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March 2020 | Buy-to-Let

Jeff Knight: The keys to a strong market

Jeff Knight is director of marketing at Foundation Home Loans

The Boris Bounce or Brexit Bounce – whichever you prefer, if either – are cited as having a positive effect on many market sectors following the General Election result back in December.

When combined with the traditional new year upsurge in activity this has served to create a positive start to the year for estate and letting agents up and down the country.

The latest data and analysis from The Royal Institution of Chartered Surveyors (RICS) revealed that there has been growing activity across the UK housing market in January.

RICS found that renewed optimism from buyers and sellers continued to pick-up as the number of homes being listed for sale increased during the month. In addition, January saw an increase in the number of people looking to buy as new buyer enquiries rose to a net balance of +23% from +19% in December.

Agreed sales also rose for the second month in a row (a net balance of +21%). This increased activity and underling confidence being exhibited by a variety of homebuyers has to be a highly positive trend.

After all, strong homeownership aspirations remain key to a healthy housing and mortgage market.

Additional data from the Q4 2019 Landlord Panel research from BVA BDRC, highlighted how post-election confidence in the UK financial market has increased significantly (+15% year-on-year).

The General Election outcome has driven a very strong uptick in confidence around UK economy, and for the first time in many waves, other confidence indicators also saw a slight quarter-on-quarter increase – capital gains (2%), the UK’s private rented sector (2%) and own letting business (3%). Prospects for rental yields was the only indicator out of the five key themes (financial market, capital gains, UK private rented sector, own letting business and rental yields) not to see an improvement in confidence in Q4.

In terms of the influence on the buy-to-let sector, expectations around the likely impact of the general election results are split with 26% thinking it will be positive for landlords, whilst 28% think it will be negative.

Those with larger portfolios tend to be most positive about the potential impact of the result, with the smallest landlords more unclear.

Reasons for positive expectations include there now being greater certainty around Brexit, and a belief that Conservative policy tends to be more in favour of landlords. Whilst negative expectations are driven by the abolishment of S21, anti-landlord policies and increased legislation.

Delving a little deeper into the BVA BDRC Landlord Panel research, other key findings emerged regarding profitability, business optimism, tenant demand and portfolios.

Profitability

Profitability was suggested to have remained stable in Q4, with 85% of landlords making a profit from their letting’s activity. The proportion of landlords claiming to derive a full time living from their letting activity increased by 4% from Q3 to Q4, driven by a rise in those with 4-10 properties who reported making a full time, profitable living. The ‘scale’ of profitability increases in line with the number of properties managed; At the top end of the market, one in four landlords managing 20+ property portfolios report deriving a ‘substantial’ profit from their business.

Business optimism

For the first time in over a year, landlords’ business optimism increased. Profitable, expansionist landlords were reported to be the most optimistic, and interestingly those letting to migrant workers were much more confident than average, indicating that greater certainty about Brexit is being welcomed. The proportion of landlords believing that demand is reducing is now at its joint lowest level for three years (16%).

Rising tenant demand

An increasing number of landlords reported that demand had increased, up 3% from Q3 figures to 25%. Perceived tenant demand was similar across many UK regions. However, those reporting increased demand fell below 30% in the South East, North East and the West Midlands. Central London remained polarised, with one in three landlords reporting a recent decrease in tenant demand but around four in 10 reporting a rise in demand.

Portfolios

Some 14% of landlords intend to increase the size of their portfolio in the next year, whilst 22% plan to reduce it. The proportion of landlords aiming to reduce their portfolio in the next 12 months edged down for a 2nd successive quarter, from the all-time high of 26% recorded in Q2 2019. It remains the case that larger portfolio landlords are significantly more likely to be looking to divest property, with 45% intending to do so in the next year.

Diversity is key when it comes to landlords looking to maximise their current and future portfolios. Choosing different property types represents one route, with an increasing number of landlords incorporating houses in multiple occupation (HMOs), off-plan new builds and short-term lets into their portfolios.

Another route is via investment in a different location, especially in those places where yield is historically strong, and rising. And specialist lenders continue to lead the way in meeting these demands and driving this sector forward.