Understanding the changing face of buy-to-let

Shawbrook Bank's Gavin Seaholme looks at the impact the COVID pandemic has had on buy-to-let investors and tenants.

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Gavin Seaholme Head of Sales - Property Finance, Shawbrook Bank
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18th November 2021
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The learning objectives for this article are to:

  • To be able to identify the value and size of the PRS market
  • To be able to explain how landlords & tenants have changed since the Covid-19 pandemic
  • To be able to explain what changes are taking place regarding EPCs and their impact

Almost half of private landlords cut tenant’s rent in 2020

  • Since March 2020, residential landlords estimate they gave up £6.5k in rent reductions and a further £7.5K on payment holidays
  • More than a third of landlords proactively offered a rent reduction or payment holiday
  • On average, rent reductions lasted four months and full payment holidays lasted three months

Almost half (46%) of landlords reduced monthly rent payments for their tenants because of the pandemic, according to upcoming research from Shawbrook Bank.

In total, 28% of landlords gave their tenants a full rent payment holiday; a period of up to three months where tenants were not liable to pay any rent. Additionally, 18% offered a rent reduction; a period where tenants paid a lower level of rent as agreed with their landlord.  On average, rental payment holidays lasted for three months, compared to rent reductions which lasted four months.

Those landlords that gave their tenants a payment holiday estimate they lost £7,500 on average, in comparison rent holidays cost landlords £6,500 on average.

When asked about how the agreement had come about, more than a third of landlords who gave a form of rent reduction said that they proactively offered it to their tenant, while a further 45% said it was a mutual decision. Concerns around furlough, job security and redundancy were all common reasons why a rent reduction or payment holiday were suggested. 

Portfolio landlords – those owning four or more properties - were more likely to have agreed a rent reduction with their tenants compared to single property landlords; some 17% of portfolio landlords admitted to missing out on income compared to just 12% of single property landlords.

The majority (59%) of landlords who gave rent reductions did this for more than one of their properties.

We now turn our attention to the Private Rental Sector (PRS) in more detail, to assess its value what have been the key drivers, for example the demand/ supply question, and also the impact of regional rental yields.

 

Value of the Private Rented Sector grows to £1.4trn

  • Rising house prices largely but not exclusively driven by the Stamp Duty holiday drive growth in the value of the Private Rented Sector (PRS) of 5.8% in the last year
  • Rising house prices to boost tenant demand
  • Increasing landlord confidence, low mortgage rates and rising rental yields further set to boost the PRS going forward

The value of the Private Rented Sector (PRS) in England, Wales and Scotland grew by 5.8% to £1.4trn in the last year. Since the first national lockdown, house prices have rebounded at pace. March 2021 saw house price growth of 9.9% year on year, as the Stamp Duty holiday boosted confidence and demand.

Buy-to-let properties have also seen marked price increases, with the value of the average buy-to let property across the UK rising by 5.6% to December 2020 to approximately £258,900. The past eighteen months have been a period of substantial consequence for the PRS, which had already been impacted in recent years by taxation and regulatory changes. Some landlords chose to leave the market and the PRS actually contracted in size over the last year.

Separately, many tenants made a change, opting to return to their family homes during the pandemic, to leave cities in search of more space, or to make the most of the Stamp Duty holiday and become homeowners themselves. This reduction in the size of the PRS therefore isn’t surprising after the last year. The outlook however points to growth.

Demand from tenants has been growing.  In total, 42% of landlords report that they have seen demand increase for their properties in the past 12 months. In addition, two thirds (67%) of landlords said that they were confident about the future of the property market over the next twelve months, with a third (34%) of all landlords planning to buy a property in the coming year.  As house prices continue to grow, an increasing number of people are renting for longer. Half (49%) of renters say they expect to be renting for the rest of their life. Affordability is one reason behind these figures. However, a growing number are also choosing to stay renting. More flexible lifestyles have led to some looking for the same from their property. In total, 10% said they prefer the reduced responsibility of renting, while a further 7% said that renting allowed them to live in a better location than if they bought.

When asked why they were confident about the future of the property market, landlords pointed to house price growth (41%), an increase in demand from tenants (41%), the general strength of the economy (33%), and the increased rental yields currently available (26%). For landlords looking to buy over the next year, to capitalise on the increase in tenant demand, and current low mortgage rates, Shawbrook’s research reveals the regions where high rental yields can be achieved. The highest rental yields can be found in the North West (5.5%), Yorkshire and the Humber (5.4%) and Scotland (5.8%). In comparison, while London may generate the highest rents, yields for London buy-to-let properties are currently amongst the lowest at 3.9%, below the UK average of 4.3%.

