The housing market looks set for a tough 12 months but one segment that appears to be bucking the trend, for now at least, is the holiday-let sector.
Brokers report that demand remains strong, particularly from investors who see more opportunity here than with standard buy-to-lets (BTLs).
Disruption to overseas travel following the Covid-19 pandemic led to a surge in demand for UK holidays, pushing up rental prices and yields for holiday-let owners. This stimulated demand from investors, driving up prices across the sector.
Holiday lets can generate significantly more income than a standard let can
Prices have also been supported by increased demand from residential buyers in the post-Covid ‘race for space’ — as hybrid working patterns became the norm, many looked to relocate to larger properties in rural locations, or invest in second homes.
International travel has restarted, but this hasn’t created a significant slump in demand for UK holiday lets, with brokers reporting that yields are holding up well and new buyers are still looking to get into this market.
Mortgages for Business head of commercial Andy Elley says: “The sector has performed very well. Business has been booming and we don’t expect a slowdown soon.”
As he points out, borrowers in this sector have seen capital values rise by more than 35% over the past four years, alongside strong growth in rental yields — particularly for larger properties.
There are more lenders adding more products to the market, and we are finding that competition is growing
Elley says yields of 8%–10% are not unusual for larger holiday lets and this is driving demand from new investors, particularly in popular holiday destinations such as Cornwall, the Cotswolds, Devon and the Lake District.
Diversification
Private Finance technical director Chris Sykes is expecting to see more interest from BTL investors looking to diversify portfolios or boost yields.
“A lot of landlords are looking at opportunities that could generate a larger cashflow, even if it comes with a higher amount of effort as a holiday let does.”
One attraction is that high seasonal rents on holiday lets can help investors borrow more, compared to a standard BTL loan.
Energy costs have rocketed. The 50% increase has to be factored in to higher nightly or weekly charges
L&C Mortgages associate director David Hollingworth says BTL landlords have been hit with a raft of legislation and red tape in recent years.
“The market for BTL landlords has not got any easier, and higher interest rates and the consequent hike in stress rates don’t ease that situation.
“Holiday lets can generate significantly more income than a standard let can, although the downside is that this can be seasonal and may mean no income at certain times of the year.”
Higher net worth
Brokers say buyers are typically higher-net-worth individuals, often looking for a holiday-let property they can stay in from time to time that will generate new business income. This is in contrast to the second-home model, which may be let out occasionally, often via Airbnb, to help cover costs. Brokers warn that, if this is done via a residential mortgage, the terms and conditions may prohibit such short-term lets.
Investors are exploring city-based properties and areas that can attract holidaymakers all year
Elley says average borrowing for purchases in this sector has been in excess of £400,000, with many buying via a property holding company, which has advantages for higher-rate taxpayers. Most are looking at 75% LTV loans, typically on an interest-only basis, he adds.
Pricing has remained fairly competitive in this area, despite rate rises. At the start of February, says Elley, it was possible to get a 75% LTV loan at around 4.64%, even for a limited company.
More lenders are offering specialist holiday-let products, improving the financing choice for borrowers. Hollingworth says building societies have tended to be more active in this market but there are now options from specialist lenders such as Hodge and LendInvest.
Elley says: “It’s the two-year discounted rates and tracker rates that have generally been the most popular.”
The market for BTL landlords has not got any easier
What is often key is finding a lender that will take into account the projected holiday-let income rather than the rent as a standard longer-term BTL, enabling buyers to borrow more.
Elley gives the example of a four-bed holiday let in Cornwall with a value of £500,000.
“This could have a projected holiday-let income of around £50,000 per annum, which allows for an LTV of £375,000 at 4.64%, making interest payments around £1,450 a month.”
In contrast, he says, a lender would assess the assured shorthold tenancy (AST) income at around £21,000 on the same property with a standard BTL, meaning a maximum loan of £299,000 and leaving the borrower to fund a larger deposit. With a BTL five-year fix at 5.62%, this means monthly repayments of £1,400, but on a smaller loan.
Professional investors
House and Holiday Home Mortgages director Joe Stallard says professional investors now have a better understanding of the holiday-let sector, helping to extend this market beyond traditional hotspots.
The downside is that this can be seasonal and may mean no income at certain times of the year
“Investors are exploring city-based properties and areas that can attract holidaymakers all year. Seaside locations remain strong, but areas that don’t require sunshine are also more popular.”
Stallard says he’s seen more lenders move into this space in recent months but adds that proposition development must continue, to match the needs of this new wave of investors.
Grand Union Finance managing director Sam Norris says activity from lenders does not always keep up with investor demand, but adds: “There are more lenders adding more products to the market, and we are finding that competition is growing.
“The change to a simpler rental calculator — working off a property’s potential AST rent, as opposed to the more traditional high-, medium- and low-season rates we were accustomed to — has helped massively with being able to make recommendations more quickly to clients.”
A lot of landlords are looking at opportunities that could generate a larger cashflow
Despite this positive outlook, some brokers have reservations about future growth. Yields remain attractive, but few anticipate the same capital appreciation for those buying now, at least in the medium term, given current housing market pressures.
Risk of saturation
Sykes says this isn’t the only market BTL landlords are considering for diversification, citing renewed interest in houses in multiple occupation and multi-unit freehold buildings. He also questions whether there’s a danger of the holiday-let market becoming saturated, with buyer demand further pushing up prices and the sheer number of available lets dampening yields.
There are other potential problems, not least the threat of councils introducing local regulation designed to deter outside investors, keeping prices more affordable for residents in the most popular holiday-let locations.
Houz Mortgages director Benjamin Blyth agrees there could be trouble. Blyth, who is also a holiday-let owner, says that, while demand from holidaymakers remains robust, costs are rising.
Business has been booming and we don’t expect a slowdown soon
“My own rate is due to go from sub-4% to over 6% when I refinance. At the same time, energy costs have rocketed. The 50% increase has to be factored in to higher nightly or weekly charges — which may slow bookings, particularly in a cost-of-living crisis.”
Additional costs and potentially fewer bookings could mean that for some owners the sums no longer add up. Existing holiday-let owners may sell up, particularly those who have owned the property for a long period and are looking to cash in healthy capital gains before any market slump.
However, brokers say an additional supply of properties is unlikely to weaken the market much, given the number of potential buyers. Any indication of softening prices could simply attract more purchasers, looking for a second-home bargain.
This article featured in the March 2023 edition of MS.
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