Private landlords face prospect of rental arrears and falling returns
“Pay what you can.” That was the response of one landlord to his tenants in the days following the coronavirus lockdown, as requests rolled in for rent reductions of up to 50 per cent.
In messages and phone calls, tenants related how their income had dried up, with business put in cold storage, and jobs furloughed or cut.
With a small portfolio of buy-to-let properties spread across north London, the long-term landlord-investor, who did not wish to be named, told the FT he sympathised with his tenants who had all been reliable payers in the past.
“You have to be fair with people and let them get back on their feet,” he says, acknowledging that he is fortunate in not being heavily leveraged or dependent on their rents to sustain him.
However, not all of the UK’s estimated 2.6m buy-to-let landlords can afford to be as magnanimous. After a sustained tax and regulatory squeeze on the sector from successive chancellors, the hit to income combined with an uncertain outlook for rental growth and property prices could prompt some smaller landlords to sell up.
Landlords with cash to invest nonetheless believe investment opportunities could yet emerge, with jittery market sentiment limiting competition from other buyers and even pushing up demand for rental property.
Here, FT Money explores the outlook for buy-to-let in a shrinking economy as landlords assess the challenges that lie ahead.
The outlook for rents
The impact of coronavirus on the buy-to-let sector is a tale in two parts — the immediate effect on rental yields, and the longer term picture.
Since lockdown, activity in the rental market has diverged from the residential sales market. Until last week, government-imposed restrictions had made it very difficult to buy or sell a property. However, the lettings market has been able to function more freely — providing properties were empty and renters who were content with a virtual viewing followed social distancing and hygiene guidelines as they moved in.
Some data suggest landlords have been quicker to return to market than tenants, following the initial shock of lockdown. Property analysts TwentyCi found that the supply of rental properties dropped in April, but has since rebounded to 99 per cent of the norm in 2019. Demand from tenants in the form of agreed lets, however, has come back only partially, to 58 per cent of the 2019 average and 64 per cent of its pre-lockdown mean in February and March.
“Supply is outstripping demand,” says Colin Bradshaw, chief customer officer at TwentyCi, “which means rents are falling or must fall”.
Property website Zoopla monitors demand at an earlier stage in the lettings process, recording when potential tenants contact agents to ask about specific properties to rent. Thus measured, demand plunged by more than 55 per cent in the last three weeks of March. After springing back in April and May, however, it is now running at a startling 30 per cent higher than in early March.
Richard Donnell, Zoopla’s head of research, says rental demand has bounced back — and then some. “I was expecting it to be skewed by price or region, but it is a broad-based rebound. It is partly to do with the closure of the sales market creating demand in the rental market. People are looking for short-term flexibility in the rental market, which is what it delivers.”
Buy-to-let has often been cast as a potential problem for financial stability, on the grounds that any house price fall could risk becoming a house price crash if it prompted a big sell-off by landlords, each holding multiple properties.
However Nigel Terrington, chief executive of Paragon Bank, a buy-to-let mortgage lender, says the rented sector is “like a release valve” at times when the purchase market goes into reverse. “In a weaker economy, people tend not to buy homes and rental demand increases relatively. The supply of property available to rent does not rise, so you have more demand from tenants than you have supply for.”
In the short term, the surge in activity is likely to continue as pent-up demand is released by the partial relaxation of lockdown. But the picture will not become clear until restrictions are further eased and the “life support” of government furlough schemes unwind. This week’s historic spike in unemployment claimants to 2.1m could rise considerably if the 7.5m people currently on furlough find they do not have jobs to return to. This will take some time to be reflected in rents.
Lucian Cook, residential research director at estate agent Savills, says the current rental market is “the most difficult to read” in over a decade, amid competing forces in supply and demand for rented accommodation. His predictions suggest landlords should revise their expectations on rental growth. “The longer term effect on earnings because of a weak economy limits the capacity for rental growth as we come out of the lockdown, particularly in the mainstream markets where those earnings are all-important,” he says.
