Our experts from the property and finance markets highlight the key trends to watch out for this year in the buy-to-let market.
The buy-to-let landscape has changed significantly in recent years, with rising inflation and interest rates pushing up costs for both landlords and tenants. Potential house price drops in the year ahead, along with upcoming energy efficiency legislation requiring rental properties to have an EPC rating of C or above are also stoking concerns for landlords. Despite this challenging backdrop, opportunities remain. Experts from Knight Frank Finance and Knight Frank joined a panel discussion to highlight the key trends to watch in 2023 and what investors and landlords can expect in the months ahead.
- Mortgage rates will likely decrease
“While we’re past the days of sub 2% mortgages, we’re already starting to see interest rates in the low 4%,” says Huy Le, landlord and buy-to-let finance specialist.
“The Bank of England may have increased the base rate and will possibly increase it further, but lenders have already baked in this increase in central rates so as the year progresses, I’d expect to see a lot more competition between lenders. I think there’s a lot of optimism to be had in the market.”
“Fundamentally, lettings is still an attractive asset class even with the current headwinds we’re having,” says Dave Mumby, Knight Frank’s regional head of Prime Central London lettings. “Over the last two years, we’ve seen huge demand, coupled with devasting levels of constrained supply, which has led to significant price growth – in some cases 25%, specifically in prime central London.
“The outlook for 2023, is a continued growth in rental price. Not double-digit growth but around 5-6% because stock levels still remain very low, and we will see yields increase. Gross and even net yields have been down 1.5% for a number of years now, but as of today they’re probably around 3-3.5%, which is good news for investors and landlords. That looks to be driving upwards for the considerable future.”
- Preparation is key to cost increases for landlords and tenants
“Costs for landlords have increased,” says Mel Constantinou, regional head of South West London and Home Counties lettings. “It’s expensive to rent a property out and get it market ready but it’s also important to consider the high level of demand that is out there at the moment. This means you’re going to get great tenants, with a great length of tenancy, and at a great price, which could cover lots of the additional costs discussed.”
Huy adds, “With the right advice, the buy-to-let market is absolutely still viable. An expert can help landlords structure their investments in the right way that may result in tax benefits moving forward. There’s also a lot of mortgage product innovation out there, which can suit consumers individual needs and requirements.”
On tenants, Dave says, “It’s tricky to be a tenant at the moment. The only place that’s seen higher price growth recently than London is New York and that is underpinned by the sheer lack of stock in the market, so preparation is key. Make sure you have all your financial information ready and that you’re prepping anyone who you’re using as a referee to get yourself into pole position.”
- Rent becomes a long term asset class
“The big emerging trend I’m seeing across the Prime Central London market is a sense of perspective and the understanding that these investments are moving more into a pension asset class, where holds are 5-10 years+”, says Dave. We are no longer in the climate of people being able to acquire a property, find a tenant and bank on the capital value over two to three years, and then exiting with a profit. But the professionalisation of the sector means landlords are now wanting to hold things for a longer term and I think the sector is moving in this direction.
“Yes, there are challenges as a landlord, yes there are more costs but if you have the right structures in place to hold your investments and you get the right advice on whatever your mortgage arrangements might be, you can see significant growth and return on that asset on a capital value basis and you’re banking on really great yields at the moment.”
If you would like to watch the panel discussion or forward the link to a friend or colleague, click here to access a recording of the webinar at any time.
If you are interested in exploring any of the topics mentioned and would like to discuss your options, contact one of our experts who would be happy to help. We have access to over 200 lenders, and can help find a cost-effective mortgage for you.