The great ascent of BTR

Build to rent (BTR) is growing rapidly, offering a low-risk and resilient income. It’s therefore no surprise that numerous lenders are muscling in

Words by Jeremy Bowden

While BTR is a concept that has been around in the UK for over a decade, only recently has it been experiencing strong growth. The government first explored BTR in 2009 with the Private Rented Sector Initiative, according to Neelam Saihjpal, BTR director at property specialist Centrick. This was followed by the government’s Montague Review published in August 2012, with the first units built the same year. The review was designed to boost BTR, and included measures to encourage investment in good-quality, privately rented homes to help meet housing demand.

Since then, the sector has gradually grown, both in terms of investment and the number of homes. In Q4 2022, around 242,500 units had been completed or were in the pipeline: 78,700 had finished, 50,500 were under construction, and the remainder were planned.

Funding-wise, the latest Savills research revealed that over £4.3bn was invested in BTR in 2022, marking a fourth consecutive record-breaking year. While BTR investment volumes slowed in Q4 2022 as investors faced economic and political headwinds, levels have rebounded this year, reaching an estimated £1.12bn in Q1 2023, as revealed by Cushman & Wakefield’s latest BTR report.

Randeesh Sandhu, CEO and co-founder; and Daljit Sandhu, COO and co-founder of Precede Capital, say interest in the UK’s BTR sector had surged in recent years. They give some reasons: “These include the chronic undersupply of high-quality, well-managed rental homes, a growing interest in operational assets from institutional capital, [plus] investors increasingly willing to invest in BTR operators as well as the assets themselves.”

Cities And Critical Mass

London has been the obvious focus for BTR, but other major cities have seen significant activity, including Manchester, Birmingham and Leeds (an objective of the Montague Review), according to Ian Fletcher, director of policy (real estate) at the British Property Federation (BPF).

Neelam says Birmingham and Manchester are the most established BTR markets outside London, “but Leeds offers the largest pre-construction pipeline and Edinburgh’s affluent population is ripe for city centre BTR development”. Of the £1.1bn invested in Q1, BNP Paribas estimated that 7580% was outside London. Most recently, it has spread to smaller cities such as Southampton and Aberdeen, Ian notes.

In London itself, BTR is expanding from central to commuter belt development opportunities. However, it remains a product for large towns and city centres, requiring a critical mass of private renters, boosted by overseas tenants looking for temporary homes.

Targeted Tenants

For landlords, BTR offers good economies of scale due to managing multiple homes within a single development. Projects can be tailored to the occupiers targeted and, in general, tenancies are longer and more stable, reducing turnover costs, according to Tom Berry, asset finance adviser at Arc & Co. He adds that brokers can work with a single landlord or an operator managing multiple units within one scheme, simplifying the funding process, refinancing and eventual end disposal. “This also enables the broker to work on large-scale transactions through one party,” he adds, which would earn brokers more commission.

Neelam states that BTR rents and income growth recovered quickly post pandemic, with strong rent collection, renewals and low arrears for landlords. “From a performance perspective, BTR has proven its investment credentials.”

When it comes to BTR investments, James Saunders, CEO at Quintain Living, notes the importance of being responsive to tenant needs. In response to residents’ demands, the firm increased leases to an average of three years during the pandemic, up from 12–18 months before. “We offer a package of services, including broadband, furniture, working with utilities to get better deals, lounges, rooftop terraces, podium gardens, and free gyms— that’s a huge amount of added value.”

Of course, this adds a premium to BTR rents—but the amount varies, according to Tom: “As with any rental market, the dynamics vary vastly from project to project, depending on a range of factors. As such, it is difficult to apply a blanket figure that might apply to any premium.”

BTR properties also tend to be more energy efficient, primarily because they are new and built with green credentials in mind, which is increasingly important to tenants. One example of this would be Birmingham’s Great Charles Street development undertaken by a JV between Apache Capital, Harrison Street and NFU Mutual. The scheme will include several sustainability features, such as air source heat pumps, solar photovoltaic panels, and the ability to source renewable energy for the site through the Renewable Energy Guarantees of Origin (REGO) scheme—all of which will contribute to the project’s energy performance and low Scope 1 and 2 emissions profile.

