Colin Bradshaw, chief customer officer at TwentyCi, “which means rents are falling or must fall”.
Property website Zoopla monitors demand at an earlier stage in the lettings process, recording when potential tenants contact agents to ask about specific properties to rent. Thus measured, demand plunged by more than 55 per cent in the last three weeks of March. After springing back in April and May, however, it is now running at a startling 30 per cent higher than in early March.
Richard Donnell, Zoopla’s head of research, says rental demand has bounced back — and then some. “I was expecting it to be skewed by price or region, but it is a broad-based rebound. It is partly to do with the closure of the sales market creating demand in the rental market. People are looking for short-term flexibility in the rental market, which is what it delivers.”
Buy-to-let has often been cast as a potential problem for financial stability, on the grounds that any house price fall could risk becoming a house price crash if it prompted a big sell-off by landlords, each holding multiple properties.
However Nigel Terrington, chief executive of Paragon Bank, a buy-to-let mortgage lender, says the rented sector is “like a release valve” at times when the purchase market goes into reverse. “In a weaker economy, people tend not to buy homes and rental demand increases relatively. The supply of property available to rent does not rise, so you have more demand from tenants than you have supply for.”
In the short term, the surge in activity is likely to continue as pent-up demand is released by the partial relaxation of lockdown. But the picture will not become clear until restrictions are further eased and the “life support” of government furlough schemes unwind. This week’s historic spike in unemployment claimants to 2.1m could rise considerably if the 7.5m people currently on furlough find they do not have jobs to return to. This will take some time to be reflected in rents.
Lucian Cook, residential research director at estate agent Savills, says the current rental market is “the most difficult to read” in over a decade, amid competing forces in supply and demand for rented accommodation. His predictions suggest landlords should revise their expectations on rental growth. “The longer term effect on earnings because of a weak economy limits the capacity for rental growth as we come out of the lockdown, particularly in the mainstream markets where those earnings are all-important,” he says.
Historical data show that as earnings fall, so does rental growth. There are early signs of this in data produced by estate agency Hamptons International, a subsidiary of Countrywide. Rental growth on renewed tenancies (new lettings were too few to produce reliable results) slowed in March compared with the same month last year and were dragged further into the negative in April after a 3.2 per cent fall in rents in London and a 2.4 per cent fall in the Southeast.
Aneisha Beveridge, head of research at Hamptons International, says uncertainty over household incomes prompted falls in regions with the highest rents, as it is there that tenants’ incomes tend to be most stretched.
In the medium term, she expects the falls in rents to be felt more sharply in properties at the lower end of the value spectrum. “Middle and high income workers have been less affected by the crisis and are unlikely to see their incomes change too much for the time being. Among the lower income groups, many have lost jobs or been furloughed and seen their income fall. Realistically, if their incomes are being cut it’s very unlikely this won’t be passed on to rents.”
Countervailing forces may act as a brake on the downward trajectory of rents. The latest figures from Zoopla provide intriguing evidence of this, for instance, since they show the asking price for rents rising by 10 per cent from the beginning of April to this week, even as the national economic picture darkened.
Mr Donnell of Zoopla suspects a significant part of the rise is down to short-let landlords who previously advertised on platforms such as Airbnb or HomeAway now moving into longer-term lets as curbs on international travel and other restrictions pile pressure on their business model.
“These homes tend to be in tourist hotspots, which are higher value rental areas, hence the increase in value,” he says. Overall, though, he expects the number of new lets to fall by 25 per cent in 2020, as a result of the economic impact in the second half of the year and moves lost to the coronavirus restrictions.
Rents may also be supported by frustrated buyers or those now rethinking their plans in a post-Covid world. The direction of house prices remains uncertain, but the great majority of buyers contacting FT Money since lockdown have said they would be looking for discounts on offers made in January or February or pulling out of deals.
Would-be first-time buyers are those most likely to be cooling their heels in the rented sector or in the parental home for some time to come. Many will have been challenged by mortgage lenders’ recent restrictions on the high loan-to-value mortgages sought by those with smaller deposits.
Even as some lenders are returning to high-LTV lending, the lockdown has had a disproportionate effect on the finances of younger workers, hampering their ability to pass lenders’ affordability tests. Employees under the age of 25 were around two and a half times as likely to work in a sector that is now shut down as other employees, according to research by the Institute for Fiscal Studies.
The new-build sector will also take time to get back up to speed, restricting the supply of new homes to the market and leaving landlords with tenants in place for longer.
David Lawrenson, a longtime buy-to-let investor, believes certain types of rental properties will be more vulnerable, including short lets, student accommodation and houses of multiple occupation (HMOs).
“I think this crisis does lead to a simpler buy-to-let model,” says Mr Lawrenson, author of the Letting Focus blog. For now, students may be tied in to paying rents on unoccupied properties, but the turmoil in the higher education sector is certain to hit demand when those tenancies end in the summer. This will be tough for landlords with a portfolio concentrated in those areas.
Lenders are already aware of the risks of exposure to the student market, and are asking questions of landlords seeking to remortgage or buy, according to Mark Harris, chief executive of mortgage broker SPF Private Clients. “Lenders are asking: if you typically let to students, are you more exposed than, say, landlords with properties near hospitals?”
