There is no such thing as one buy-to-let market

Originally published by Mortgage Solutions

Buy-to-let has just turned 30 and, judging by some of the commentary surrounding its anniversary, you could be forgiven for wondering how it ever made it this far.

We have heard plenty about landlords allegedly leaving ‘in their droves’, rental property numbers falling, increased regulation – we can’t deny that – and the suggestion from some less than enlightened commentators that buy-to-let investment simply does not work anymore. Try telling that to the thousands of landlords up and down the country.

However, the underlying problem with much of this commentary is the simple assumption that there is one buy-to-let market, populated by one type of landlord making the same investment decisions for the same reasons. Of course, this is nonsense.

There isn’t, and our latest Rental Barometer demonstrates just how diverse the modern property investment market has become.

Landlords are doing very different things

Our average landlord borrower mortgage applicant now owns 18 properties, compared with 12 a year ago, while 30% of our applications come from landlords with at least 15 properties and 66% from those owning four or more.

At the same time, first-time landlord applications increased from 9% to 10% during Q3, so this is not simply a story of established professionals acquiring everything while nobody new enters the market. Some landlords are undoubtedly selling, but others are buying, some are refinancing, some portfolios are shrinking and others are getting considerably bigger.

All of those things can happen simultaneously, which is why taking one statistic about landlord exits, or a dip in limited company incorporations, or a fall in property supply since the RRA was introduced, and extrapolating it across the entire sector rarely tells us enough about what is actually happening.

There isn’t one regional market either

The same applies geographically, because our Q3 figures show landlords operating in markedly different investment environments. Yorkshire & Humberside now has the highest average rental yield at 9.3%, with purchases accounting for 43% of applications, while the North East delivers 9.2% but only 22% of activity is for purchase.

Wales presents another picture entirely, because average yields fell from 8.1% to 7.5% during Q3, yet purchases represented 46% of applications, the highest proportion of any region. Greater London sits at the other end of the yield table at 6.4%, but average monthly rents are £2,597 and 60% of our applications there come from landlords with six or more properties.

Trying to describe all of those markets with one national narrative makes little sense because landlords are investing in different properties, at different price points, producing different yields and serving very different tenant populations.

Buy-to-let has changed, not disappeared

Thirty years of buy-to-let has inevitably resulted in a huge number of changes to the sector, and today’s landlord may be investing through a limited company, operating multiple HMOs or MUFBs, managing a substantial portfolio and making decisions based on considerably more sophisticated financial modelling than might once have been required.

Regulation has changed too, most recently through the Renters’ Rights Act, while taxation, higher financing costs and affordability requirements have all altered the economics.

Yet our average England and Wales yield increased from 7.5% to 7.9% over the past year, with eight of the 10 regions we cover recording annual increases.

Buy-to-let investment has of course changes but it clearly hasn’t stopped; the proposition has become more nuanced, and landlords increasingly need to identify the properties, locations and financing structures where the numbers work for them.

Complexity creates an advice opportunity

For advisers, I believe this changing market should be viewed as an opportunity. There may have been a time when the landlord conversation could revolve largely around finding a competitive mortgage rate, but the circumstances, wants and needs of today’s clients can be considerably more complicated.

An adviser might be dealing with somebody buying their first rental property one day and a landlord with 30 properties the next, while another client could be refinancing a limited company portfolio, considering an HMO, releasing equity for another purchase or deciding whether a particular property still deserves its place within their portfolio.

Those clients need help understanding not only rate, but also rental cover, stress testing, LTV, product fees, ownership structures, property criteria and how one financing decision might affect the rest of a portfolio. Not forgetting huge changes such as the RRA has already introduced, and those planned for the very near future.

A more specialist landlord market requires more specialist mortgage advice, and that should put advisers who genuinely understand buy-to-let in an increasingly important position.

Thirty years after its arrival, I don’t think the interesting question is whether buy-to-let looks like it did in 1996, because clearly it doesn’t. The important point is that there is no single landlord, tenant, property, investment strategy or regional market which defines today’s PRS. And in that diversity we find the strength of the sector, and we see the future as well.

Buy-to-let has changed considerably during those 30 years and it will continue changing, but landlords are still entering, experienced operators are still growing their portfolios and investment is still taking place every day. For advisers, understanding all those differences is precisely where the opportunity lies.