Costs And Complexity

On the downside for landlords, large upfront investment is required for BTR schemes which, along with planning and construction risks, creates a significant barrier to entry for many smaller operators.

Another big problem, according to Ian, is a shortage of suitable land, which limits development opportunities. “There aren’t many places for 250-plus units in inner cities,” he says. Neelam also cites land values and build costs as major obstacles.

Another difficulty can be regulation. “The government approach on planning issues at the moment is quite constrictive,” comments Ian. James agrees this is a hurdle, considering not all councils are aligned on their approach to BTR. Tom says: “Managing and, in some cases, educating the local authority is one of the biggest challenges when it comes to securing planning permission. Local authorities have their own policies with regard to development, which can vary from one scheme to the next, and this creates a more complex process for the developer. The key to mitigating this is for the developer to work closely with the councils to ensure that the proposal aligns with the policies. This may involve negotiation on the percentage of affordable housing within the scheme or making alterations to the design.”

Lenders In On The Act

There is no shortage of those willing to provide finance to the BTR sector, although some question whether funding flows will be able to keep up should growth continue as expected. James shares that Quintain taps a wide range of lenders that are attracted by the low-risk and resilient income stream, professional operation, and high levels of compliance. Financing has “broadened out”, he says. “There are debt and equity investors; a lot prefer debt because they’re getting guaranteed interest rates and repayment returns,” he explains.

Precede agrees that multi-family BTR is popular for debt financing because the tenancy risk (in theory) is lower, and demand for housing in locations such as London means there is a low likelihood of high vacancy rates.

Ian notes that interest on loans for

BTR is slightly higher than in 2022, but the sector is never short of capital. This comes from multiple sources, including pension funds, private equity, overseas (especially from investors with exposure in their own countries, such as US operators of multi-family projects) and sovereign wealth funds, as well as most of the major UK banks. He highlights how BTR offers a great ratio of assets/liabilities for pension funds due to low risk: “Pension funds are now prepared to take on construction and sometimes even planning risk, whereas before they would just dip their toe into the sector by buying into stock from housebuilders. Now they are investing at the start and dictating what they want.”

While Tom claims there are now several lenders serving the BTR arena, he notes there are few, if any, obvious examples of finance providers that operate in this sector exclusively. He also warns that flows may struggle to keep up with anticipated growth. “Given BTR’s current popularity as an investment sector, there is currently a sufficient depth of funding options but, as the development pipeline expands, there is a danger that the finance market may fail to keep pace with demand,” he says.

Precede’s founders comment that recent market volatility has cut banks’ appetite for risk and driven many to scale back their lending, with the gap being filled by non-bank lenders. These include Precede itself, which in March provided a £188m five-year loan to fund the development of Great Charles Street in Birmingham. The lender’s co-founders add that banks may now require additional forms of recourse or security from their sponsors if a loan goes higher than a certain LTV and/or debt yield, depending on circumstances. Overall, lending criteria for BTR schemes vary, according to Randeesh and Daljit: “Some lenders focus on LTC, some on LTGDV, some on debt yield/ICR. In reality, most lenders focus on all of these things and the loan is impacted by who the borrower is and where the asset is.”

When comparing the ease of accessing finance compared to the BTL market, traditional BTL mortgages are very different from the institutional lending involved in BTR. The scale, commercial nature and complexity of

BTR schemes—adding to the overall risk—mean that, in general, loans for these projects incur far more rigorous due diligence, with lenders scrutinising financial stability, gearing levels and management records, as well as detailed information on the likely performance of the scheme involved, including tenant demographics and rent levels.

Quintain’s James claims lenders are now keen to invest at 50% LTV (down a bit from the peak, which was up to 75%) a debt yield of 6-7%, and interest cover of 1:1 to 1:3.

Twice The Size In Five Years

BTR is expected to continue growing rapidly, with Knight Frank claiming the market could nearly double in size to £102bn by 2028.

