There can be little doubt that 2023 has been a year of transition for the UK property market, with noticeable and significant challenges confronting investors and intermediaries alike.
Most significantly, the Bank of England’s aggressive, inflation-battling rate hiking cycle elevated the base rate by 1.75 percentage points in the first eight months of the year, culminating in a 15-year high of 5.25 per cent.
As such, balancing rapidly rising mortgage repayments with rental income has been one of the prominent difficulties for landlords in the past 20 months or so.
This is corroborated by a recent Butterfield Mortgages’ survey of BTL landlords, which found nearly half (49 per cent) saw rising interest rates as a key challenge when managing their property investments this year.
Despite these hurdles however, there are indications that suggest a positive swing in the market.
At its past two meetings, with inflation falling below 5 per cent, the BoE voted to maintain the base rate at its current level, which has allowed the lending landscape to stabilise. Accordingly, BTL landlords appeared to gain a sense of optimism moving into 2024.
So, how have landlords navigated this turbulent BTL market?
No exodus
With mortgage costs rising, much of the media in the past few months has been consumed by predictions of a large departure of landlords, but these predictions appear to be somewhat overstated.
Indeed, Butterfield's survey portrays a remarkably resilient BTL sector, with 87 per cent of landlords either maintaining (53 per cent) or expanding (34 per cent) their property portfolios in the previous 12 months – the opposite of the mass exodus that many commentators have been heralding.
Research from The Mortgage Lender too has found almost three-quarters (74 per cent) of buy-to-let landlords feel confident about the performance of the property market over the next 12 months.
Furthermore, even though their mortgage repayments have risen significantly, more than half (51 per cent) of landlords decided not to increase the rent they charge in the past 12 months.
Largely this is because, as 62 per cent of landlords told us, they were uncomfortable hiking rent during the cost of living crisis, but the data also demonstrates that the resilience of bricks and mortar means many property investors can withstand and absorb unexpected economic uncertainties.
Nonetheless, some adaptations had to be made, with 37 per cent of landlords responding to the new high-interest rate environment by increasing rent.
Additionally, the survey found 45 per cent of landlords are enhancing their properties’ energy efficiency by investing in additions that have, in the past two years, increased their energy performance certificate rating.
This commitment to improving energy efficiency signifies a long-term dedication to the BTL market, even if the proposed EPC regulations were scrapped earlier this year.
Optimism prevails
Looking ahead to 2024, many landlords deem the choppy economic waters affecting property investments to be calming.
According to Butterfield’s research, for example, 47 per cent believe the BoE’s base rate will fall in 2024. This view is shared by many economists, who expect the base rate to start to fall by as early as June 2024.
Elsewhere, although house prices are expected to fall by another 1 per cent by the end of next year, BTL landlords are more optimistic, with 32 per cent foreseeing a rise in house prices in the next 12 months.
As a result, the majority of landlords are positive about the future performance – in terms of both capital growth and rental returns – of their investments, which is perhaps why a quarter of landlords aim to expand their BTL portfolio in the next 12 months.
Effective communication by lenders and brokers about how the economic environment is affecting a borrower's mortgage will be of the utmost value in 2024.This should give the market a significant boost. Indeed, the fact that 66 per cent of investors plan on maintaining and only 7 per cent plan on reducing the size of their portfolios demonstrates the confidence that landlords have in their investments as the investment landscape continues to stabilise.
Supporting this, recent forecasts from Chestertons show rental prices could rise by 5 per cent in 2024. Alongside further expected reductions in mortgage rates (and therefore repayments), this should translate into strong and improving rental yields next year.
Despite this encouraging outlook, some uncertainties do linger in the BTL sector.
With the next general election approaching, for example, 51 per cent of landlords told us they would delay any long-term investment decisions until the outcome has been decided.
Meanwhile, a majority (62 per cent) would like more consistency and clarity regarding government policies that affect landlords.
This is likely due to the unsettled landscape of BTL regulations in 2023, such as the decision to postpone the incoming changes to EPC regulations.
Supporting landlords
It is promising that a number of landlords maintain a positive outlook despite the challenges that the BTL market has faced in the past couple of years.
As the market rebounds and economic circumstances improve, however, it is crucial that landlords continue to be provided with the necessary support in order to manage their portfolios effectively and confidently next year.
Importantly, landlords will require flexibility, certainty, and excellent customer service from their brokers, so intermediaries must be able to leverage their expertise to secure financial products that best match their client’s needs in the months ahead.
Meanwhile, with many challenges still confronting investors and their portfolios, effective communication by lenders and brokers about how the economic environment is affecting – and could affect – a borrower's loan or mortgage will be of the utmost value in 2024.
To conclude, while landlords appear to be optimistic about their property investments, the future of the BTL sector remains the subject of significant speculation.
It is imperative, therefore, that lenders and brokers remain steadfast in supporting their clients’ investment plans as attention turns to the new year.
Alpa Bhakta is the chief executive of Butterfield Mortgages, a London-based prime property mortgage provider
