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Sustainability, professionalisation and diverse portfolios will shape the future of BTL – analysis

  • 24/09/2021
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Sustainability, professionalisation and diverse portfolios will shape the future of BTL – analysis
It has been 25 years since the first buy-to-let mortgage was officially launched as a finance product.


The Association of Residential Landlords, now ARLA, worked with a group of lenders to develop the proposition, first approaching Natwest and Paragon. 

In that time, the private rental sector has expanded to account for 19 per cent of UK households, compared with 10 per cent of households in 2001. 

As the size of the sector has grown, so too has the amount of regulation. Figures from the National Residential Landlords Association (NRLA) show there have been 168 pieces of legislation imposed on landlords in the last decade. 


Increased professionalisation 

A decade of tougher regulations, say brokers, has populated the sector with more professional landlords, making it harder for amateurs to operate. 

Matthew Rowne, director of the Buy to Let Broker, said the myriad of governmental and regulatory changes introduced barriers to anyone who wanted to “dip their toe in the water” of being a landlord. 

Rowne said the need to determine what can be gained from a property portfolio upfront as well as the ability to prepare for any amendments could “potentially make an amateur landlord reticent”. 

He added: “The modern landlord needs to adapt to the changing needs of tenants, and remain agile and robust.” 

Jane Simpson, managing director of TMBC, agreed but said there was still space for amateurism. “Savings made during Covid have lifted the interest of some amateur landlords looking for good long-term investments,” she added. 

Simpson forecast that instead, there would be a split in interest with professional landlords opting for complex property structures and amateur investors going for vanilla properties and holiday let. 

Howard Reuben, owner of HD Consultants, said the introduction of regulation was brilliant and further highlighted the need for competent investors. 

“Standards have increased over the last 25 years and the ultimate benefit to the landlord is that they now have a far more professional business being run within formal guidelines. And for the tenant, they can be assured that they have a safe, licensed, properly run home,” he added. 

However, Reuben said he hoped overseers of the market would loosen their grip on taxes to allow standard expenses such as mortgage interest payments to be deductible business expenses for personal borrowers. 

He said landlords “shouldn’t have to suffer punitive costs and suffocating red tape” if the government recognises the contribution the sector has made to housing demand.


Product offering and diversification 

Rowne said the private rental sector would continue expanding beyond what had been seen already, resulting in “huge” opportunities for the committed and professional landlord. To meet this, the ability to be flexible with product offerings will be key. 

“Between the beginning of 2016 and the end of 2020 more companies were set up to hold buy-to-let properties than in the preceding 50 years combined.  We also see accountants coming up with more and more complex structures to create tax efficiencies for their landlord clients.   

“When you also consider the demand from both tenants and landlords for the benefits of multi-occupancy living, it is abundantly obvious that the days of one-dimensional lending solutions are limited,” Rowne added. 

Simpson said this had put rates and fees on the backburner as most of the deals her firm placed were “driven by the complexity of the case and which lenders will consider the application”. 

This need for adaptability aligns with landlords holding more complex properties, brokers said. 

Simpson said this was partially down to landlords diversifying their portfolios to spread risk and ensure tax efficiency and profits. 

“Having a greater diversity in your portfolio will leave you less at risk of being affected if one of these areas faces any hardships,” she added. 

Rowne said the reduced leniency towards interest cover ratio calculations following the Prudential Regulation Authority’s changes in 2017 resulted in landlords investing outside of cities like London. He said the rise in home working during the pandemic accelerated this, as tenants sought suburban and out-of-city dwellings which offered higher yields. 

Ultimately, having a mixed portfolio could protect landlords from drastic drops in house prices, he said.

“Should we see the anticipated correction to house prices sometime in the future, agile landlords with more diverse securities are not stuck with an effective non-yielding, non capital appreciating business,” Rowne added. 


Social responsibility 

Green mortgages have gained prevalence in recent months as lenders release products to encourage both homeowners and landlords to improve the energy efficiency of the UK’s housing stock.  

Currently, 1.8 million privately rented homes have an energy rating of C or above. 

However, with government figures indicating 3.2 million homes in the sector still do not meet this standard, brokers said more needed to be done to help landlords with the average £10,000 cost it took to improve a home’s ecological standards. 

Jeni Browne, director of Mortgages for Business, said overall landlords were showing more interest in green initiatives than they were when she started trading in 1990. Despite this, she said current product offerings did not go far enough and suggested the market needed “a little less green washing and a lot more genuine commitment to environmental sustainability”. 

She said: “The problem is that [lenders are] only offering borrowers preferential rates when they purchase an energy efficient property – one with an EPC rating of A to C, for instance – rather than rewarding those improving the ecological footprint of the UK’s housing stock.” 

Rowne said lenders could play a key role in “stimulating landlords into improving the energy performance of their properties”. However, he suggested most were motivated by the low rates and high loan to values offered to properties with an already high energy rating over the perks associated with renovations. 

“Regardless of whether much of the burden of responsibility should rest with lenders, if such measures stimulate the improvement in energy performance in homes in the UK, then this can only be a good thing,” he added. 


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