Critical drivers are the shortage of affordable housing in the UK—particularly in major cities—plus changing attitudes towards renting and demand for higher standards and better services. On top of this, Tom notes that climbing interest rates had recently escalated the necessity for rented property in general, made worse by the removal of Help to Buy and BTL landlords exiting the market. “BTR’s popularity will increase due to the desperate need for housing supply, the shift towards renting in the short term, changing tenant expectations, and the longer-term institutionalisation of rental markets,” add Randeesh and Daljit.

So, could BTR pose a threat to traditional BTL properties? According to Precede’s founders, it already does: “While BTL landlords are already feeling the pressure of interest rate rises and the costs of regulatory compliance—such as the proposed new EPC requirements—BTR offers a quality of service and amenities that have historically been sorely lacking for consumers in the national rental market.”

However, BTR cannot fill all the gaps left by retreating BTL landlords. It is believed that such schemes will remain large scale and focused on major cities, and are unlikely to extend to smaller and less densely populated conurbations. For this reason, along with its currently small scale, most feel BTR is not yet a threat to BTL’s place in the market. However, Neelam says it could become one eventually, with “private landlords unable to compete with the resident experience in BTR”.

While BTR might not solve the UK’s housing crisis, it can certainly contribute— not least by channelling new sources of capital into homes and providing muchneeded supply at scale. The sector’s high and reliable returns and raised standards are expected to continue to attract investors and tenants, although growth may well be constrained in the UK by a lack of opportunities in prime locations.

Nevertheless, Precede’s founders maintain BTR may help, even though it is difficult to say how far it offers a solution to the nation’s lack of housing: “There is no silver bullet to such a complex and continuously changing issue, but it will certainly play an important role.” marketing to do with the event, including tickets, programmes, the online voting page, marketing emails and on screen at the Hurlingham Club.

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Words by Andreea Dulgheru

When people were unable to travel abroad during the pandemic, the holiday let market blossomed on the back of the staycation boom. Since the borders reopened to new and exotic places, many in the BTL sector are left wondering if the holiday let bubble is set to pop—especially with government regulations knocking at the door. Seven industry experts—Alison HoughtonCorfield, director at Master Private Finance; Barry Luhmann, head of BTL mortgages at United Trust Bank; Grant Seaton, head of intermediary lending at Cumberland Building Society; Narinder Gill, associate at Coreco Specialist Finance; Samantha Demuth, head of regulated and term finance at Finanze; Louis Theed, property finance specialist at Propp; and John McCaffery, tax partner at Alexander & Co Chartered Accountants and Tax Advisers—share their views about the latest proposals and weigh in on infuriating property influencers and how some investors can be ignorant on what is really required.

Andreea Dulgheru: Despite all Covid travel restrictions being lifted in the UK in 2022, reports last summer highlighted an increase in the number of holiday let properties in the UK market. In your experience, have you seen a rise in demand for holiday lets?

Alison Houghton-Corfield: From a master broker perspective dealing in specialist finance for holiday lets, we’ve seen a massive increase, but more so last year. As for the reason why I think they are so popular, it’s purely down to yield. A lot of people have seen that, since the pandemic, holiday lets are the place to be, as you can earn more money than from a standard BTL.

Narinder Gill: I’ve seen a large increase in interest in holiday lets derived from the pandemic. It’s an interesting space and certainly not a market I see diminishing any time soon; it won’t be a flash in the pan.

Barry Luhmann: It’s definitely the yield that drives this market, or people simply wouldn’t bother. It’s far easier to rent on AST terms than a holiday let, plus you’ve got extra work and costs that you suffer as a holiday let landlord—but yields are far superior in the vast majority of cases.

AD: What would you say are the biggest misconceptions when it comes to financing holiday lets?

Louis Theed: One of the things that I come across quite regularly is education—landlords don’t know they need a holiday let or other specific mortgage to rent their property out on that basis. I think there’s a big educational piece to be done across the industry about what type of finance is required for these lucrative investments that they’re delving into.

