The past few years have not been the easiest for buy-to-let (BTL) landlords. From dealing with changes to the taxation of BTL income to navigating the new, high-interest-rate environment, landlords have found their profits significantly squeezed as a result.
As a consequence of these tougher economic conditions, a number of smaller-scale BTL property investors found the going too tough and exited the market. Of those who have remained, many have scaled back their plans to expand their portfolios as a direct result of higher borrowing costs.
At LHV Bank, we haven’t seen any major signs of investor retrenchment because our borrowers aren’t dabblers in the market. We focus our commercial investment lending on those operating in the commercial and semi-commercial sectors and portfolio residential landlords with eight or more properties.
Shifting BTL investor priorities
What we have witnessed is investors who have responded to the new realities of the marketplace by changing the make-up of their portfolios; specifically, moving towards assets that provide higher yields than those from so-called ‘vanilla’ BTL properties.
In today’s environment, clients are much more attuned to asset values; they are not prepared to overpay for properties when previously they may have been willing to because of their expectations of capital appreciation. Nowadays, they are looking to see if the property will generate a profit without the carrot of rising asset prices, or whether there is an opportunity to enhance a property’s value via refurbishment or changing its use.
There has been a noticeable rise in investor demand for houses in multiple occupation (HMOs), mirroring the increased demand from renters who have been forced to reduce their housing expenses because of the cost-of-living crisis.
HMOs typically generate better yields than standard BTL properties because income is received for each room (as opposed to the property as a whole); in fact, landlords can earn up to three times as much as they would from a non-HMO investment.
Loss of income due to void periods is also likely to be less than for a single property, as it’s rare for all tenants in an HMO to leave en masse.
Meanwhile, some of our clients are blending elements (and therefore risk) or taking some low-yielding residential property and combining it with some carefully calibrated risk in the form of commercial assets. These mixed portfolios may consist of residential and commercial assets, as well as semi-commercial properties. The latter can be a gateway into the commercial property market for those who have previously only operated in the residential marketplace.
As well as often generating above-average yields, semi-commercial means the investor’s exposure spans two sectors and the risk is therefore spread. As with HMOs, void periods are typically less than with single, residential properties: with semi-commercial, it is unlikely that both the residential and commercial elements will be vacant at exactly the same time.
BTL investor experience matters
As investor clients move further away from standard residential BTL properties, so the complexity of the deals increases. For example, a commercial term loan will typically require more time and effort to get over the line than a run-of-the-mill BTL mortgage. Similarly, if an application combines different assets, then each element will come with its own set of requirements.
As a result, it becomes vital for them to partner with a broker who is not daunted by complexity, and a lender who has both the experience of and appetite for bespoke lending. At LHV Bank, we have built a team of industry professionals who have many years’ combined experience in SME and commercial lending. Where other lenders may struggle with a case that has a number of moving parts, we have the flexibility to tailor a solution. And because we have a very advanced lending platform, we can provide the client with a single loan solution, even though it may well be made up internally of a number of different elements.
We also understand that complexity should not automatically result in a long, drawn-out process. We keep brokers and their clients up to date at all times during the application and utilise initiatives such as title insurance where appropriate for faster processing.
While we only secured our banking licence in May 2023, we have already exceeded £250m in deposits and £128m in lending, with our loan book on target to have more than doubled from our 2023 year-end figure of £70m by the end of July 2024. This highlights both the strength of our ambition and our ability to complete complex cases, which should be music to the ears of brokers and their SME clients.
