Alan Cleary: What does 2020 hold in store?

Alan Cleary: What does 2020 hold in store?

Alan Cleary is managing director of Precise Mortgages

I'm not typically one for Mystic Meg-style predictions, but this year I think there are a few trends that are likely to persist as well as some that may emerge.

With so many negative headlines focussed on the demise of buy-to-let, spiralling rents and narrowing profit margins, you’d be forgiven for assuming this part of the market is suffering.

That’s not the case at all. We saw strong demand for buy-to-let in 2019 and believe this year will prove a similar story. What is changing is the type of demand.

The much maligned changes to the tax relief landlords can claim against their mortgage interest have served to reshape the market, particularly as house prices are still high in most areas of the country. Yields on single lets have undoubtedly been squeezed in London and the South East, but this has driven landlords to invest in other areas of the country.

The type of property landlords are opting to purchase now is also a shift from the buy-to-let of 10 years ago. Last year saw the sell-off of a large number of single lets in high value areas of the country – leading the press to warn of a landlord exodus.

Indeed, the latest survey from the Association of Residential Letting Agents suggested the number of buy-to-let investors selling their properties remained high, at an average of four a month per branch in 2019.

This fails to account for the landlords who sold and repurchased, either elsewhere in the country where better yields were attainable or in multi-unit lets and houses in multiple occupation.

This year is likely to see a continuation of this trend towards purchasing higher yielding HMOs and multi-lets as landlords come to the end of their terms and consider how best to rebalance portfolios.

While much of the buy-to-let purchase activity is outside of London and the South East, we still think that landlords in this part of the country have options.

Last year we began to apply blended loan-to-values for landlords who hold their portfolio with us; that has proved very popular as it allows for higher yielding assets to effectively subsidise lower yielding assets which, nevertheless, have high capital values.

More innovative types of underwriting such as this, and also allowing landlords to top slice using earned income, is likely to increase over the course of this year.

Figures published by the Ministry of Housing Communities & Local Government showed annual housing supply in England amounted to 241,130 net additional dwellings in 2018-19, up 9% on 2017-18. Some 14,107 of the net additions from change of use were through permitted development rights where full planning permission was not required.

These comprised 12,032 additional dwellings from former offices, 883 from agricultural buildings, 199 from storage buildings, 69 from light industrial buildings and 924 from other non-domestic buildings.

This tallies with our experience in the short-term sector. Last year saw a large amount of bridging activity focussed on developing single lets, former commercial and residential stock into HMOs and multi-units for let.

This is just another way that landlords are adapting to add capital and rental value to existing properties to support their profitability under today’s tax regime.

Current government policy is to extend permitted development rights to purpose-built blocks of flats from January 2020, and eventually roll permitted development rights out to detached houses.

This would allow homeowners to add an extra two storeys to their homes without seeking planning permission, under the same rules that currently apply to small extensions and loft conversions.

It’s likely that this type of conversion will support solid lending volumes in the bridging sector this year, with a pick up in activity plausible.

The latest survey from RICS, predicts an improvement in the residential market, which has been relatively subdued amid the political uncertainty that has dogged Westminster for the best part of the past year.

Sales expectations over the next three months look more stable, with a net balance of +11%, up from 5%, while the 12-month outlook was the most positive sentiment since February 2017, with a +35% net balance.

Looking at regions individually, RICS is predicting a solid increase in transactions over the next 12 months across virtually all areas covered by this survey.

Prices are also expected to pick up over the next 12 months on a headline level, with 33% more respondents in the November survey anticipating house prices will rise rather than fall over the next 12 months. Significantly, prices are expected to return to growth across all areas of the UK with Wales and Northern Ireland leading the way.