NG: In my opinion, I’d say it’s the experience needed. There is a lack of understanding from landlords, who think it’s as easy to get a holiday let financed than it would be any other type. Lenders ultimately want to provide finance to individuals who have got a proven track record in managing tenants and properties. To take on such projects, it’s not a case of leaving it to [holiday cottage rental agency] Sykes to manage it; there’s an onus on you as landlord to make sure all your affairs are in order and you’re aware of your obligations.

Samantha Demuth: It’s a business at the end of the day, isn’t it? They’re starting a business, not just a standard BTL, which could be relatively straightforward compared to a holiday let, where it’s obviously a lot of effort. One of the things I have noticed—especially off the back of a lot of property training events that take place within this sector—is that a lot of investors come to us thinking they can get a huge house to let out with lots of bedrooms, and get a commercial valuation on day one. Landlords need to be educated on what it really means to get into this market and to be realistic as well.

AH: Samantha touched on something that will wind me up at times: all these presentations and investor shows that are being promoted online by influencers. They get people in, sell them this fantastic dream of owning a portfolio worth so many millions, take money off them, and then walk away. But the people attending don’t have the understanding and education that they would have got if they’d spoken to a broker or lender. I don’t know how they would do it, but there’s got to be some kind of regulation around that. This has got to be addressed somewhere down the line.

Grant Seaton: As a lender, we found a lot of people were already in the marketplace but had BTL mortgages in the background, so they were actually breaking the covenants of the mortgage. During the pandemic, we also saw some people who were registered for business rates while others weren’t, so it was quite a task for some people to get support through that period. If there is any lesson to be learnt, it is to have everything right, investigated and researched fully.

AD: John, from a tax point of view, what do you see as the main misunderstandings?

John McCaffery: For furnished holiday lets, there are a lot of conditions you need to meet in order to qualify. To fall within the regime, it’s got to be furnished to a standard that’s available for letting out, which some of these properties aren’t. It’s also got to be available for let for at least 210 days a year, and you need to let it for 105 days a year. Plus, you can’t let it to any one individual or party for more than 31 days in that period. It has to be a proper business. That said, if you meet all those conditions, there’s up to a 10% tax rate on disposal of the property [under the Business Asset Disposal Relief scheme]—depending on its value—and you can get tax relief for the assets you buy for the property, like furniture, white goods, plant and machinery, and other fixtures and fittings. In addition, you can put the income you get into a pension, which you can’t with normal residential property. On the flip side, you need to register for VAT—you don’t have to as a residential landlord—and then you’ve got the compliance of having to do quarterly VAT returns. Perhaps the biggest misconception, though, is that people think furnished holiday lets qualify for inheritance tax relief, but they generally don’t. So, if most of the business is letting out the property and its activity is wholly or mainly property investment, you still have a particularly chunky inheritance tax liability coming along if you’re not careful and don’t plan for it.

AD: From a funding point of view, what would you say are the biggest differences between regular BTL and holiday let mortgages?

BL: The biggest one for us is how you work out the rent for the ICR. I don’t think all lenders in the market do this, but we’ll use agency letters for low-, medium- and high-season rental. We’ll also use actual income if a landlord is remortgaging a property and has got nearly 12 months or more, if that can be validated and proven with some kind of agency or bank statement. However, the majority of [our] customers are purchasing or converting from an AST to a holiday let and relying on the agency letters, which we have to scrutinise intensely. It’s not like sending a valuer out who gives you one figure.

GS: A couple of additional things we would look at now would be the top slicing of income to be able to support the borrowing. We’ve seen that coming up a little bit more as costs start to go up for people. We’re currently looking to increase our ICR at the moment, because of [this]. As a result of the recent cost of living price increases, there has been evidence of some owners having to subsidise payments. That’s why we’ve started looking at top slicing more and have a process in place for that—if there is substantial background income that can evidence and support it, then we’ll use that.

NG: Grant’s made a valid point there about top slicing, and I’ve seen instances where the less experienced landlords looking at holiday lets really do underappreciate seasonal demands. They don’t understand the implications of having a holiday let in the middle of January not being tenanted for five or six weeks, and don’t take on board how much it will affect their cash flow in the event of a two-month tenancy break, work required on the property, or if there’s increased competition. You’ve got to keep on your toes with these types of properties, because they’re now two a penny for rent in the right areas. Landlords have got to make sure their properties stand out and are lettable.

