Buy-to-let market divergence persists

The UK housing market has historically been a tale of two parts - London and the rest of the country. “That has absolutely been borne out,” said Belvoir (BLV) chief executive Dorian Gonsalves, citing rising demand in suburban locations and a flagging market in the capital in recent months. 

An increase in home working and a drive for more space has weighed on rents in the capital, while travel restrictions have also increased the supply of stock as more short-let properties have returned to the market. 

Belvoir, which earns 60 per cent of its revenue via lettings, said rents had risen everywhere except the capital. However, market town areas have outperformed cities across the country, according to Gonsalves. “Some of our offices have got stock levels in single digits,” he said. He cites one of the group’s franchisees in Devizes, Wiltshire, which at one point had only one property for rent on its books. 

Earning 93 per cent of revenue from lettings and sales outside the M25 insulated Belvoir from weakness in London last year. Lettings management service fees from franchisees bounced back from the spring lockdown, resulting in 2 per cent growth over the year, with the booming sales market boosting revenue up 13 per cent for the group. 

An improved cash position and 14 per cent earnings growth led to a further boost to the dividend, which was covered more than twice over by the EPS. 

Split rental market

Broader industry data reinforces the divergent fortunes within the lettings market. Rents in inner London fell by an annual 17 per cent in March, according to Hamptons International’s lettings index, against a 2.6 per cent rise in outer London. 

In contrast, a lack of supply has lifted rents in regions across the rest of the country, with the south west, south east and Wales leading the growth. The shortage of rental homes on the market has meant that so far this year half of landlords letting a property were able to secure a higher rent than they had previously achieved, according to Hamptons.

Gonsalves said that demand in the capital had not yet increased, but that a change in the government’s ‘work from home’ message later this year could herald an improvement. Indeed, the seeds of recovery could be in place in London, viewings were up by almost two-thirds in March, according to the estate agency. However, that is not only set against a relatively weak comparative, but also a sharp rise in supply, which may limit any rebound in rents. 

Buy-to-let investors have faced a growing taxation and administrative burden in recent years, which has made operating in the sector less attractive for those with smaller portfolios. However, the ban on evictions and coronavirus lockdowns limited the number of landlords that sold up last year, which fell to a seven-year low, according to Hamptons International.  

Given mortgage interest relief was fully phased out during the 2020/21 tax year, most landlords wanting to leave the sector may have already done so. Yet proposed changes to the capital gains tax regime - which the government refrained from enacting last month - could prompt a further exodus among landlords who would face a higher tax bill on sales proceeds. 

Rents could remain subdued this year as government support schemes unwind and the rate of unemployment rises, heightening affordability constraints that will prevent rents from rising too much. Areas where there is more headroom for growth, due to more affordable rents, could prove more resilient. 

Bad debts expected to rise

Specialist buy-to-let mortgage lender OSB (OSB) increased its loan loss ratio to 0.38 per cent of gross loans last year, from 0.13 per cent in 2019. That was despite the proportion of loans of more than three months in arrears holding steady at 0.9 per cent, although it did include a £20m provision in relation to potential fraudulent activity by a third party on a secured funding line provided by the group. 

Chief executive Andy Golding said that while OSB had experienced a high level of mortgage payment holiday applications, the vast majority of borrowers had restarted payments and there had been no noticeable increase in the arrears profile. Active deferrals were equivalent to only 1.3 per cent of the loan book value at the end of December. “However, there are still a fair few elements of stimulus in the market,” he added. 

Arrears rates for buy-to-let and residential mortgages had been broadly equal, he said. “Our landlords are seeing decent pricing and decent occupiers and quite a lot of churn in people moving out and moving in,” said Golding.  

In the wake of the first lockdown, the lender reduced the maximum loan-to-value ratio available on its products to 75 per cent for buy-to-let and residential mortgages, predominantly due to a lower credit risk appetite. It has no plans to increase that at present, Golding said. 

“I think the government has recognised clearly that lenders are demonstrating a greater degree of conservatism and that's why they’re introducing things like a mortgage guarantee scheme,” said Golding. The scheme will see lenders provide government-backed residential mortgages that allow borrowers to purchase a home with just a 5 per cent deposit. 

The gross buy-to-let loan book rose 4 per cent, despite the group temporarily suspending new lending during the first lockdown and returning during the second half of the year. Management has guided towards underlying net loan book growth of around 10 per cent this year and a recovery in the net interest margin to the 2019 level of 2.66 per cent. Analysts at Investec forecast that will feed through to EPS of 60p this year, rising to 73.2p in 2022. 

Despite the risks facing the lettings market, chiefly that a rise in unemployment sparks a rise in rent defaults, shares with a bias towards the rental market have performed extremely well over the past 12 months. Belvoir’s market value has almost doubled during that period – helped by resurgent home sales – and its shares trade at 12 times forward earnings, above a five-year average. OSB has performed even better and its shares now trade at an equivalent 21 per cent premium to forecast net tangible assets at the end of December this year. That leaves shares in both groups looking fairly valued. For exposure to the private rental market without the administrative headache, PRS Reit (PRSR) still looks good value.  

Last IC view: Hold, 306.4p, 27 Aug 2020

Last IC view: Hold, 116p, 4 Sep 2019