The economic reckoning, when it comes, is also likely to favour landlords with properties in locations with a diverse mix of employments, reducing the risks of one big local employer going bust or shutting down.
Research by the Centre for Cities think-tank looked at what the virus fallout meant for the economies of British cities and large towns. Crawley was found to be the most exposed, as its proximity to Gatwick airport means more than half of local jobs are in vulnerable or very vulnerable sectors such as aviation and aircraft manufacturing. Luton — a buy-to-let hotspot in recent years — and Derby, with jobs in aviation and automotive industries, were also considered vulnerable.
Buy the dip
Despite the prospect of difficult conditions in the rental market for some time, plenty of landlords see long-term opportunities to benefit. John Howard, a buy-to-let investor and developer who is a veteran of three property recessions, believes those with cash and the willingness to take risks will be able to find bargains in the coming shake-up.
“I’ve always done better coming out of a property recession than at any other time,” he says. “There are more deals to be done than in a hot market. There are fewer people investing and there’s less funding around. If you’ve got funds, that’s a strong combination.”
He adds that those who are able to buy will have more time to make a decision and feel less need to do the more complex, labour-intensive deals that a competitive market necessitates. “This year and next, you will have many more options and variety in what you can buy. You won’t need to take silly risks.”
Mr Terrington of Paragon Bank takes a similar view. “Professional property investors buy with a long-term horizon. Those on our books hold their properties on average for 17 years. Some of them will see this potentially as a buying opportunity.”
Low interest rates will give mortgaged landlords some comfort, where they have enough equity to be able to select from deals across the market. Buy-to-let mortgage lenders are starting to reintroduce higher LTV deals and interest rates have moved much closer to those of residential mortgage deals in recent years.
For those considering their fixed rate options, however, Mr Howard advises a longer term fix, since the difference is relatively small for greater peace of mind over interest rates. “If I were looking at it now, my advice would be to take a little bit of pain. If you can remortgage on a two-year fix at 2 per cent or a five- or seven-year fix at 2.5 per cent, I’d be doing five or seven.”
For landlords, the economic uncertainty ahead comes after a succession of tax and regulatory changes that have eaten into their returns.
In 2016, a 3 per cent stamp duty land tax surcharge was introduced on buy-to-let and second homes. Regulators have required lenders to impose stricter tests on affordability. Most significantly, the government has gradually reduced higher rate tax relief on mortgage interest payments. Staggered over four years, the last stage of its withdrawal came on April 6, in the midst of the coronavirus crisis.
Few tears are likely to be shed among the general populace for a sector often perceived as having benefited in the good times from loose regulation, easy debt and rising house prices at the expense of first-time buyers, among others. But the private rented sector serves an increasingly important role in an economy in which the government struggles to meet housebuilding targets and pressures on affordability prevent households from joining the ranks of owner-occupiers.
The growing tax and regulatory burden has led to the departure of “amateur” landlords holding just one or two properties, leaving more of the market to the professionals with larger portfolios held via a limited company. Experts say this shift could accelerate if those who now have a bad experience of unpaid or delayed rents simply throw in the towel.
Mr Cook says: “Some will say as and when the market returns I’m going to take the opportunity to move on and change my investment plan. Others who are not worried about the lack of tax relief will hold tight. But you’d certainly expect the trends we’ve seen of late to continue.”
Landlords and tenants
Property investments have always been management intensive, but landlords face difficult negotiations with tenants who are struggling to pay the rent.
Research from the National Residential Landlord Association suggests landlords have responded positively to tenants’ requests for help on rents since lockdown; but a survey from the campaign group Generation Rent found more than half of renters who asked for a rent discount were refused.
Many tenants will be unable to pay their way over the coming months, prompting the question of how landlords should deal with rental arrears after the government’s three-month ban on evictions comes to an end on June 25.
Mortgaged buy-to-let landlords can ask their lender for a “mortgage holiday” of up to three months if the tenant is unable to pay the rent, but many are reluctant to do so through fear this could count against them if they refinance or expand their portfolio in future.
Buy-to-let investor David Lawrenson believes most landlords will prefer to drop rents and keep tenants in place rather than face the financial and logistical problems of voids in a struggling market.
“There’s evidence that rents have been reduced because people don’t want to leave their properties empty. There are so many costs and so much admin involved with finding someone new,” he says.
Where tenants move on and a landlord must decide how to price the rent for a new occupant, he recommends the standard procedure of pricing to the local market — though he predicts a fall of around 10 per cent in the coming months, as rising unemployment and reduced incomes weigh on affordability. “People will be facing increased taxes. It will mean they just can’t afford it and landlords will have to take a rent reduction.”
When landlords and tenants cannot come to any agreement on rents, the normal procedure would be for the landlord to serve notice of eviction, forcing the tenant out.
Eloise Illingworth, an associate at law firm Withers, who has been dealing with tenancy disputes since lockdown, says where landlords have sought advice on tenants who have paid no rent or only a small fraction of the rent, the advice has been to serve notice even though possession claims are effectively suspended under the government ban.
“Serve notice as soon as possible and the sooner your claim will be dealt with [after the ban ends].” She warns, however, that you should not expect a quick resolution even then. “There is going to be a huge backlog of possession claims in the summer unless further restrictions are put in place.”