Property as an Investment: Inc Impact of COVID-19 - UK - April 2020

OVERVIEW
What you need to know
Key issues covered in this Report
Products covered in this Report
EXECUTIVE SUMMARY
The market
Nearly 5 million UK adults own a second home or investment property
More than a third of privately rented dwellings are mortgaged buy-to-let
COVID-19 will lead to a sharp decline in lending in 2020 but will then stabilise
Figure 1: Forecast of new buy-to-let mortgage advances (adjusted) – Fan chart, 2014-24
Market recovery has been driven mainly by strong remortgage activity
2019 growth in house-purchase activity will not be repeated in 2020
Slowdown in remortgage activity was expected prior to COVID-19
Impact of COVID-19 on Property Investment Market
Figure 2: Expected impact of COVID-19 on property as an investment, short, medium and long term, 10 May 2020
Companies and brands
LBG is the largest buy-to-let lender
Figure 3: Largest buy-to-let lenders, by amounts outstanding, 2018-19
Nationwide gains on market leader
Different lenders adopt different strategies amid slowdown in growth
Coronavirus restricts availability, reversing the recent trend
The consumer
9% of UK adults own a rental property or second home
26% of property investors own multiple properties
Figure 4: Size of property portfolio, February 2020
Property investors expecting to sell/exit market cancel out those expecting to make further purchases
Figure 5: Property-related plans over the next two years, February 2020
A small proportion expect to remortgage or take out a new loan or further advance
9% are struggling to make a profit and 13% have considered selling up
Figure 6: Difficulties experienced by property investors, February 2020
5% have set up a limited company
There’s little appetite to become a rental property owner in the short term
What we think
THE IMPACT OF COVID-19 ON PROPERTY INVESTMENT
 SHORT, MEDIUM AND LONG-TERM IMPACT ON THE INDUSTRY
Figure 7: Expected impact of COVID-19 on property as an investment, short, medium and long term,10 May 2020
 OPPORTUNITIES AND THREATS
Short-term upheaval but long-term growth was already slowing
Crisis has complex implications for supply and demand
Remortgaging activity will hold up better than purchases
Rates cut will ease some pressure….
…but rising arrears will still have an impact
Strategic shifts will create opportunities for specialists
Holiday lets will be badly hit in the short term but medium term is more positive
Opportunities for new advice channels
 IMPACT ON THE MARKET
Sharp drop in buy-to-let lending in 2020
Figure 8: Forecast of new buy-to-let mortgage advances (adjusted) – Fan chart, 2014-24
 SHIFTS IN CONSUMER BEHAVIOUR
Household finances held up in April…
Figure 9: The financial well-being index, January 2016-April 2020
…but confidence in the year ahead dropped sharply
Figure 10: The financial confidence index, January 2016-April 2020
Impact on key consumer segments
Potential property investors will be cautious about new commitments
Prospective second home purchasers could be more resilient
Property investors who are reliant on rental income face cashflow problems
Renters more exposed to the crisis and likely to put off major plans
 HOW A COVID-19 RECESSION WILL RESHAPE THE MARKET
Rising unemployment hit lending and increase arrears
A different type of recession for the buy-to-let market
Further government intervention likely
 COVID-19: MARKET CONTEXT
ISSUES AND INSIGHTS
Rent and mortgage arrears to rise as a result of the coronavirus
The facts
The implications
Searching for new growth opportunities 
The facts
The implications
THE MARKET – WHAT YOU NEED TO KNOW
There are around 2 million buy-to-let loans outstanding
Remortgage activity accounts for over 70% of new business
COVID-19 will hit house purchase sector in 2020
Slowdown in remortgage activity likely 
Holiday rental sector to be hit hard by social distancing measures 
Tax and rule changes reduce appeal of investing in bricks and mortar
MARKET SIZE AND FORECAST
Buy-to-let mortgage market matures and growth-rate slows
Figure 11: Number of buy-to-let mortgages outstanding, 2010-19
New lending grew by 9% in 2019
