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June 2020 | Buy-to-Let

Ying Tan: Positive signs but pragmatism required

Ying Tan is founder and chief executive of Dynamo

With many lenders returning to the market on the back of the resumption of physical valuations, the buy-to-let (BTL) marketplace has sprung into life after a tough transitional period.

This is true of the whole mortgage market, and underlines the importance of intermediary firms, packagers, networks and clubs forging even closer relationships with lenders to keep up to date with the raft of product and criteria changes as we start to pull away from lockdown and enter a whole new lending world.

Technology will continue to support and service the BTL sector moving forward, but the weight of the human touch is more evident than ever.

The recent lack of physical valuations not only left a huge hole in the wider mortgage market, but decimated many of the more niche markets, where its importance was magnified.

Within BTL, some transactions were still able to take place, but this number paled to insignificance when compared with the vast swathes of pipeline business generated prior to the crisis.

Another human element which will remain integral across many BTL propositions is manual underwriting. In a similar vein to valuers, the importance of underwriters sometimes goes under the radar, but they will rise to the fore and really show their worth as the sector battles its way through what remains an uncertain time.

Lenders will need to work closely with intermediary partners on a case-by-case basis and, while specialist lending activity is likely to see an immediate resurgence, we have to remain cautious and apply the right levels of manual and tech support to ensure we move at the right pace and in the right direction.

The BTL market will not return to pre-pandemic conditions any time soon, but the signs are certainly more positive than even a week or two ago.

So, let’s take a quick look at current market conditions to assess where we go from here.

Lifting the barriers

Rightmove saw almost 5.2 million visits as the property market reopened on Wednesday 13 May, up 4% year-on-year. These stats highlight how quickly interest returned following the government’s announcement of changes to its housing market policy.

The data showed that sales demand (unique enquiries) doubled from Tuesday 12 May to Wednesday 13, representing a figure only 10% lower than on the same day in 2019.

Rental demand also surged, with the highest number of unique enquiries recorded in one day since September 2019. These figures show the pent-up demand from homebuyers, tenants and landlords generated before and during the lockdown period.

Rental yields

The average UK rental yield currently sits at 3.5%, a marginal decline from 3.6% prior to the pandemic, according to research from Howsy.

Even with the obstacles facing the current market, there are pockets of strong regional returns. Bradford showed the highest average yield at 10%, followed by Gwynedd (6.2%) and North Down (6%).

Other areas ranking highly were Glasgow, Liverpool, Preston, West Dunbartonshire, North Lanarkshire, Forest Heath and Manchester.

At the other end of the scale, Malvern Hills, Kensington and Chelsea and Chiltern reported the worst yields at 2.3%. The largest increase in yields was in North West Leicestershire, up 1.4% during the pandemic.

Arun, Corby and West Norfolk registered increases of 0.8%, while North Dorset and Newark and Sherwood saw an uplift of 0.7%. Kettering, Derby, Breckland and Falkirk were also among the top 10 for rental yield uplifts during the pandemic.

However, Rhondda Cynon Taf, York, Gedling, Chiltern, and the Vale of Glamorgan were found to have experienced the largest declines, between 1% and 3.5%.

While all landlords will be carefully evaluating the performance of their portfolios, the need for mortgage payment holidays or additional borrowing, and any wider housing market trends, the opportunity for strong rental returns is still evident in many parts of the country.

What will happen next? Your guess is as good as mine as to what follows. One thing we do know is that the BTL market is filled with a renewed sense of cautious optimism, and we have seen how adaptable the lending and advice chain is. This is hugely positive, but we do have to remain pragmatic.

All firms operating in the BTL space will have to change the way they operate. Products and criteria will continue to be affected, in terms of availability, choice, loan-to-value (LTV) limitations, risk appetites and a valuation backlog.

The challenge facing BTL lenders is unique, but if we’ve learnt anything over the past 10 to 15 years, it’s that this is a resilient sector with the capacity to evolve and prosper.

Another thing we can be sure of is that the UK reliance on the private rented sector will grow. Tenant demand is expected to surge, as the purchase market will take some time to find its level.

Portfolio landlords are expected to lead the charge, as tax and regulatory changes are still creating barriers for ‘amateur’ landlords. I expect BTL lenders to target this band of potential borrowers in the coming months.