Historical data show that as earnings fall, so does rental growth. There are early signs of this in data produced by estate agency Hamptons International, a subsidiary of Countrywide. Rental growth on renewed tenancies (new lettings were too few to produce reliable results) slowed in March compared with the same month last year and were dragged further into the negative in April after a 3.2 per cent fall in rents in London and a 2.4 per cent fall in the Southeast.
Aneisha Beveridge, head of research at Hamptons International, says uncertainty over household incomes prompted falls in regions with the highest rents, as it is there that tenants’ incomes tend to be most stretched.
In the medium term, she expects the falls in rents to be felt more sharply in properties at the lower end of the value spectrum. “Middle and high income workers have been less affected by the crisis and are unlikely to see their incomes change too much for the time being. Among the lower income groups, many have lost jobs or been furloughed and seen their income fall. Realistically, if their incomes are being cut it’s very unlikely this won’t be passed on to rents.”
Rental shake-up
Countervailing forces may act as a brake on the downward trajectory of rents. The latest figures from Zoopla provide intriguing evidence of this, for instance, since they show the asking price for rents rising by 10 per cent from the beginning of April to this week, even as the national economic picture darkened.
Mr Donnell of Zoopla suspects a significant part of the rise is down to short-let landlords who previously advertised on platforms such as Airbnb or HomeAway now moving into longer-term lets as curbs on international travel and other restrictions pile pressure on their business model.
“These homes tend to be in tourist hotspots, which are higher value rental areas, hence the increase in value,” he says. Overall, though, he expects the number of new lets to fall by 25 per cent in 2020, as a result of the economic impact in the second half of the year and moves lost to the coronavirus restrictions.
Rents may also be supported by frustrated buyers or those now rethinking their plans in a post-Covid world. The direction of house prices remains uncertain, but the great majority of buyers contacting FT Money since lockdown have said they would be looking for discounts on offers made in January or February or pulling out of deals.
Would-be first-time buyers are those most likely to be cooling their heels in the rented sector or in the parental home for some time to come. Many will have been challenged by mortgage lenders’ recent restrictions on the high loan-to-value mortgages sought by those with smaller deposits.
Even as some lenders are returning to high-LTV lending, the lockdown has had a disproportionate effect on the finances of younger workers, hampering their ability to pass lenders’ affordability tests. Employees under the age of 25 were around two and a half times as likely to work in a sector that is now shut down as other employees, according to research by the Institute for Fiscal Studies.
The new-build sector will also take time to get back up to speed, restricting the supply of new homes to the market and leaving landlords with tenants in place for longer.
David Lawrenson, a longtime buy-to-let investor, believes certain types of rental properties will be more vulnerable, including short lets, student accommodation and houses of multiple occupation (HMOs).
“I think this crisis does lead to a simpler buy-to-let model,” says Mr Lawrenson, author of the Letting Focus blog. For now, students may be tied in to paying rents on unoccupied properties, but the turmoil in the higher education sector is certain to hit demand when those tenancies end in the summer. This will be tough for landlords with a portfolio concentrated in those areas.
Lenders are already aware of the risks of exposure to the student market, and are asking questions of landlords seeking to remortgage or buy, according to Mark Harris, chief executive of mortgage broker SPF Private Clients. “Lenders are asking: if you typically let to students, are you more exposed than, say, landlords with properties near hospitals?”
The economic reckoning, when it comes, is also likely to favour landlords with properties in locations with a diverse mix of employments, reducing the risks of one big local employer going bust or shutting down.
Research by the Centre for Cities think-tank looked at what the virus fallout meant for the economies of British cities and large towns. Crawley was found to be the most exposed, as its proximity to Gatwick airport means more than half of local jobs are in vulnerable or very vulnerable sectors such as aviation and aircraft manufacturing. Luton — a buy-to-let hotspot in recent years — and Derby, with jobs in aviation and automotive industries, were also considered vulnerable.
Source: FINANCIAL TIMES
