Comment: Buy-to-let is set to stay busy

Despite signs of BTL belt tightening, brokers have huge opportunities, especially if they embrace specialist lending

The buy-to-let sector has been a hotbed of activity over the past couple of years, with brokers and lenders alike having their hands full helping clients navigate what has almost overnight become a more punitive tax regime for landlords. The market has far from stalled, but growth in the PRS has slowed to 2.3 per cent over the past year – less than a third of the rate three years ago.

As the tax changes begin to bite, some landlords have naturally chosen to leave the market, and we’ve seen landlord confidence about the prospects for their portfolio fall back to 41 per cent, some way behind the 67 per cent reported three years ago.

Despite these signs of belt tightening, however, there’s still a huge opportunity for brokers, especially those embracing the growing demand for specialist lending.

However you look at it, buy-to-let is becoming more specialised, a side-effect of the changes to stamp duty last year and a reduction in mortgage tax relief this year. We have fewer, but more professional, landlords, in both size and scale, and their needs are changing as well. Specialist lenders are stepping up to meet the more complex requirements from brokers as demand for incorporation remains high, accounting for 44 per cent of loan applications in Q1.

Net returns are likely to suffer slightly over the next four years as tax rises make an impact, especially for highly geared investors, but just 4 per cent of landlords currently report making a loss, and investment for these long-term investors remains lucrative.

Average monthly rents have risen by 1.9 per cent to £889 in the past year, meaning landlords are making gains while costs are being stretched; and, with rents rising faster than house prices in the past six months, yields have edged up to 4.5 per cent.

Furthermore, as the weighting of total returns shifts away from capital gains and towards income, it will hasten the rate at which short-term speculators leave the market. This will provide more stability for tenants.

The next challenge for brokers is the introduction of the PRA’s new underwriting standards in October, when a more detailed assessment of a borrower’s personal finances and stress testing at a higher interest rate will be required. This, once again, is likely to cause heightened activity over the summer, so expect things to get busy again soon.

Adrian Moloney is sales director at Kent Reliance