With inflation falling and reports that members of the Bank of England are voting to cut the bank rate, the tides may be turning on interest rates this year. In light of this, Capital Economics, an independent economic research house, has forecast that the base rate will be cut faster than expected, coming down to 3.00% by the end of 2025. This is especially encouraging considering that the Spring Budget left much to be desired in the property sector, with the only notable mentions being the capital gains tax (CGT) cut and lettings tax breaks being abolished.
These changes may well prompt portfolio holders to sell their properties, releasing more residential housing into the market, however, it fails to address skyrocketing tenant demand. The latest Price Index of Private Rents from the ONS revealed that the average UK private rent increased by 9.2% in the 12 months to March 2024 pointing to glaring issues with affordability, which is exacerbated by a lack of housebuilding. The latest figures show that housebuilding remains behind target with only 232,820 dwellings out of the Government target of 300,000 reportedly being built in 2023, making the rental sector all the more important. Although the election expected later this year may provide solutions to the lack of housing supply, the combination of lower rates, increased demand, and higher rent yields make buy-to-let landlords well-positioned to take advantage of the market.
High levels of confidence in buy-to-let landlords are prompting growth in property portfolios
For those committed to the market, our research shows that 74% of residential landlords not only feel confident about the performance of the property market over the next 12 months but also confident about their own property investments (71%). This increases to 87% for portfolio landlords with over 11 properties. In addition to confidence in the market, 73% of landlords say they’d seen demand from tenants increase over the last six months, with 27% saying it has been a significant increase.
This confidence in the market has had an influence on landlords’ portfolios. Indeed, a quarter (25%) of landlords say they added a single property to their portfolio in the last 12 months, and 27% added multiple properties. Landlords are also looking rosy for the next 12 months, with 26% of landlords reportedly planning to add a single property to their portfolio, and another 26% planning to add multiple.
The aforementioned points around benefiting from increased tenant demand (31%) and buying before interest rates rose further (24%) were primary reasons why landlords have either grown or are considering growing their portfolios. Other common motives include having spare capital to deploy (25%), wanting to diversify into a different UK region (21%), and wanting to buy a property with a better EPC rating (20%).
Priorities and ambitions for property portfolio holders
Although this confidence and desire to expand portfolios is evident, it has to be balanced with landlords’ priorities, particularly when it comes to renewing their mortgages.
42% of landlords are on five-year fixed mortgages, 21% are on two-year fixed mortgages, and 15% are on a Standard Variable Rate (SVR).
With rates having reached their peak in August 2023 at 5.25%, and although they are expected to gradually come down, landlords are understandably concerned about the impact of renewing their mortgages. 42% of residential landlords are set to renew their mortgage this year, while 53% are set to renew their mortgage in two to five years’ time. Those needing to renew their rate expect their mortgage payments to increase by an average of £615.
When looking at what landlords consider important when choosing a mortgage, a majority (65%) say a broker’s recommendation, which speaks to the importance of brokers to property owners. 72% consider the flexibility on criteria important, 70% say support offered by the lender and 62% say specialism of the lender.
The opportunity for diversification
One particular area landlords should consider exploring is diversification. As previously noted, confidence levels in residential landlords were high but it was further uplifted for landlords that predominantly own HMOs (86%) and student accommodation (84%).
This reveals a blossoming trend of landlords diversifying their portfolios, with 21% of respondents saying they were keen to gain more diversity across property types. When also thinking about top priorities when it comes to purchasing a new investment property, 23% of residential landlords say the long-term investment potential is of importance, which may have an influence on a diverse portfolio. Some are even turning to diversification in order to cope with higher monthly costs, with 14% of respondents saying they would consider converting their buy-to-let property into an HMO to secure better returns and 13% would look to convert their property into a holiday let in order to meet higher monthly costs.
Having a diverse portfolio can be an effective way of offsetting any future turbulence in the market. But as with any property, landlords also need to keep in mind what tenant demands and priorities are when it comes to renting. When asking what they considered these to be, 82% consider energy-efficient properties a priority for tenants; 72% think it’s properties with space for home working, 87% think an attractive location is a priority, and 80% report outdoor space as being a priority for tenants.
This all points to the importance of brokers in supporting buy-to-let landlords with their next steps, whether that be growing their portfolio, remortgaging, or looking into their next investment option, especially as this has to be balanced with market fluctuations and legislation reforms.
This provides brokers with the unique opportunity to showcase their specialist knowledge and educate landlords on the different paths they can take and what each entails, in order to nurture portfolios and encourage them to continue growing.
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To recap, this article has helped you…
- Consider buy-to-let landlords’ ambitions and goals for their portfolios.
- Identify the gaps in landlords’ portfolios and the importance of diversification.
- Examine how brokers can support landlords in growing their portfolio.
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