The end of remaining Covid-19 restrictions in the UK has further aided a revival in a recently muted buy-to-let (BTL) sector.

Alongside changes to taxation and legislation forcing landlords to reassess their business models in recent years, life under Covid-19 restrictions created further barriers for the market. The easing of these constraints has seen firms respond by expanding their BTL ranges, updating existing products and keeping rates competitive – creating a resurgence in the market.

‘Race for Space’ reversal

Following a quieter end to 2021, BTL activity hit the ground running during the first months of 2022, with uncertainty easing, and enquiries picking up. Following the widely discussed ‘urban exodus’, which reportedly saw large numbers of people leaving towns and cities in a ‘race for space’, this uptick in market activity finds more investors looking to move back into urban areas.

As demand in cities rebounds, so too does the investor demand for specialist asset classes such as houses in multiple occupation (HMOs). At the peak of the pandemic, investor and tenant interest in HMO properties waned, as a result of the risks associated with co-living arrangements – but this move back to living in cities and towns, with workers returning to offices, supports the HMO model, and is likely to continue to drive demand throughout the year and beyond.

Impact of stamp duty holiday

The stamp duty holiday introduced in 2020 went a long way in helping to keep the market moving during the pandemic, and even though the holiday is now over, low rates available have helped keep BTL investors interested. Given the impact Covid-19 had on people’s spending habits, a number of more fortunate people have seen their savings levels increase and are now looking for places to invest.

With equity values currently volatile, property remains an attractive option and has led to first-time buyers and first-time landlords being particularly active. Home buyers going after purchases they had postponed over the past two years is likely to have contributed to overall activity within the property sector. Although property prices remain relatively high, the end of the stamp duty holiday has reduced demand for some sectors, which has caused prices to settle in some areas. This offers landlords the opportunity to find good deals – if they know where to look.

Shifting standards

The UK BTL sector has also seen strong demand from foreign investors, with particular interest from regions such as the Far East and Europe. At Octopus, we serve both first time and returning foreign national investors, and this year we have seen consistent interest in new build properties in city locations such as Manchester, Leeds and Birmingham. Many foreign investors are looking for low maintenance investment properties, with a focus on capital growth and diversifying their portfolios, as well as yield.

Thinking about the portfolios of both domestic and foreign investors, the government’s Minimum Energy Performance of Buildings (No.2) Bill currently making its way through parliament is likely to lead to some shifts in future. The government’s proposal is that all newly rented properties will need to meet a compulsory energy performance certificate (EPC) rating of band C from 2025. Savvy investors will consider this potential change in regulation when thinking about potential assets and what the cost implications might be to bring them up to scratch with any new standards that are brought in.

Cost of living crisis

Considering the current energy challenges and the rise in demand for HMO properties, another factor for BTL landlords to consider is the impact of rising living costs on tenants. HMO properties usually come with an all-inclusive rate, covering rent and utility bills in one payment. Landlords will need to factor in the rising cost of energy, especially given that the typical HMO tenants are students or recent graduates whose income will not be increasing at the same rate. Ensuring there is enough of a buffer to meet mortgage payments, whilst also having confidence that tenants can cover the all-inclusive rate, will be key to ensuring that yields aren’t negatively impacted.

With an upward trend in investment from both foreign nationals and domestic investors, a return to special asset classes such as HMOs, and the further easing of Covid-19 restrictions, the BTL market is back in full force. There are some challenges on the horizon to consider, including the impact of changes to energy performance regulations, but increased demand across the sector provides both brokers and borrowers with the chance to take advantage of some strong growth opportunities.

Steve Matthews is head of residential lending at Octopus Real Estate