A Long Way from the Worst

Originally published by The Intermediary

The year has started off in a positive fashion with a large number of landlord borrowers deciding not to let the grass grow under their feet, particularly in a sector which – despite an increase in stamp duty costs – still presents a very sizeable investment opportunity for those willing and able to take it.

Certainly, no-one would deny the Budget was particularly positive for the sector, but even as early as December, it was clear to see from our business applications and transaction levels, particularly purchase, that landlords were still committed to the sector and were feeling more positive.

Of course, a lot of that comes from having certainty about what the ‘rules of the game’ now are. No-one will have enjoyed hearing from the Chancellor that the stamp duty surcharge for additional property purchases was going to be upped immediately to 5%, but letting the dust settle on that decision and just simply being aware of it, allows landlords to factor in those extra costs.

Plus, of course, in the immediate aftermath we did hear from landlords who were able to mitigate against those extra costs on deals they were already working on. Negotiating a lower purchase price for instance.

Overall, therefore, certainty tends to bring activity, and building through December and into January we have seen that activity increase as both new and existing landlords sense that, despite some positive words about improving the UK housing market, much still rests on the ability of the private rental sector (PRS) to house those who can’t, or don’t wish to, get on the housing ladder.

That disconnect between supply and demand is still as sharp as it has been for the last few years, which continues to result in the strong rental yield figures we are seeing from all the regions of the UK in which Fleet lends.

Our latest Rental Barometer Index shows this in abundance with strong annual rental yield figures across all but one region, the West Midlands, and this had only seen a slight 0.5% drop.

In areas like the North East (9.3%), Yorkshire & Humberside (8.6%), and the North West (8.3%) we are seeing particularly strong yields, while even the lowest, Greater London, is showing a 5.8% yield. Which clearly will lead to landlords seeking investment opportunities that can deliver the same level of yield potentially in the same regions as they are currently invested in, but also further afield.

There’s no doubting that a continued shift in mortgage pricing is also helping investment activity, even if there have been some recent ups and downs in that regard. In the last quarter of 2024, both Fleet’s average 75% LTV two- and five-year fixed-rates had both fallen from the previous quarter, and our anticipation is that we should continue to see this going in the right direction.

Of course, we did have a bump up in swaps during the middle of January which impacted pricing, but the good news coming out of the UK in terms of a dip in inflation and an increase in GDP, sent swaps back in the other direction quite sharply.

It does show a level of volatility, which clearly both landlord borrowers and their advisers need to be on top of, but even as you read this, we may well have had a further cut in Bank Base Rate during February. This was written at the tail end of January by the way.

The mood music as I write was swinging in that direction certainly, and with the Governor of the Bank of England, Andrew Bailey, being very bullish about four potential rate cuts this year, with another MPC member talking about cuts up to a possible 150 basis points, then it’s possible to envisage Base Rate being well into the 3% zone by the end of 2025.

That, as we all know, makes a considerable difference to landlord borrower affordability, and even now we’re seeing an often much-maligned demographic, the first-time landlord, also making a strong reappearance as more new investors recognise the strong income and capital growth that can still be achieved through the PRS.

Even if the Government is able to get anywhere near its 1.5m new homes target by the end of the decade, population growth over the last 10-15 years alone still needs to be met by housing, and with many people being priced out of buying, the steadfast option remains a PRS property.

2024, according to IMLA, ended with approximately £33bn of buy-to-let lending, up from just over £30bn in 2023. It anticipates that will rise again over the next year or two, up to £38bn in 2025 and £42bn in 2026, with buy-to-let purchase activity continuing to grow, of course alongside a strengthening refinance market.

My own inclination is to suggest these figures might actually be a little conservative, especially if we can continue the theme of the early weeks of 2025 well in to the year ahead.

Landlords are resilient at even the worst of times, but this current environment feels like a long way from the ‘worst’; instead, I would hope advisers are able to sense and benefit from greater buy-to-let activity levels, and as a specialist lender in this area, we certainly have an appetite to support you in these endeavours.