BTL market ‘ripe for growth’ in 2022 – Harrington

by: Guy Harrington, CEO, Glenhawk
  • 14/12/2021
  • 0
BTL market ‘ripe for growth’ in 2022 – Harrington
Despite the unprecedented backdrop, 2021 saw many of the dominant market trends of 2020 continue, and only a fool would bet against more of the same in 2022.

 

House price growth has continued on its turbocharged trajectory, hitting double digits and outdoing the phenomenal 7.5 per per cent growth in 2020.

Supply chain challenges continued to hinder construction of new homes. The Suez Canal incident, Brexit and custom delays at ports caused material and labour shortages resulting in a supply crunch that contributed to UK house price growth.

The ongoing supply chain issues are also contributing to cost inflation – cement prices are up 40 per cent year-on-year and bricklayers are charging 33 per cent more than before the pandemic – with smaller developers and homeowners suffering the most.

The buy-to-let (BTL) market looks ripe for growth. Whilst the government’s punitive position is unlikely to change, the stamp duty changes unintentionally stimulated the market. In the low-rate environment, for the more active landlord looking for attractive income, amassing BTL portfolios is a solid investment. With leverage, an eight to nine per cent cash on cash return is achievable.

The big question is where interest rates will go. We should expect to see a rate increase in Q1, which would be a first step to reining in house price growth, although this will probably be marginal. The low mortgage rate war is likely to peter out as well, whilst the full impact of the pandemic is likely to put further pressure on household finances.

Alternative lending sector in ‘rude health’

Whilst H1 saw a de facto response from lenders of heavy retrenchment, with a far more conservative approach towards loan to value bands, assets and borrowers, as we approach the end of the year, the alternative lending sector is in rude health.

This year, 2021, compounded the old mantra that ‘An Englishman’s home is his castle’. Quite literally, people took stock of their homes, asking themselves ‘shall I paint it, refurbish it, knock it down, or buy somewhere better suited to my post pandemic needs’?

As the hunt for yield intensifies, the pool of borrowers has grown. Demand is back to pre-Covid levels, reflecting the strong performance of real assets, and residential real estate.

At the same time, there is more institutional capital seeking exposure to the sector than ever before, a trend that is set to continue into 2022. This is partly driven by their reluctance to take equity risk and see the mezzanine or senior debt part of the capital stack as an attractive income diversifier.

This year also witnessed a perfect storm of record low interest rates, high household saving levels, pent-up demand, government stimulus and pandemic induced changes to living habits. 2022 is set to be a bit of a wake up call.

What else? Green finance, which has taken off in the mainstream and listed markets, will move up the agenda of alternative lenders, driven by consumer, funder and peer group pressures. My Christmas wish list includes the government getting serious about the supply of new homes – I want to see quality, well thought out new build schemes that make the most of the English landscape.

A rebate on stamp duty land tax for smaller developers would be a starting point. And addressing the affordability issue is also critical, to support first-time buyers.

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