The market for property investors and landlords is undergoing significant change. While there is still space for large and small investors alike, they are increasingly operating in different spaces of the market.
Over recent years, depressed yields on other asset classes caused in part by quantitative easing (QE), designed to stimulate the economy during the downturn following the global banking crisis, has led to an increase in pension funds, family offices and high net worth individuals seeking yield in real assets such as real estate.
QE also helped lower long-term interest rates, which had made borrowing more attractive for businesses and consumers, which, in turn, largely stimulated further investment, spending, and house price growth.
This has meant that more recently there is a lot more private capital in real estate – including residential property – with a requirement to place their cash, sometimes at uneconomical returns.
Portfolio landlord targets
Traditionally the industry has seen institutional money buy lower yielding, standard residential stock. For example, a decent return from a C3 residential block comes from owning the whole thing; it no longer comes from owning one or two of the flats.
However, more recently we have seen institutional money move into HMOs and flats across the country and not necessarily solely new build PRS; rather, they’re increasingly happy to seek a return by buying piecemeal portfolios in different cities, and put them into a single large portfolio, under one brand and run them together as a portfolio with the associated cost savings.
Institutions are looking for economies of scale, long-term capital appreciation and exposure to different idiosyncratic risks. For example, if you are a UK pension fund, perhaps you want exposure to a specific demographic, such as a range of current funds which target UK millennials, and so can achieve that by renting flats to them through BTR and PRS schemes.
We are also seeing larger investors stepping in where smaller landlords do not have the cash or appetite to fund improvements to meet expected future EPC regulations, whether in 2025 or later, and so they are looking to buy portfolios of similar properties at a favourable discount. They can then leverage their economies of scale to undertake the upgrades at a lower cost.
Many of the smaller portfolio landlords are not buying at the present time, though. Indeed, we now see some selling off non-core parts (perhaps those in a different geographical area to the bulk of the properties in their portfolio). Often, this is due to needing to deleverage because of ICR challenges. Nevertheless, these properties are proving attractive to less leveraged investors.
Whilst it makes sense to convert properties to higher yielding stock such as HMOs, the best HMOs are typically in areas which are subject to an Article 4 direction and so new conversions aren’t possible. More so, we are seeing a rise in short-term lets. Historically, investors would let properties on an AST basis; now they’re trying to let them as a holiday let to get the additional yield. That said, there can be significant work, cost, and risk of running a holiday let, often meaning it ends ups providing the same yield as a longer-term let.
On a larger scale, we’re seeing whole blocks of flats being treated as serviced accommodation. Unfortunately, this is sometimes accidental whereby the yields that the residential developer based their initial calculations on have altered so they cannot refinance it on ASTs because the serviceability is not there. The only way that they can get out is by selling or increasing the yield on it by making it a serviced accommodation block.
Options for smaller investors
We all know that smaller landlords have been leaving the market due to increased costs and repeated attacks from Chancellors of the Exchequer. The truth is you could have recently gained a better real net return investing in US Treasury bills than you could in a lot of UK property; plus, a US Treasury bill is highly liquid, there are no on-going maintenance costs, and it is almost totally risk-free.
While we’re not seeing a material shift of residential landlords switching to semi-commercial properties, it would make sense to, as long as they understand the risks of having a commercial tenant. Find a good one and there is money to be made. If you’re looking for high serviceability, semi-commercial is good for the portfolio.
The local high street is proving to be much more resilient in the face of online shopping and shifting retail trends. There’s a lot of merit in investing in a neighbourhood parade of shops, because everyone needs a hairdresser, a coffee shop, a dry cleaner and a fish and chip shop.
It’s therefore beneficial to the smaller investor to now be looking at alternative sectors – don’t always try and compete with the pension funds; look elsewhere and use your capital where it’s more appropriate.
And at HTB, we love supporting investors, regardless of their size; we’re a trusted specialist bank with the expertise and the track record. We help large and small investors alike, have a very competitive semi-commercial proposition as well as our buy-to-let offering and we also lend up to £25m.
Property investors still have opportunities in the UK market; they just need to find their sweet spot and work with a lender who has the expertise and appetite to help over the long term.
Marcus Dussard is sales director, specialist mortgages at Hampshire Trust Bank.
