How will the Coronavirus crisis affect the prospects of buy-to-let?

The Coronavirus pandemic has taken a heavy financial toll on tenants in the UK. With hundreds of businesses suspending their activity temporarily or having to lay off part of the employees, many people have been finding it increasingly difficult to keep up with rent payments or, in the worst cases, choose between paying rent or buying groceries. 

In this uncertain and anxiety-ridden context, most landlords have sympathised with the vulnerable situation in which tenants find themselves and offered to reduce rent and accept payment delays. In a time of crisis, such initiatives are certainly praiseworthy. And yet, not all the 2.6 million buy-to-let landlords in the UK were able to be so generous, as much as they understood the challenges faced by tenants.  

The landlords with small portfolios, who rely on rental properties as a primary source of income, were already hit by the tax and regulatory squeeze on the buy-to-let sector, and the uncertainty caused by the pandemic could force them to sell their properties. Meanwhile, those with more cash to invest are optimistic that the future will bring more investment opportunities because uncertainty will sway the market sentiment and discourage the competition. 

The short- and long-term impact of the Coronavirus on rentals.

To understand the future of rental business on the UK market, first, we have to analyse the short-term repercussion of the Coronavirus pandemic on the housing market as a whole. 

Due to lockdown restrictions, property sales have almost come to a halt. Lettings, however, have been able to function, at least to some extent. As long as the property was empty, and everyone followed social distancing and hygiene rules, people could still rent. But even so, the lettings market isn’t working at full power. The demand from tenants is 58% lower compared to the 2019 average and 64% lower than February and March 2020. This means we could be looking at a fall of the rental sector, according to Colin Bradshaw, CCO at TwentyCi: 

“Supply is outstripping demand, which means rents are falling or must fall”. 

Online property portal Zoopla also shared some insights: at the end of March, the demand for rentals had dropped by more than half, then it recovered in April and early May, and now it’s 30% higher compared to the start of the lockdown. 

Richard Donnell, Zoopla’s head of research, explained that this market dynamic was caused by the closure of the sales market and by people looking for flexible short-term solutions. So, even if many were expecting the rental market to crash in some regions, the signs point towards a recovery. 

This recovery also solidifies the idea that the rented sector works like a release valve when the purchase market slows down, as explained by Paragon Bank’s Nigel Terrington:

“In a weaker economy, people tend not to buy homes and rental demand increases relatively. The supply for property available to rent does not rise, so you have more demand from tenants than you have supply for.” 

Will the same trend continue once the Government further relaxes lockdown restrictions? Most likely yes, at least in the first weeks following it. However, it remains to be seen how things will evolve as the furlough schemes come into effect. At present, the UK's furlough scheme covers a whopping 7.5 million people, but if they have no jobs to go back to once restrictions are lifted, then we could be looking at a dramatic rise in unemployment claims. 

One of the biggest challenges when making long-term predictions is that the present market is hard to read and looks unlike anything we’ve seen in the past decade. The Coronavirus pandemic is unique compared to others, so landlords should be cautious when it comes to rental growth. Historically, earnings and rental growth are proportional. As soon as people start making less money, we’re bound to see a drop in rental growth. According to real estate agency Hamptons International, the number of tenants who renewed their contract was slower in March 2020 compared to the same period last year. In the Southeast, rental growth on renewed tenancies dropped by 2.4%, and in London, it dropped by 3.2%. Of course, London’s percentage isn’t surprising, considering that the capital has high rent prices, high costs of living and the budgets of residents were already stretched thin before the pandemic.

In the following months, low-income households will be the most impacted by the pandemic. If medium and high-income families managed to stay afloat during this period, low-income ones had to deal with steep drops in their monthly budget or even lost their jobs. As time passes, it will become increasingly harder for them to make ends meet and eventually they might not be able to pay rent. 

 The market is in for an overhaul. 

Many landlords are now releasing long-term lets for apartments that were previously targeted at tourists, on platforms like Airbnb. With international travel on hold, many people who made a living out of tourist properties had to adapt and change their business model. And, since these properties are often located next to landmarks and have excellent transport links, it’s normal for rent to be higher. Still, the number of people looking for new lets is expected to drop by 25% as we enter the second half of the year. 

Frustrated home buyers could save the day for landlords, though. Since it’s still unclear how the housing market will evolve, many people who had planned on buying a house decided to wait it out, renew their rent, or even continue living with their parents until the market stabilises. 

Young buyers are particularly affected by the COVID-19 pandemic, forcing some landlords to change their acceptance criteria. According to data from the Institute for Fiscal Studies, people under the age of 25 are around 2.5 times more likely to work in a field that was shut down by the pandemic. 

New homes will also take longer to build because of the restrictions, and that could keep tenants in rented properties for longer. 

But that doesn’t mean the rental sector is invulnerable. On the contrary, some landlords could take a big hit, especially the ones offering short term lets, such as student accommodation and houses of multiple occupation. 

According to buy-to-let investor David Lawrenson, the pandemic could favour a simpler buy-to-let model. At present, students have no other choice but to keep on paying rent even if they don’t live in those properties, but that could change in the summer. Landlords who only have properties around student hotspots might have to change their strategies and adapt to the challenges of the student housing market. 

Meanwhile, landlords who own properties in locations with a diverse mix of employments will be more protected because they don’t depend on only one major employer. Research shows that, apart from student properties, the properties located next to the airport will experience a drop in demand, as will the ones next to aviation manufacturing facilities. 

The crisis could hold hidden opportunities for experienced investors. 

The COVID-19 pandemic is a true test of resilience and adaptability for landlords. If beginners might not have what it takes to pass it, experienced landlords and investors might even manage to find lucrative opportunities. 

This isn’t the first recession to have hit the UK’s property market, and, with the right strategies, you can even thrive in this stressful period. Veteran investor John Howard explains: 

“I’ve always done better coming out of a property recession than at any other time. There are more deals to be done than in a hot market. There are fewer people investing and there’s less funding around. If you’ve got funds, that’s a strong combination.”

He advises investors to take a little bit of pain and go for a longer-term fix since this will offer them more peace of mind over interest rates. 

We also shouldn’t forget that before the uncertainty caused by the pandemic, landlords have had to deal with several tax and regulatory changes that took away some of their returns, such as the 3% stamp duty land tax surcharge of 2016. 

As the regulatory environment becomes even more challenging, experts estimate that landlords who only own one or two properties will become discouraged and leave the market if they were previously dealing with unpaid or delayed rental. Meanwhile, veteran investors and rental companies will continue to hold tight and take advantage of buying opportunities. At Citydeal Estates we continue to guide our clients through these challenging times.