Updated: Nov 18, 2020
The Luxurian Homes guide to adapting to the volatile rental market post-lockdown.
Three months have passed since the UK government issued a national lockdown policy, and the country is only just beginning to ease its restrictions. Shops are gradually opening back up to high-street trade, and the economy is taking its first steps towards recovery. The effect of the global pandemic on our economy however has been difficult to quantify. Specifically, areas like the housing and rental market remain in a state of uncertainty.
Despite the impact of Coronavirus, there's recently been a rise in positive news regarding the state of the rental market. Rental demand in the UK has never been higher, and experts predict that this trend will continue; rental yields in many parts of the country have increased while other areas have remained stable. The government also recently announced new measures to protect the rental market - Landlords struggling with buy-to-let mortgage payments are now eligible for a payment holiday.
It is important to note however that most of these articles do not predict near-future market trends, and it's almost certain that we have not yet seen the full extent of damage to the rental market. As the furlough scheme protecting many workers begins to wind down, there will be a period of national redundancy - companies are struggling to overcome the strain of non-recoupable overheads after three months of ceased trading. These redundancies will inevitably affect many existing tenants, and therefore their ability to pay rent.
When you factor in the government's eventual re-introduction of property repossessions and evictions, landlords and property investors must follow trends closely as we enter a period of market volatility.
That being said, Landlords can stand to increase their annual net yield, or at least ease the negative effect COVID-19 has had on their investment. During this time, it has never been more necessary to adapt to current market demands and understand the potential shift in prospective clientele.
At Luxurian Homes, we want our clients with investment properties to be as informed as possible. As such, we have produced this comprehensive guide to maintaining a high yield after the pandemic.
Renovate Your Investment to Attract Higher-Tier Tenants
For the first time since the financial crises , a large sector of prospective clients are enquiring into properties within a price bracket much lower than their salary could hypothetically accommodate. This change is a perfectly natural reaction to the current economic climate: the public is becoming increasingly concerned with their financial security, regardless of their income or position within a company. Simply put, people are just not willing to take risks at this time, and will compromise their rental price bracket if it means reducing unnecessary extra spending each month.
This new trend in market search criteria can be extremely lucrative for landlords with investment properties in the low-to-middle end of market value. Where the higher tier of prospective tenants are willing to compromise on property location and square footage, they are less inclined to compromise on luxury appointments such as a feature kitchen, or feature bathroom.
Looking at your investment from a purely monetary perspective, renovating your rental property to accommodate a higher tier of tenant can provide multiple benefits. Should your investment be considered tired, dated or of poor quality, the money spent on a renovation - when factored into your total investment against potential return yield - is the most profitable long-term action. However, The biggest justification for renovating your property is that prospective tenants with a higher annual salary provides greater security for your investment. You need a tenant that can consistently pay the rent each month, despite the global pandemic. Increasing the desirability of your property to attract tenants who can provide consistent and secure money flow is the best way of accomplishing a consistently high rental yield.
Be Especially Thorough When Screening Tenants
During this time, it is vital to differentiate the circumstances in which a potential tenant would be inquiring about your property. The optimal scenario would be a prospective tenant looking to reduce their excessive monthly spending. However, many renters are looking to downsize because their salary has been reduced, or forced to relocate because their current rental agreement is no longer affordable. As a landlord, you need to vet each prospective tenant thoroughly, differentiating those that can comfortably afford your property, to those who could be considered an investment risk. If you inadvertently hand over the property to someone who fails to pay the rent, your rental yields will soon hit negative figures. During this time, it may even be advisable to find a reputable letting agent that can help find suitable tenants, as their vetting process will have a proven success rate.
Adapt to Desirable Market Trends
During this period of social distancing, isolation, and lockdown measures, we have seen the UK population confined to their homes. This long period of confinement has made the majority of the public re-evaluate what they want from a property. This revised public property wishlist has caused a massive shift in what is perceived as a highly desirable property on the rental market when compared to market demands before COVID-19.
For example, new data collected from online estate agent Rightmove has shown recent searches for rental homes with gardens nearly double since the begging of lockdown. On average, searches for ‘Garden’ are 16% higher than registered in January and February and are up 26% over figures recorded this time last year. Rightmove commercial director and housing market analyst, Miles Shipside, commented on the data concluding, “People are rethinking their needs and location, and are searching for some outdoor space and tranquillity.”
After three months of needing to remain indoors, the market has come to value outdoor space in a potential property. The public now considers the act of gardening, or simply spending time outside to be an essential part of improving their health and wellbeing. Many rental properties have small gardens or small outdoor areas where tenants could sit outside, but Landlords often neglect these spaces because, until recently, they didn't impact return on their yield. Investing time and money now in the outdoor area of your rental property will now have a significant effect on its desirability, and may soon increase the value of your investment. Any property with a garden, roof terrace, balcony, or even within proximity to a park will benefit from this new market demand.
Along with gardens, searches for pet-friendly policies have also spiked since the beginning of lockdown. People have been lonely during this period of isolation, and many have resorted to acquiring a new pet to supplement the feeling of isolation. Concrete figures of increased pet ownership since lockdown do not yet exist, but The Royal Society for the Prevention of Cruelty to Animals reported a 600% increase in visits to its dog fostering pages, and reports on unprecedented demand for dogs has led to a nationwide puppy shortage. One of the overriding sentiments within this guide is learning to compromise with new market demands. Having a pet-friendly policy along with a renovated garden will now make your property highly desirable, and could help justify a premium price.
Prepare to Move Your Property Into a New Market
In short, the student rental market will likely collapse this year, and you need to prepare for this outcome. Rental properties marketed towards students have been one of the most profitable avenues available to Landlords over the last few decades. The HMO [house of multiple occupancy] method of renting, along with fixed guarantors and low supply against demand housing in university cities can often generate yield returns of over 10% for landlords - double the national yield average. Given the current climate, traditionally high demand for student rental properties will fall, based on news and figures regarding university attendance and tuition.
A survey by the University and College Union found that more than one in five students could defer going to university this year. This survey, however, does not account for adapted new mediums of tuition, soon-to-be practiced by universities this term. Although 89 out of 92 Universities stated in a Universities UK survey that they will provide ‘some in-person teaching next term’, most of these universities will do the majority of their tuition online. What this means for student housing demand is simple: for many students, there is no incentive this year to study away from home, and therefore demand will significantly drop. Although this fall in market demand for student housing will only be short-term (students will eventually go back to attend daily university lectures, and therefore require accommodation), it is important to prepare for potential sharp losses. Broadening your property target market at this time to young professionals, or non-student HMO could be the best option until student demand returns.
Take Steps to Protect Your Investment
As stated throughout this guide, the market is changing. Market conditions are not the best to be chasing maximum profit margins if you’re not in the fortunate position to renovate, or seek new tenants.
Simple measures, such as taking out a rental guarantee insurance policy that will cover your returns if your tenants are unable to pay the rent is highly advisable at this time. Equally, if you have good reliable tenants that cannot afford the rental price, dropping the rent by 10% to accommodate this may yield a more linear, less uncertain return on investment over the coming year.
Although the coming months may be unpredictable, the conclusions to draw from this guide can be simplified within a few simple statements: adapt to new market demands, avoid tenants that could be considered a risk in this economic uncertainty, and make preparations to protect yourself and your investment.
At Luxurian Homes, we care about all of our clients, and our community. If you need advice, or have any further questions about rental renovation, property market placement, or anything else regarding your home/ investment property, don’t hesitate to contact us.
We're happy to help.