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Buy-to-let is dead. Long live buy-to-let! This deceleration is rife in the property world and pops up every now and again when the economy looks particularly bleak.

This phrase – and accompanying pessimism – is often attributed to Stuart Law, founder of Assetz Capital who made a living from buy-to-let for decades.

He got out of the game in 2019 as the sector began to struggle, but this may have been premature.

Vincent Burch – MPU

While the pandemic distorted every market, asking rents jumped by 11% in the 1st quarter of 2022, according to Rightmove.

The market has never been more competitive. Average rents outside of London have hit a new record high of £1,088 per month.

Buy-to-let may have plenty of life in it – but it may not be feeling so great for landlords at the moment

Regardless of this demand though, there’s no denying buy-to-let investors are facing plenty of challenges ahead of them.

Michael Gove, the Secretary of State for Housing, has been accused of all but declaring war on landlords.

Renters are on the verge of having a new set of rights, with the scrapping of section 21 making it harder to evict tenants or adapt quickly to rapid market changes.

Several popular areas for investment are also being targeted.

Second homeowners may be banned from renting out buy-to-let properties for short-term lets, in a bid to drive down house prices in places like Cornwall.

Owners of empty commercial lots are also in the firing line. Under new proposals, local authorities may end up swooping in and auctioning off commercial properties in town centres left vacant for over a year.

At the same time, landlords will have to prepare for oncoming environmental changes, likely to eat into profit margins.

Yet despite all these issues, buy-to-let is still proving worthy of investment, with plenty of potential on the horizon.

Tenants are desperate for more rental properties to hit the market as they’re priced out of buying. ARLA Propertymark, the industry body, found its members had on average 10 properties per branch available to rent in May.

This hadn’t changed much from April but, they also reported an average of 113 new applicants per branch in May, up from 78 in February.

There’s a rising number of renters chasing limited options.

Buy-to-let yields have been hit by rising costs and Government changes, but much of the pain is focused on the short-term.

By the end of 2022, buy-to-let yields are predicted to sit at 4.26%, according to Capital Economics.

At first glance, this may feel underwhelming but for comparison, AJ Bell expects the FTSE 100’s total dividend pay-out for 2022 to generate a yield of just 3.9%.

And let’s not forget, these returns are based on averages. Investors who know where to look are likely to fare much better over the coming years.

Healthier days could lie ahead

With costs being notoriously high in the southeast, buyers eyes are moving up north.

A £1.5m pot could buy a single apartment in prime central London – or six flats in Liverpool.

Buy-to-let yields may also edge towards 8% in Sheffield or Manchester.

Additionally, Investors can take advantage of infrastructure or industrial upgrades which are often scattered around the UK. 

An obvious example being Crossrail, which is expected to raise prices and demand in new commuter hotspots.

Ironically, the current issues facing the buy-to-let market may provide investors with a unique opportunity.

We’re facing the prospect of rising demand just as the opportunity to invest in supply improves.

A rare sweet spot.

Many landlords are exiting the market given the perceived difficulties laying ahead, potentially creating opportunities for savvy new entrants.

And let’s not forget, all this rental opportunity lays on top of the opportunity for capital gains.

There’s no getting around the fact that property prices have provided unbelievable returns for buyers.

In April 1990, the average property price sat at nearly £58,000.

Today, the land registry has average prices at just over £281k. Even if landlords were to struggle with less-than-perfect tenants, they’re likely to see their assets balloon over the long-term.

No matter how much legislation or state intervention is brought in, we should remember nothing really sways long-term supply and demand.

The latest data from the ONS showed the number of households in the private rented sector rose by 63% between 2007 and 2017, while renters are expected to outnumber homeowners by 2039.

Buy-to-let is far from dead – it’s just resting to fight another day.

Mike Cook
Mike Cook, Chief Mortgage Officer at MFS
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Mike Cook, MFS
Chief Mortgage Officer, MFS

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