Where 2021 was spent getting used to life after lockdown, we might have expected 2022 to see the UK settle back into normality, albeit permanently shaped by the effects of Covid-19.
However, the country quickly faced new challenges, with successive Bank of England Base Rate hikes taking their toll, from everyday spending through to mortgage rates. For the first half of the year at least, house prices also continued to rise acutely, meaning many hopeful buyers found the first rung of the ladder to be out of reach.
While price growth has started to ease, inflationary pressures have only just started to take their toll. As such, more people than ever are relying on the rental sector.
A year of opportunities
Zoopla’s UK Rental Market Report for Q3 2022 shows rental demand is up a whopping 142% compared with the five-year average, while stock dropped by an even more dramatic 46% this year. This does not create a positive picture for renters, who face rental price growth of 12.3% per year – and an eye-watering 17.8% in London – but it does pose a strong opportunity for those looking to invest in buy-to-let (BTL) and provide a much-needed injection of stock.
Investors and brokers should be keeping an eye on the rising appeal of houses in multiple occupation (HMOs). While the pandemic saw buyers and renters look for more space and distance from others, its aftermath had quite the opposite effect in many quarters. With younger renters looking to move closer to social and professional hubs whilst battling rental prices, HMOs have offered a solution and the added benefit of an in-built community, at a time when many living alone have seen the realities of isolation.
For landlords, HMOs can offer higher rental yields, as well as decreasing the risk of void periods. Meanwhile, taking larger properties in need of renovation and splitting them into HMOs could help address this country’s ongoing supply issues.
Meanwhile, the return of the freedom to leave the house has come with other trends that the right investor can use to their advantage. Travel abroad might be prohibitively expensive as the purse strings tighten, but Covid-19 gave many people a fresh perspective – according to the Sykes Staycation Index 2022, the first half of the year saw a 30% uptick in bookings, with 77% of Brits planning to holiday in the UK at some point.
Holiday lets in high demand areas such as Cornwall or the Lake District, could be more lucrative than long-term rentals, albeit with more legwork involved in maintenance and managment, the need to weather seasonal changes in demand, and stay on top of evolving legislation and regulation around this relatively new market.
Feeling the squeeze
While 2022 has undoubtedly thrown out many opportunities for those looking to invest, diversify and take advantage of high rental demand, it has not all been plain sailing for landlords. Indeed, for a section of the property market that has felt itself to be the target of much regulation and restriction over recent years, 2022 simply continued the trend.
First, this was the first year that the removal of interest tax relief for BTL investors fully came to fruition. Landlords can no longer deduct any mortgage interest from their rental income when calculating their taxable profit, instead receiving 20% tax relief on mortgage interest payments.
The year progressed and the squeeze did not loosen, as rates rose and many BTL lenders took an increasingly strict approach to affordability and stress testing. In October, following the ill-fated mini-Budget, available BTL mortgage products dropped by almost half month-on-month, while some lenders raised their minimum stress rate above 8% to address ongoing uncertainty.
Most recently, Jeremy Hunt’s Autumn Budget heralded drastic cuts to the threshold for Capital Gains Tax (CGT), from £12,300 to £6,000 in 2023, and again to £3,000 in 2024. This adds further to an environment where landlords may feel they cannot rake in the profits with quite the same ease as in years past. For some, this is an ongoing tendency on the part of successive governments to use the BTL industry as a cash cow, with the need to recoup money stronger now than ever.
Looking ahead
As we round off 2022, it might be easy to see only more troubles on the horizon. Indeed, 2023 will see the cost-of-living crisis truly take hold, and the dreaded word ‘recession’ is likely to become a reality. House prices are likely to fall, having tipped over their peak and been met with a sudden drop in buyer demand. Meanwhile, many landlords are reporting an urge to leave the market.
However, for those with an eye for opportunity, there is considerable silver lining to the gathering storm clouds. A correction in house prices means the opportunity to buy, while landlords leaving the market is only going to add fuel to the fire of renter demand, raising rents even further. In addition, demand for HMOs and holiday lets is only likely to grow further as people look to pinch their pennies while still living their desired lifestyles.
In all, 2023 could be a strong year for those willing to put in the work. For example, a landlord might do well to find a property in need of work – whether refurbishment or splitting into an HMO – and leverage their improvements to gain greater rental yield at the other end. Such commitment during 2023 is likely to reap further rewards further down the line, when the economy eventually starts to show signs of recovery.
Whether leveraging an existing portfolio to fund a purchase, or accessing finance to make improvements and changes before letting out, short-term finance could be the answer to turning these ideas into opportunities. Rates have remained relatively steady compared with the term market, and, with a thorough understanding of the nuances of both bridging and BTL, Castle Trust is well placed to help this market continue to innovate, at a time when it is more integral than ever as part of the UK’s financial ecosystem.
Barry Searle is managing director of property at Castle Trust Bank
