How policy is changing what makes a good holiday let investment – Aitken

The view might still be the same and, assuming the British weather plays ball, people will still want to spend a week or two there. For an investor, however, the calculation behind that property may have changed significantly.

This gives brokers more to think about when advising on holiday lets than the rental income and the mortgage available on day one. A good holiday let investment not only needs to work financially now, it should also give the owner enough headroom to respond when circumstances change.

Research from our inaugural Holiday Let Index found that 72% of holiday let owners said council tax premiums had a major or moderate influence on their decision to participate in the market. The removal of full mortgage interest relief influenced 70% to the same degree, while the abolition of the Furnished Holiday Let tax regime stood at 67%.

You might expect numbers like those to result in owners heading for the door, but that’s not what we found. Some 30% intend to purchase another holiday let within 12 months, while only 3% plan to leave the market, so the appetite to invest is still there, even as owners give the finances greater scrutiny.

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The postcode now carries more weight

Location has always been fundamental to holiday lets, although we’ve generally looked at it through the eyes of the guest. Brokers will already be used to asking what demand is like outside the summer months and whether the projected rental income makes sense. A busy August does not pay the mortgage for the other 11 months of the year.

Local policy means the postcode can affect the sums in other ways too. An investor can get the demand right and have a perfectly sensible idea of what they can charge, but the costs attached to operating a holiday let locally can still influence the return they eventually make.

Planning is a good example of why the local position can make a difference. The proposed C5 planning class would create a separate planning category for short-term lets, giving local authorities greater control over their use in areas where restrictions are introduced. Among the owners who answered our question about how such a change could affect them, more than half said they would be very or somewhat likely to sell if a C5 planning class restricting the number of holiday lets were introduced in their area.

Does the investment have room to move?

Borrowing costs give us another way of looking at the same question. We asked owners what would happen if their mortgage interest rate rose by another percentage point over the following 12 months, and 40% said the property would remain viable, but their profits would fall, while another 27% said they would be close to breaking even.

If a one-percentage-point rise takes you close to breaking even, you probably want to know that before you buy the property, not afterwards. A broker can get beyond whether the mortgage works today and establish how much tolerance there is in the numbers if the cost of borrowing changes further down the line.

Gross yield will only answer part of that question. A property producing a decent return today is obviously a good starting point, but having some reserve in the finances gives the owner more options if their costs change later.

What could the market look like from here?

Pull all of that together, and you start to get a sense of some of the factors that will impact the direction of the holiday let market over the next few years. Investors may become choosier about what they buy and more hands-on once they own it, because tax treatment or local policy can make a perfectly good property work very differently financially.

Holiday let owners have already shown that many are prepared to adapt, and the continued appetite to buy suggests policy change has not removed the attraction of the market. A good holiday let still needs people who want to book it, but the owners doing well are showing there is another part to the equation: knowing what you can change when circumstances move around you can be every bit as useful as getting the original numbers right.