Continued house price growth through the pandemic has been matched by record rental increases, making headlines in recent months and pointing towards an ongoing lack of supply set against continued demand. However, a number of key issues are lurking and having a profound effect on traditional buy to let landlords. Interest rates have rocketed in recent weeks, creating challenges to borrowers seeking to refinance. Regulation has gradually been tightening including the soon to be enacted Renting Homes Act and more stringent EPC requirements to achieve MEES compliance. Against this backdrop, institutional investors have an increasing appetite to develop well specified, purpose-built apartments in the shape of Build to Rent schemes. This adds another layer of competition to landlords of traditional small to mid-size buy to let residential property portfolios.
- Competition is rife from institutional investors seeking returns from the opportunity to build modern Build to Rent schemes at scale that are increasingly catering for a broader range of occupiers. How will landlords of traditional, typically older housing stock compete with well-located modern accommodation offering the best ESG credentials and facilities such as private dining, roof top terraces and on-site gymnasiums?
- Government regulation in the form of Renting Homes (Wales) Act, due in December and the likely equivalent for England are causing landlords to seek expert advice and instructing managing agents often reducing net income. Or taking the option to sell the property with tenants in situ, potentially at a reduced capital receipt to a vacant possession sale.
- MEES regulations are set to tighten and many properties, especially older stock, are poorly positioned to achieve compliance without extensive and costly improvement works. If the property is not MEES compliant then it will be unlawful to let it and could be regarded as unsuitable for a mortgage advance.
- Rising interest rates is a common issue across all sectors which is having a profound effect on the buy-to-let sector, with many lenders withdrawing products from the market whilst they reprice to adjust for a volatile financial market. Landlords requiring new finance are finding this is far harder to secure and considerably more expensive, adding to the pressures on net returns.
What to do about this now
- Understand how the property competes in its peer group, both at a local and regional level. What is the borrower’s plan to maintain occupancy? Has required capital expenditure been budgeted for?
- Review rental income undertaking a sensitivity analysis to assess whether increased operating costs, higher interest rates and capital expenditure for compliance with regulations can be absorbed. If not, has the landlord got deep enough pockets to cover a negative cash flow in the short term?
- Ensure that appropriate licences, legal occupational agreements and notices are in place, up to date and served correctly where required, along with health and safety requirements such as gas certificates and electric tests (EICR). The presence of the correct documentation will save time and be critical to ensuring optimum capital receipts are secured at point of sale.
- Assess the energy performance of the property to understand what is required to meet MEES regulations and how this cost can be met. Does the borrower have a plan to achieve impending and future MEES requirements? How will this be carried-out when tenants are in situ? What will the cost be?
- What is the exit strategy? Review exit values and strategy. Would an early exit be preferable before increasing operational costs and interest rates erode value? This could provide certainty in a market which is likely to soften. Moreover, would a sale with vacant possession achieve higher capital receipts? How long will it take and how challenging will it be to achieve vacant possession?
How can Cushman & Wakefield help
Our Receivership & Recovery Solutions team regularly provides strategic advice to lenders, insolvency practitioners, corporate and equity fund clients on the above scenarios.
Solutions we can offer include providing third party impartial advice to ensure that the right strategy is being followed.
We can obtain accurate, up to date advice on current values to assess realistic LTV positions as well as what exits could be achievable.
Our current cases cover the breadth of the UK raging from individual buy to let houses to multi-let developments. In each case, obtaining all relevant information early and positioning the asset for sale or to achieve a refinance swiftly will obtain the best outcome.
If you are experiencing any issues in this sector and would benefit from further advice, please get in touch with one of the team for an informal confidential discussion.