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April 2020 | Buy-to-Let

Jeff Knight: Guiding clients through tough times

Jeff Knight is director of marketing at Foundation Home Loans

As we continue to operate in unprecedented times, the residential and private rented sectors will come under even more intense scrutiny in the wake of individual financial circumstances.

Thankfully, everyone is trying to work together to find solutions. How these will pan out remains to be seen, but suffice to say that all lenders are assessing how and where we can support the most vulnerable homeowners, landlords and tenants.

Whilst it’s difficult to ignore what’s happening around us from a health perspective, it’s also important to maintain a grip of current market conditions and ensure we stay in touch with not just loved ones but also clients.

Working in the industry, we have a better sense of announcements, but clients may need help and guidance to navigate these tough times. What is clear is that we do not know what life will look like in the future. Will things go back to how they were? I doubt it.

As the world of football has ceased, I find myself looking at old matches to remind myself what the game was like before it stopped. With this in mind, I thought I would touch on what the buy-to-let market was like pre-crisis.

To begin, let’s focus on one area more and more landlords are zoning in on as the needs of the rental population changes. As a lender we have seen a surge in interest from landlords who are looking to diversify their portfolios.

Yields, rental voids and cost implications are obviously playing a major role within this, so it’s little surprise that a growing proportion of professional landlords are looking to bolster their house of multiple occupancy investments.

Gone are the days where these were confined to student accommodation and stereotypical grubby bed-sits.

This is an area which has greatly improved from both a tenant and landlord perspective. Stronger regulatory measures have resulted in improved standards.

Properties are now being better designed for communal living and providing comfortable, cost-effective solutions for tenant of all ages. Of course, this area of the buy-to-let market is still far from perfect but forward strides are certainly being made and a growing number of landlords are realising this.

But don’t take my word for it, let’s look at the data. A decent proportion of the recent Q4 2019 Landlord Panel research from BVA BDRC was dedicated to HMOs. It highlighted this to be the 4th most popular purchase target. When asked which type of property landlords are intending to purchase, 52% responded that terraced properties remained the most attractive target. One in four landlords were suggested to be looking to acquire an HMO, whilst only 11% of landlords intended to divest this type of property.

The portfolio profile remained largely unchanged in Q4, with terraced houses continuing to be most common help property with portfolios, but it’s also evident that portfolio diversity is increasing in line with size.

Landlords with 11+ properties were reported to be holding an average of 3.2 different property types in their portfolio, compared to the 1.8 held on average by those with 10 or fewer. HMOs were highlighted as playing a vital role within this, especially at the higher end of the professional landlord scale.

On a regional basis, the incidence of HMOs was suggested to be highest in the North West and Wales, with 29% of landlords owning this property type in these regions.

This was followed by the South West (27%), West Midlands (26%), North East (23%), South East (excluding London) (20%), East Midlands (19%), East of England (17%), London (Outer) (16%), and Yorkshire and the Humber (16%), with the lowest being Central London (13%).

Property-related costs have played a massive role for landlords over the years, but recently there has been increased scrutiny surrounding these.

According to the report, on average, landlords spend around 20-30% of their gross rental income on running and maintaining their properties.

When it comes to HMOs, inevitably landlords spend a slightly higher proportion of costs on running and maintaining this property type – around 28% of their gross rental income. In comparison, landlords were said to spend around 23% of their gross rental income on running and maintaining non-HMO properties. Landlords with 20+ properties claim to spend the highest proportion of their gross rental income on maintaining non-HMO properties (30%).

At the top of this costings list is property upkeep, repairs and maintenance which comes in at 28% of total expenditure.

Making up the top five slots of landlord outgoings are: any other costs associated with renting out the property (23%), property management and letting fees (10%), service charge (9%) and joint fifth are ongoing regular servicing (cleaning, gardening) and accountancy or professional services fees, including legal representation (5%). It’s important for landlords to realise that these costs must be viewed in relation to rental yields and how these are balanced across their portfolios.

The value attached to the advice process also continues to play a major role in this balancing act for landlords.

These are unprecedented times. Let’s stick together.