AD: Based on the increased competition and the danger of not having a regular stream of income, what should landlords do to mitigate these issues?

NG: I’d say having reputable management companies and specialist property managers in place, rather than relying on an agency or self-managing it if you don’t have the experience. There are certainly plausible reasons to self-manage if you’re an experienced landlord and have been doing it for many years, but it’s always worth not skimping on the management cost. Specialist managers are not cheap, but they’re there for a reason, and I’d strongly suggest the less experienced landlord sticks by them.

SD: Also, a lot of extra research and due diligence has to be done on the areas they’re looking to purchase in to see what the demand is for a holiday let. You also need to consider whether the property be used for any other situations when the holiday season is perhaps taking a dip. It’s important to look at what is available in that area for excursions or other activities, and how else the property can be used. I think some landlords opt for a holiday let in a nice town purely for emotional reasons because they like the look of it but haven’t thought about it from a business point of view. A lot more research must go into the front end—it’s a business at the end of the day.

JM: Landlords also really need to think about ownership structure before they purchase—it gets a bit messy if done afterwards—as well as their reporting obligations in relation to tax returns. I spend a lot of my time sorting out a lot of messes that haven’t been thought about properly…

SD: Do you mean set it up in a limited company versus an LLP?

JM: Yes, as a limited company. LLPs don’t have the advantages that people think they do, and there’s actually a lot of misinformation about them. Company structures, in the right circumstances, are very useful for these things and retain the tax advantages.

AD: Is the surge of holiday let properties in the market regional, or are you seeing this nationwide?

AH: When the pandemic first hit, they tended to be all around coastal areas— that’s where the demand was as people were isolated and wanted freedom.

But, in the past six to 12 months, it’s been more spread out for us.

LT: I’ve seen enquiries for all over the UK and some interesting opportunities being identified. I had one client that was looking to buy a property quite near to an airport, and they were setting it up purely for short-term accommodation before people fly, which is obviously very different from someone buying a coastal property to rent out as a traditional holiday let. I think that landlords are getting more inventive with the type of opportunities they’re trying to identify.

AH: I’ve seen a few around a specialist hospital as well, where people were looking to buy properties there so they could rent them out to families who were coming to look after ageing parents. I’ve seen quite a few of them over the past couple of months.

GS: I think national parks have always been the typical, historic areas where people would look to purchase a holiday let. But there are situations where investors are thinking outside the box when it comes to the quieter seasons. Let’s say there is some industrial activity happening in that area—a nuclear plant getting built, for instance. Landlords will think if they get something within travelable distance of that, they could fill the property with contractors coming from other towns and cities to work on a project over the winter season as well. I’ve seen a little bit of that and it makes sense.

LT: On that subject, I’ve seen a number of people converting HMOs into short-term accommodation targeted specifically at workers, for example near hospitals. But I think there’s a question about property standards that comes up, too. Some landlords that are converting existing BTLs into either serviced accommodation or holiday lets may underestimate what they need to do with the property in order to keep it occupied and generate a good income.

NG: We saw quite a number of these types of transactions in and around Birmingham when the Commonwealth Games were on; landlords were targeting individuals coming to watch the games but, before all that, the contractors. At the time, this was fantastic, but you’ve got to be thinking: what are they doing now? There’s got to be an air of caution when looking at high-turnover, volumetype letting, with the usage of Airbnb and these wonderful apps that are out there, because you can fall very quickly on your face if something changes, and you don’t have that surety of a coastal town.

SD: Yes. I agree with that. We’ve seen a few of our investors who are trying to mitigate that and utilise some of the specialist BTL products that allow either an AST or a short-term let; if they can make it fit on an AST figure rather than the holiday let income, then they’ve covered both bases. So, when we can get those through, they’re obviously nice and easy because we know they can fit on both sides.

