Holiday let investors adapted how they operate instead of exiting the market after the abolition of the furnished holiday let tax relief, research has found.
The inaugural Holiday Let Index from The Cumberland showed that investors saw their profitability increase, indicating their ability to adjust to the changes.
The furnished holiday let tax regime was scrapped last April, meaning investors could no longer treat their investment as a commercial asset and were subject to standard property income rules. This saw investors lose the ability to claim capital allowances on certain purchases and reduced the mortgage interest relief they could claim.
The research found that 48% of holiday let investors had seen the profitability improve since the tax was scrapped, with a third reporting a rise between 1% and 15%.
A slightly lower proportion – 27% – said their profitability had declined by the same margin.
To mitigate the tax change, 47% of investors increased their nightly rental rates and 46% worked to increase their occupancy.
What mortgage and protection advisers should take from the FCA’s AI stance
Sponsored by Sesame Bankhall Group
Over a third reduced their maintenance and capital expenditure, while around a quarter changed their management approach.
Some 19% switched to an interest-only mortgage, 15% reduced their portfolio size and 11% transferred into a limited company.
Further, The Cumberland’s research showed that 86% of holiday let investors continued to achieve gross yields above 5%, with over a third seeing yields of 7-8%.
Planning restrictions could push investors out of the market
With proposals to introduce a C5 planning use class for short-term holiday lets, 56% of investors said this would make them consider selling up.
The planning use class is intended to give local authorities more power over where holiday let properties can be introduced to help manage the impact on local housing.
Some 72% of investors said council tax premiums had the biggest influence on their investment decisions, and 70% said mortgage interest relief had the most impact.
A further 67% pointed to the removal of the furnished holiday let regime, and 67% said capital allowances. An additional 62% said their investment decisions were primarily shaped by compliance requirements.
A more professional investor
Mortgage brokers also reported a change in the type of investor they were seeing, with 36% saying clients had become more experienced and professional. A further 16% said clients were prioritising steady income and long-term gains, while 8% had larger portfolios.
Additionally, they reported a significant use of limited companies, with 48% of mortgage brokers saying a quarter to half of their clients used one and 44% saying this was the case for half to three-quarters of their clients.
Some 8% of brokers said between 76% and 100% of their clients used a limited company.
The Cumberland said: “More experienced landlords, more cautious borrowing behaviour and greater use of limited company structures all suggest the sector is becoming more professional. Investors appear to be placing more emphasis on steady income and long-term value than on rapid growth.
“That does not mean the market is less attractive. It means investors are being more selective. Location, income potential, management quality and borrowing structure are likely to play a greater role in future decisions.”
Despite this general optimism, 24% of brokers said their clients had become more cautious when borrowing.
Investors eye opportunities in holiday let
The research found investors felt fairly confident about the future of the market, with 61% saying their expectations for future yields were either good or very good.
Further, 57% felt positive about their expectations for future capital growth, and a quarter intended to extend their portfolio. The majority – 61% – wanted to maintain their portfolio size, 4% wanted to reduce it and just 3% were looking to exit the market.
Some 30% of investors planned to purchase another holiday let within 12 months, while 12% intended to sell at least one. Around 17% were unsure of their purchasing plans.
Lenders should change approach to income, brokers say
Demand for holiday lets remained strong, as 88% of brokers reported a rise in enquiries and 44% felt positive about the outlook of the market.
However, brokers said there needed to be some changes in lending approaches, with 16% wanting to see income assessments based on short-term rental performance, and an equivalent share of respondents wanting lenders to make calculating between holiday data and long-term letting easier.
Some 12% wanted more realistic affordability assessments, while an equivalent proportion wanted to see faster underwriting.
Around 8% wanted more higher loan-to-value (LTV) options, 8% wanted better rates and 8% wanted fixed rate periods to be more flexible.
Grant Seaton, head of intermediary lending at The Cumberland Building Society, said: “Given everything the holiday let sector has experienced over the past few years, it would have been easy to surmise that investor confidence had fallen sharply. What our research actually revealed was a much more nuanced picture, with several findings that challenged some of the assumptions surrounding the market.”
Seaton said the mutual produced the index so it could “hear directly from the people who know the market best”.
He added: “By bringing together the views of brokers, landlords and homeowners, we’ve been able to build a clearer picture of what’s happening across the sector today, how recent changes are shaping decisions and where opportunities continue to exist.
“As a mutual, listening has always been an important part of how we work. Every conversation with a broker or borrower helps us better understand the market and the people we support, and this research is another extension of that approach.”