Buy-to-let property investors were seeing record demand for rented housing before the Covid-19 outbreak, but what does the future of the sector look like?
As we have previously explored on the Experience Invest blog, the buy-to-let property sector has an interesting history in the UK.
The latest chapter in the story of the buy-to-let segment, and indeed the housing market as a whole, is unfolding right now, amid the ongoing coronavirus pandemic and the various economic measures the government is implementing to deal with it.
So how does the buy-to-let picture look in 2020, and what could the future hold?
The start of an extraordinary year
Over the past five years, the UK government has introduced a number of measures that have impacted the buy-to-let market and created additional factors for investors to think about. Among these changes were reductions in stamp duty relief for landlords and a surcharge for people buying homes in addition to their main residence.
However, figures released at the start of 2020 showed that, while conditions like these might have made buy-to-let investment more complicated for some, the fundamentals of the market – such as demand for rental property – remained strong.
A report from ARLA Propertymark revealed that demand for rental accommodation reached a record monthly high in February. An average of 82 new prospective tenants were registered per estate agency branch in the month. While this was down from the figure for January (88), it marked a new record for February and was 25% higher than a year earlier.
The research also showed that 41% of agents saw landlords raising rents in February 2020, a slight fall from 42% in January, but a significant year-on-year increase from 34% in February 2019.
This data covered a period before the outbreak of Covid-19, which would be declared a global pandemic and led to an unprecedented shutdown of the British economy.
The Covid impact
The lockdown conditions that came into effect in the UK on March 23rd 2020 had a huge impact on every component of the housing market, with property viewings temporarily suspended and transactions coming to an almost complete halt.
Since the gradual reopening of the market began in May, however, there have been positive signs of a steady recovery in the sector.
Furthermore, the health crisis has given rise to some policy changes that could prove beneficial for people buying property in the UK, including a temporary stamp duty holiday. Chancellor Rishi Sunak announced that stamp duty will not be payable on the first £500,000 of all property sales in England and Northern Ireland until March 31st 2021.
Properties costing more than £500,000 will only be taxed on their value above that amount. Landlords and second home buyers are eligible to benefit from the tax cut, but will still have to pay an additional 3% stamp duty they were charged under previous rules.
Mr Sunak said the average stamp duty bill will fall by £4,500 as a result of the change.
Another consequence of the Covid pandemic that could benefit property investors is the low interest rate environment, with the Bank of England recently announcing that the base rate of interest will be kept at a record low of 0.1%.
The post-Covid picture
There are several reasons for investors to feel confident that the UK buy-to-let property market will continue to grow and deliver returns in the second half of 2020 and beyond.
As far as rental yields are concerned, the latest Homelet Rental Index for July 2020 showed that the average rent in the UK is now £965, an increase of 0.6% from the same time last year. When London is taken out of the equation, the year-on-year rise is even higher – 1.4%, taking average rents to £808.
All 12 regions monitored for the study showed an increase in rental values between June and July this year.
HomeLet chief executive Martin Totty said: “Demand for new tenancies is still strong; HomeLet received the same volume of property applications for tenant reference checks this month as the same month last year. That, coupled with the steadily increasing rents, is positive for the sector, but there’s naturally caution around what could happen over the coming months.”
ARLA Propertymark also noted that the current outlook for the buy-to-let market is strong. The organisation pointed out that, with rental demand increasing and mortgage applications also on the rise, “lockdown hasn’t been a deterrent for buyers and renters determined to make a change”.
Looking to the potential long-term future of UK buy-to-let, Cedric Bucher, manager of the TM Home Investor fund, told FT Adviser that the overall structure of the private rented sector could shift “from an ‘amateur’ towards an institutional model, very much like what is commonplace in parts of continental Europe and northern America”.
Student market potential
For investors looking for opportunities in the UK buy-to-let market right now, one segment that can’t be ignored is student accommodation, which has shown itself to be one of the most profitable asset classes in recent years.
Research by lettings management platform Howsy has shown that average rental yields in university towns and cities are currently 4.4%, but landlords stand to receive higher-than-average returns in cities like Newcastle (6.3%), Liverpool (6.1%) and Manchester (5.2%).
Founder and CEO of Howsy, Calum Brannan, said: “Many students will be searching for accommodation now that they know where they stand with their results, and this huge influx of demand is very positive news for buy-to-let landlords in uni towns across the UK.”
The pandemic certainly hasn’t dented people’s desire to pursue further education in the UK, with UCAS figures showing that university and college applications increased during lockdown. The proportion of 18-year-olds applying for undergraduate courses reached a record high.
An additional factor that investors might want to consider is the extra safety and reassurance self-contained studio apartments can offer to students who find themselves having to self-isolate while Covid-19 remains a concern.
The positive picture for student accommodation ahead of the 2020-21 academic year is just one factor that could encourage investors to consider opportunities in UK buy-to-let property right now.
It’s certainly beyond any doubt that demand for private rental property will remain strong this year and beyond.