BL: Yes. We probably see just as many applications for the traditional coastal holiday lets as we do for the city centre, whether that’s in Birmingham or Manchester for weekends away, or hen and stag nights, or in places near national parks, such as the Yorkshire Dales. These generally make sense. It’s the ones that seem to be nowhere near anything— where you wouldn’t spend one night, let alone seven—that we tend to turn away or accept on an AST. We’ve done a few of those, and they either concede or they take the application somewhere else.

AD: How is the climbing number of holiday lets impacting the overall PRS?

GS: The Lake District itself really started to suffer with housing for seasonal staff, because people had moved from HMOs and BTLs into furnished holiday lets instead, causing a lack of housing. People were having to stay maybe 30–50 miles away from where they were working, so businesses were having to bus people into work.

NG: I think there’s got to be an air of regulation around [holiday lets]. There are some councils now in certain parts of the country that are putting in more red tape and planning permission requirements. There needs to be a government approach to regulation but, ultimately, it’s difficult to apply a blanket policy when certain areas need more regulation than others.

AH: I completely agree with Narinder; the government cannot bring a broadchurch approach to this. It’s fine to bring legislation in, but there’s got to be a consultation with local councils to establish how many holiday let properties will be allowed in each area. The government has got to sit down with local councils and the industry to find out where the problems are, who it will impact, and what they need to do.

AD: That brings us to the proposals that were announced recently about new planning permission requirements for holiday lets. How do you think this will affect the PRS and those landlords looking to invest in holiday lets?

GS: What we’re seeing in Scotland now with the licensing regime that’s come in is that if somebody wants to go out and finance a holiday let, they’ve got to wait for the licence to be approved. Then, if they’re in a tourism-control zone, they’ve got to get planning approval as well. Now, the exiting owner doesn’t want to wait four or five months for that to all go through, and that might play into the long-term let sector’s favour; if a property can be used as a longterm let, they’ll dispose of it that way. We’ve learnt very quickly that [these changes] seem to have slowed down the Scottish market. What we’ve had to do to get around them is support landlords, providing they’ve got sufficient other income to support the mortgage until they get the licence and planning. However, not everyone’s got deep enough pockets to be able to evidence that.

AD: Do you think the new proposals will drive holiday let landlords away from this market and slow down activity in coastal towns and tourist hotspots?

BL: You’d think it would slow things down… If anything, I think this is just going to make this sector more professional, like HMOs, which is good. When you go and rent a holiday let, you want a nice, secure, safe property when you turn up. So, this will be a good thing in the long run.

AD: Alison, you mentioned the need for regulation in this sector, and it seems like the government is trying to make that happen, although it’s at proposal stage. In your opinion, does this regulation cover all bases, or are there still gaps that need to be filled in?

AH: It covers everything. However, what I think the government needs to do is roll out the consultation to lenders, brokers and landlords. I know they’re going to do a questionnaire, but how does that get policed? I think there’s got to be stronger policing [for the responses], and there’s quite some way to go yet until they tighten this all up. A lot of people have seen holiday lets as a get-rich-quick thing that they can do, without understanding the implications. Once they regulate and tighten it up, it will be better for everybody.

LT: I think that’s a difficult question to answer because, until something’s actually been put into practice and you can see some of the pitfalls or gaps, it’s difficult to say. But, as long as it’s open for changes retrospectively, and that it can be changed on a regional rather than nationwide basis, that’s the easiest way of approaching it. Otherwise, you’re setting something in stone without allowing any room for feedback.

AD: The next regulation initiative I wanted to talk about is the planned HMRC crackdown on owners of second homes who pretend to let them out as holiday lets just to avoid or save on tax. John, from your experience, is this prevalent?

