This analysis was originally published as LinkedIn article. You can read here:
As we begin to navigate 2023, it’s becoming increasingly apparent that the rental market is set for an overhaul. Changes to the law have already been mooted, while high interest rates are affecting buying power on both traditional and buy to let mortgages and an ongoing cost of living crisis is making waves. Rental demand is through the roof and, according to the government, residential property transactions remain lower than those in 2021 and early 2022. This creates a window of opportunity for property owners.
With all the changes due to take place and data from various high street lenders and estate agents pointing towards a difficult market, the traditional rental model can be more tedious for landlords. Major interest rate hikes on buy to let mortgages, the abolition of Section 21, further increases in capital gains tax, and new regulations mean that it’s no longer an appealing market. But, more than ever, rental accommodation is needed, and this is where the buy to flex model outshines the negatives.
Read on to find out more about the challenges facing businesses like yours, the solutions out there, and the difference buy to flex can make.
What new challenges are there?
We’ve identified three challenges that are set to change the rental landscape this year:
The Renters’ Reform Bill
The Renters’ Reform Bill, announced last year, has been introduced to give tenants “greater protection” in what the government have called a “major reset of power”. The removal of Section 21 evictions and its associated no-fault evictions, the end of blanket bans on families with children, and longer notice periods for rent increases are key highlights from the bill.
Removing no-fault evictions is the biggest news for landlords. Short and medium term lets will automatically move onto a periodic agreement, and with stronger legislation on when rent increases can be made, you may find rising mortgage payments catching up with your potential returns. This damning effect of yields has the potential to make your position as a property owner untenable, though the alternative would be selling swathes of homes in a near-recession.
The answer, in our opinion, is flexibility. Flexible letting is relatively new to the UK market, but it holds the answer for landlords that want increased yields and rapid business growth. By analysing the market, offering target tenancies at key times throughout the year, and tracking prices in line with market trends, this approach holds huge potential.
This idea is a win-win for landlords and tenants. It affords tenants the flexibility they crave, avoiding long-term contracts and allowing them to explore new areas. At the same time, it gives landlords variety in what they’re offering, with targeting for peak times readily available.
Updated Energy Efficiency Guidance
New guidance for property owners has also been introduced. Previously, homes needed to rate at E or above in their energy efficiency checks, but this is set to move to C or above. New homes have until 2025 to comply, and existing homes must be in line by 2028. This gives you a maximum of five years to update your entire portfolio if it’s made up of older homes, or even less time if you’re currently building units.
If you own a handful of properties, this may seem like a low-stakes challenge, but if you have dozens, scores, or hundreds of homes, can you make these improvements in time? Flexible letting is invariably linked to all-encompassing property operations services, and this compliance work is bread and butter for them. Choosing a flexible model alongside first-class property operations is a sure-fire way to have fully compliant homes that maximise yield.
This flexibility also means that you can have gaps between tenancies without jeopardising your rental yield. Increased returns at peak times means that you can afford to have short voids to complete upgrade work, rather than worrying about temporary accommodation for medium or long-term tenants.
As well as being a big win for you as a property owner, this is also a boon for future tenants. An energy-efficient home is high on tenants’ wishlists, as it’ll save them money on their heating bills and achieve green objectives.
Capital Gains Tax Allowance Changes
Thirdly, the Capital Gains Tax Allowance is set to change in 2023. Last year, property owners could make £12,300 per asset in tax-free profit, but this is going to drop by more than half to £6,000 this year. This is a big deal for property owners, and especially for those with larger portfolios. Whichever way you look at it, the bottom line is going to be affected - you’re losing half of your tax-free allowance on these profits!
So, you need to find a solution that increases your yield and makes up the shortfall. At Opago, we believe that buy to flex and flexible letting are the solutions you need. This flexibility gives you control, allowing you to garner a much higher yield by targeting popular months. It’s a tried and tested method, and it’s already had fantastic results for property owners in London.
What challenges will carry on in 2023?
Two of the biggest challenges that are facing property owners are high mortgage rates, especially for buy to let investors, and the cost of living. We’ve gone deeper into each topic below, detailing how buy to flex can be your friend in these trying times.
High Mortgage Rates
Kwasi Kwarteng’s mini budget in September 2022 is still affecting mortgage rates. While the number of buy-to-let mortgages has recently jumped from 988 to 1,769, the numbers still aren’t great. Average rates sit at 6%, and this is harming the bottom line throughout the city. However, the worst could still be to come, at least according to Deutsche Bank. With BTL mortgage rates led by the Bank of England’s base rate, a mooted increase from an already-high 4% isn’t good news for property owners and their yields.
Traditional methods aren’t enough to get property owners out of this problem - we need to think about something outside the box. In our opinion, flexible letting has the potential to be the saviour of 2023’s property market. The new-to-the-market approach aims to scale businesses at twice the speed with half the risk, improving yields by 30 to 40% in many cases. Flexibility is a big draw for tenants, and even in a market where scattergun applications are being sent in, having a unique selling point is a boon.
The Cost of Living
According to the consumer magazine Which, renters were more likely to miss a housing payment than mortgage holders (6.4% compared to 2.5%). As the cost of living squeeze continues, this is another factor that could worry property managers. As mentioned above, rising mortgage rates mean that property owners simply can’t afford for 6.4% of their tenants to miss payments.
Flexible renting is designed to work for tenants and for landlords, and the assurances it offers mean that missed payments shouldn’t be a worry. Clients are identified, agreed with, and served by professional teams, and this means you can take a hands-off approach while your business scales and your yield increases.
Who Are We?
With vast experience in the industry, cutting-edge technology, and a first-class workforce, Opago is perfectly positioned to provide property management solutions that allow companies to grow effectively. Our goal is to help you scale at twice the speed with half the risk - we take care of everything and allow you to focus on what matters most.
Opago’s industry-leading formula allows portfolios to be quickly transformed into flexi rentals. With typical returns increasing by between 30% and 40% when using this model, you can effectively double your yield with peace of mind.
So, What’s Next?
If you’re ready to learn more about flexible letting and everything that goes with it, get in touch with the Opago team. We have information on everything to do with this new offering here, and our experience in the marketplace means that we’re perfectly placed to help you.
This white paper has been written as general guidance only, and is based on the assumption that all relevant laws, regulations, and planning conditions have been met.