With 2020 just over and 2021 just beginning, now seems like a good time to reflect on the performance of the buy-to-let market. With that in mind, here is a quick review of the last year and some thoughts on what the next year might bring.
COVID19 hit at landlords’ cash-flows
There are probably very few groups of people who escaped 2020 unscathed. Buy-to-let landlords certainly weren’t one of them. That said, they probably had a somewhat easier time than commercial landlords.
Both groups of investors were hit by tenants reducing or stopping payments. In some cases, this was due to genuine hardship caused by COVID19. In others, quite bluntly, it was due to tenants exploiting measures intended to protect those genuinely suffering due to the impact of COVID19. Commercial landlords also had to deal with the complexities and challenges of Company Voluntary arrangements.
Residential landlords do, at least, have at least some degree of leverage with their tenants. Firstly, tenants are likely to need a reference from their current landlord to be accepted by a new one. Secondly, most tenants need to think about their credit record. Thirdly, if tenants end up being evicted “for cause”, they make themselves ineligible for social housing.
In short, residential landlords do appear to stand at least some chance of recovering at least some of the funds they should have collected in 2020. As a minimum, they can reasonably expect arrears to slow and then stop as the vaccine is rolled out and the economy can begin the process of reopening.
Financing nosedived but recovered
If you were to chart out the availability of mortgage products from January 2020 to now, it would look like a deep valley bordered by low hills. In the early months of the pandemic, lenders fled the market withdrawing all but the safest of safe products. In May, however, lenders calmed down and product options began to pick up again.
Since then, the availability of mortgage products has risen and fallen depending on how lenders are feeling. Right now, the overall mood seems to be one of extreme caution towards clients who are perceived to be on the risky side (in particular the self-employed). They are, however, perfectly willing to deal with clients who have a lower risk profile (like a lot of investors).
Investors also benefited from the Stamp Duty holiday. Even though the Stamp Duty surcharge remained in place, the potential for overall cost savings was still significant. Interestingly, 2020 saw very robust house-price growth overall. There were, however, major variations between local areas. The Midlands and North performed very strongly. London and the Thames Valley were both far behind.
This strong house-price inflation meant that buyers, particular investment buyers, had to be especially careful to avoid overspending. It was, however, excellent news for people looking to refinance existing properties. It was also helpful to established investors who wanted financing to expand their portfolios. They were able to use the increased value of their current portfolio as collateral for their new purchase(s).
Realistically, it’s highly unlikely that such rampant house-price growth will continue into 2021. Buyers are already up against the clock to take advantage of the Stamp Duty holiday while it lasts. Once it’s over, the market is likely to pause for breath and then return to normal. In other words, once the tax incentive is removed, regular slow and steady house-price growth is likely to be the way of 2021.
Brexit rumbles on for now
On the plus side, Brexit has not prompted a mass exodus of people from the UK nor has it prompted a mass return of ex-pat Brits. On the minus side, it has prompted a lot of (hopefully) short-term confusion and medium-term economic uncertainty. This has the clear potential to influence the buy-to-let property market.
Despite the recent flurry of activity in the housing market, a lot of people are likely to hold off committing to a property purchase until they know where they stand. This will increase the demand for rental property. At the same time, it’s reasonable to assume that many tenants will be very price-sensitive.
Landlords will therefore need to think carefully about their pricing. This is likely to be particularly applicable to anyone focused on the “young adult” demographic as many younger adults will have the option to live with their parents.
Short-term lets could be pushed out of cities
Between Brexit and COVID19, the issue of managing the short-term lettings market seems to have slipped off the radar. It is, however, just about guaranteed to raise its head again and probably sooner rather than later. Based on what has happened so far, the safest bet is that short-term letting is heavily regulated in cities but left well alone in rural areas.
Some investors may choose to convert their city-based short-term lets to standard residential buy-to-lets. There is, however, a strong possibility that they will be in the minority. Short-term lets are treated as commercial property. As such, they operate to a very different set of rules from standard residential lets. This is often a large part of their appeal.
It, therefore, seems more likely that people running city-based short-term lets will simply sell up their city properties. They may exit the market completely or pivot to short-term lets in rural locations. This could create a buying opportunity for buy-to-let investors.
Remote working has become part of the new normal
This is now simply indisputable. Even companies which have stated they wish to resume office working have increasingly become open to the idea of hybrid working. Some companies have embraced the remote-only approach. Many are looking to implement a combination of location-based working, hybrid working and remote working depending on staff preference and job function.
Remote working has already hit the Central London property market, especially the rental market as renters have the most flexibility to move. Hybrid workers may need to stay around the Thames Valley, but they are likely to gravitate to its more affordable areas. Genuine remote workers, however, could well decide to head up to the Midlands and North of England. These offer everything you can get in London but are far more affordable.
Mark Burns is the managing director of property investment company Pure Investor, who specialise in UK property investment and property investments in Manchester, Birmingham, Liverpool, Sheffield and Leeds.