JM: No, not so much. The system in this country is one of self-assessment. In terms of its own compliance process, HMRC has built a supercomputer called HMRC Connect. At a glance, it can press a button relating to a taxpayer and access data from 30 different sources. This includes all sorts of information about a person, including the Land Registry. From this, they can start asking questions, should they want to. Not everybody’s going to get an inquiry. One area HMRC is looking at on landlords, which is quite clever, is the rental deposit scheme. You’ve got to keep four or five weeks’ worth of rent on deposit in a government-registered scheme. Well, HMRC is extrapolating that out to what the annual rent is, and seeing if they’re returning that amount on the tax return—and a number of landlords aren’t. So, the problem for HMRC is getting behind the figures. If you do have a second home, the general tax evasion is if you’re saying it’s a furnished holiday let, and you’re claiming a 10-20% rate of tax, rather than the 28% tax on disposal. In that instance, yes, they can then go back over your tax returns for the past few years and see if you have returned the income for that furnished holiday let, and if you’ve met the conditions for that property. If you haven’t, they’re coming after you for either the income or for the disposal on the dwelling. Often, a lot of people do it without malice, thinking they haven’t done anything wrong. The furnished holiday let regime is actually pretty specific and, unless you meet all the requirements, you’re not qualified. I think every time you mention that HMRC is investigating somebody, it sends a tremor of fear through an industry, and that’s kind of what they intend to do—they will target two, three thousand people, and that will prompt a lot more people to come clean, for want of a better phrase. It’s quite psychological, the way they go after tax. But they haven’t got the resources to check every single tax return; that’s why it’s self-assessment rather than checked assessment. There is also something called the Let Property Campaign, which gives you slightly better terms if you come clean, because

HMRC knows landlords are notorious for not returning their income. The vast majority of landlords do, don’t get me wrong, but as a percentage compared to other trades and businesses, landlords are pretty high up there.

AD: Would you say involuntary tax evasion is a result of landlords’ lack of knowledge when it comes to taxing holiday and short-term lets? And, if so, what is the best way to abate this?

JM: Absolutely. The best thing to do is talk to a tax adviser.

SD: I was just thinking of that crosspollination of knowledge between industries. We’ve all got a duty of care, and while I know that we [as brokers] can’t advise on tax…

JM: Sorry to interrupt you, Sam, but one of the biggest problems I find is brokers giving tax advice.

SD: Oh yes, you shouldn’t do that! But I think [it would be good] to have the knowledge in our toolbox, almost like a factsheet, to tell clients, “This is who you need to speak to”, so you’re raising awareness to the borrower at the right time for them to be prompted. Because they might just go and speak to their accountant who might not know. They must speak to a specialist tax adviser. It’s having everyone within the industry know the checkpoints of what you need to do and when, rather than just doing your siloed action of just getting the finance and not speaking about anything else.

LT: I agree entirely. We caveat every conversation with, “Go and get tax advice here”. But one of the things that we come across quite regularly is that the landlords who are proactive in seeking out professional advice tend to go to their accountant for tax matters, rather than an actual tax adviser, which obviously isn’t the right thing to do. But then, people don’t like paying for advice, even though it’ll save them a fortune in the long run.

AH: Yes, I often find that as well. We’ll tell clients we can’t give tax advice and they need to speak to a tax adviser, but they’ll ring you two days later and ask you the same question.

AD: Going back to the taxation process, there’s been quite a bit of talk with regard to an overhaul of the taxation system for holiday lets. There are two questions within this: do you think that’s going to happen and, if it does, how is it going to affect the PRS market?

JM: I hear on a weekly basis that there’s got to be an overhaul of some area of the tax regime. Politically, furnished holiday lets aren’t particularly contentious and, as a result, I wouldn’t expect any large overhaul of this—I would, perhaps, expect a little more compliance, and people digging into whether or not properties do qualify as furnished holiday lets. It’s a very specific regime: if you don’t meet all those conditions, you’re not a furnished holiday let, and you’re just back into the mainstream PRS regime. I would say there’s probably enough regulation for holiday lets. However, I think more education is required. If you are not speaking to a tax adviser and you are looking for a furnished holiday let, you only get piecemeal information that would tell you about things like capital gains and trading profits. What it wouldn’t tell you about is VAT, interest relief, or what you need to do if you have an inheritance tax exposure. So, I think it would be more useful if there was more collated information about your tax obligations as opposed to further regulation.

AD: There is one more piece of legislation that I wanted to discuss with you all, and that’s the change in requirements for holiday lets in Wales, which came into force this April. Now, the property needs to be made available for 252 days and occupied by paying guests for 182 of them in order to be eligible for business rates—otherwise, landlords pay the regular council tax and, possibly, a premium on top of that.