 

Two in ten landlords are funding refurbishments through short-term credit

  • 19% of landlords surveyed are funding refurbishments with credit cards or short-term finance products
  • 62% of landlords have undertaken a refurbishment over the last 12 months
  • Landlords spent over £13,000 on average on refurbishments

Two in ten landlords surveyed used a credit card or another short-term finance product in order to fund a recent refurbishment according to new research by Shawbrook Bank.

Shawbrook’s Changing Face of Buy to Let report found that close to two thirds of landlords (62%) have undertaken a refurbishment to one of their rental properties in the last 12 months, with 18% renovating more than one rental property.

Landlords also used their own finances to pay for renovations to their rental properties, with 60% utilising their personal savings or investments, and 12% using a recent inheritance or windfall. A further 12% used a second charge mortgage in order to finance the changes they wished to make to their rental properties.

Overall landlords spent on average £13K on renovation projects over the last year, with portfolio landlords (those with four or more properties within their portfolios) spending £17K. With popular works including repainting (37%), fitting new carpets or flooring (28%), putting in a new kitchen (27%) or bathroom (27%). However, some landlords also undertook even bigger projects such as kitchen extensions (14%), a loft conversion (10%) or building a home office in the garden (8%) in order to capitalise on current demand for more space for home-working and living.

For many landlords, the last year provided an opportunity to undertake these improvements to their properties. With more experiencing a gap between tenancies, taking the opportunity to refurbish, allowed them to improve the property without causing disruption. 14% of landlords said they chose to renovate because they had an extended period between their previous and incoming tenants. However, the majority of landlords were undertaking necessary work to their property. A third (34%) said that their property needed a renovation.

 

Landlords taking steps to improve energy efficiency ahead of new rules 

  • 17% of buy-to-let landlords have undertaken a refurbishment in the last 12 months in order to improve the energy efficiency of their home
  • New Energy Performance Certificate (EPC) regulations will mean that from 2025 landlords cannot rent their property without an EPC rating of C or above. Without support from the government and lenders, many landlords could struggle to make changes ahead of the deadline
  • Tenants more likely to pay more or stay longer in a property if it’s more energy efficient

Landlords have begun to take steps to improve the energy efficiency of their properties ahead of new rules due to come into force in 2025 according to research from Shawbrook Bank. The new rules mean rental properties with an EPC rating of D or below will not be able to take on new tenants.

Changing Face of Buy-to-Let Report, found that 17% of landlords had made efforts to improve the energy efficiency of their property, and this rose to 22% for portfolio landlords (landlords with four or more buy-to-let properties). 

For example, of all the landlords that had undertaken a refurbishment, 22% had replaced the boiler and heating system in their property, a further 23% had replaced the windows, and 18% had installed new white goods. All these actions could have an impact on a property’s EPC rating and help landlords move closer to achieving a rating of C or above.

And, making properties more energy efficient can boost demand from tenants too. Indeed, one in ten private renters said that they would stay in their current property longer if their landlord made changes to the property which benefit the environment. Tenants were also happy to pay more in rent should landlords make certain changes to their property. 18% of tenants said they’d pay more if the windows were replaced, 15% would pay more for a new boiler and heating system, and 10% suggested that installing solar panels would justify paying more rent.

With energy bills predicted to rise substantially next year, making changes to a property to improve its energy efficiency will not only help the environment but could also save tenants a significant amount.

However, for those landlords who own older properties - which are typically less energy efficient - it can be harder to improve the rating. This could mean that by 2025 some properties will be ‘unrentable’ and ‘unsellable’.

According to data from the Ministry of Housing, Communities and Local Government there are close to 13 million homes in England and Wales currently with an EPC rating of D or below

Conclusion

We have looked at the 'The changing face of buy-to-let' report and have covered in detail what has happened in the buy-to-let market and how it has changed driven by various factors - now answer the following questions to show your learning from this piece.

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To recap, this article has helped you...

  • To be able to identify the value and size of the PRS market
  • To be able to explain how landlords & tenants have changed since the Covid-19 pandemic
  • To be able to explain what changes are taking place regarding EPCs and their impact
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