There’s a big educational piece to be done across the industry about the finance needed for these lucrative investments they’re delving into

There’s got to be an air of caution when looking at highturnover, volume-type letting, with the usage of Airbnb and other apps that are out there, because you can fall very quickly on your face if something changes

Are you seeing more landlords retract from this market because of this?

LT: I think it’s shone a light on someone treating it as a business rather than as a side hustle. Someone with a holiday let who wants to qualify for some tax advantages needs to be more focused on their occupancy rates in order to qualify for these benefits. So, they’re thinking: should they charge slightly less and reach an occupancy target? Or should they focus on profitability and take the tax hit? I think that question alone has drawn more attention to their investments and made them seek out education.

BL: Broadly, it sounds fair because, if you are letting this property for more than half of the year, then you’ve got a business. If you’re letting it for less, then it’s arguably a side hustle that, for the majority of the year, is empty or being used as a second home. When it boils down to it, I don’t think lots of councils are overly worried about fully occupied holiday lets, because they bring in lots of tourists and, therefore, income. They’re probably more concerned about second homes that sit there for most of the year unoccupied, and nothing happening in that local economy. I can see where this is aimed at: the side hustle.

LT: I also think it sounds fair to focus on keeping a property occupied—the effects of an occupied property on a local economy are massive . A colleague’s daughter stayed at an Airbnb recently and, when she got there, the owner told her the local pub was closed and that there was only one shop, which closed at 7pm—that’s because the majority of properties in the area were second homes or holiday lets with seasonality. So I think a regulation like this, to encourage occupancy, is nothing but positive.

AD: We’ve talked about quite a few regulations, and it seems the government is keen to drive away amateur holiday let landlords who are doing it just to make a quick buck. Overall, will these regulatory changes burst the holiday let ‘bubble’?

LT: I don’t think you’ll see it burst. I think you’ll probably see landlords who have been successful pick up more lets and build a portfolio of those types of properties. I don’t think you’ll necessarily see an impact in the volume of properties—you might just see more professionalism and people with a portfolio.

GS: I agree. People who have just got a side hustle, one property on the go, might exit, and then those who have got the economies of scale might pick up a few extra in their portfolio.

BL: Yes, I don’t think these tax changes alone are going to particularly alter the trajectory. We’re probably going to see another 12 months of growth, but we might see a slowdown in a year’s time.

NG: The regulations will separate the wheat from the chaff, and I think those who see [holiday lets] as a quick win—a get-rich-quick scheme—will soon realise it’s nothing like that. The more professional, business set-up individuals will see hardly any changes. That’s how they’ve been running their operations for a number of years, and that’s why they’re successful.

SD: The number of enquiries I get for holiday lets has not dwindled, so I don’t think it’s a bubble that is going to pop any time soon. Landlords are becoming more savvy to the amount of profit they can get from it and are doing a lot more research around the topic, especially how they can utilise the short-term let industry for other areas in addition to holiday lets.

AH: Yes, there is no holiday let bubble bursting. And I agree with Grant—the get-rich-quick landlords will be the ones who won’t stay in the market as long, and the other more established landlords who have a business model that fits this rental type will be the ones who’ll pick off these properties along the way.

AD: Finally, while we’ve talked a lot of about what the government is looking to implement, I’d like to know what one thing you think should be brought into this market to help the holiday let industry and the PRS?

GS: Housing supply would help, but that’s quite a generalist approach!

LT: I would say compulsory landlord education. Narinder mentioned it earlier, and there’s been talk historically about people having to meet a minimum standard to become a landlord. I think that should be something quite prominent because, without the owners understanding their obligations, it’s difficult to provide good-quality housing stock.

NG: Yes, I’d even like to see an approved landlord status added—something to evidence that they’ve got the necessary minimum requirements to ensure quality standards.

SD: Agreed, and you could have boltons for different sub-sectors, since holiday lets are very different from standard ASTs. I think education is key for this industry, for sure.