Figure 12: Volume and value of new buy-to-let lending (house purchase loans and remortgages only), 2015-19
COVID-19 forecast – lending to fall sharply in 2020 before recovering in 2021
Figure 13: Forecast of new buy-to-let mortgage advances (adjusted) – Fan chart, 2014-24
Figure 14: Forecast of new buy-to-let mortgage business (adjusted), 2014-24
Pre-COVID 19 forecast – market expected to stabilise 
Figure 15: Forecast of new buy-to-let mortgage advances (pre-COVID-19) – Fan chart, 2014-24
Figure 16: Forecast of new buy-to-let mortgage business (pre-COVID-19), 2014-24
Forecast methodology
MARKET SEGMENTATION
House-purchase sector achieves growth in 2019…
Figure 17: New buy-to-let loans for house purchase and remortgages, by volume and value, 2015-19
…but is unlikely to be repeated in 2020
MARKET DRIVERS
Spreads on buy-to-let lending narrowed in Q4 2019…
Figure 18: Spreads on buy-to-let lending (quarterly basis), Q1 2014-Q4 2020
…as market competition and product availability continued to increase 
Figure 19: Quoted average monthly buy-to-let mortgage rates at 75% LTV, February 2012-February 2020
Property investors experience a fall in yields
Strong tenant demand for private rented property…
…while there are signs of a contraction in supply
Only 0.2% of buy-to-let loans were in arrears in Q4 2019…
…but arrears are likely to rise in 2020 
Different ways of investing in bricks and mortar
Domestic holiday rental sector set for a sharp drop in demand 
Figure 20: Number of domestic holiday rentals, 2014-19
REGULATORY AND LEGISLATIVE CHANGES
Property investors face an increased regulatory and tax burden
Figure 21: Summary of tax and regulatory changes affecting the buy-to-let market, 2016 onwards
Figure 22: Stamp duty land tax rates for residential and additional properties, from April 2016
Figure 23: Phased withdrawal of mortgage interest tax relief available to landlords, 2017/18-2020/21
COMPANIES AND BRANDS – WHAT YOU NEED TO KNOW
LBG is the largest buy-to-let lender…
…although second-largest, Nationwide continues to gain on the market leader
Different lenders use different strategies
The recent rise in competition is put in reverse by COVID-19
MARKET SHARE
LBG continues to see gradual erosion of its share
Figure 24: Largest buy-to-let lenders by amounts outstanding, 2018-19
Nationwide narrows the gap on LBG
Figure 25: Largest buy-to-let lenders by gross new lending, 2017-18
Barclays and Santander grow buy-to-let balances strongly in 2019
OneSavings Bank grows share following Charter Court merger
Coventry Building Society
RBS Group’ new buy-to-let advances fell by more than a third in 2018
Paragon’s buy-to-let business stable
COMPETITIVE STRATEGIES AND LAUNCH ACTIVITY
More newcomers have emerged over the past year
Specialist lenders are more likely to cater for landlords with complex or large portfolios
Coronavirus pandemic causes lenders to change strategy
Buy-to-let market had become more competitive until COVID-19 raised fears of a housing slump
Landbay withdraws from peer-to-peer buy-to-let market
More lenders see potential in the burgeoning holiday let market
THE CONSUMER – WHAT YOU NEED TO KNOW
9% of UK adults own a rental property or second home
Property investors expecting to sell/exit market offset those expecting to make further purchase 
Remortgage activity likely to be subdued over the next two years
A significant minority were finding things tough before COVID-19
Few adults plan to enter rental property market in the next two years
OWNERSHIP OF INVESTMENT PROPERTY AND SECOND HOMES
One in 11 adults in the UK owns an investment or second property
Figure 26: Ownership of investment property or second home, February 2020
Residential landlords have a slightly younger age profile than second-home owners
The propensity to own a second property rises with household income
Figure 27: Proportion of adults who own a second home or rental property, by age, gross annual household income and housing situation, February 2020
Around one in seven second property owners live in the rented sector
7% of property investors own four or more properties
Figure 28: Size of property portfolio, February 2020
Figure 29: Size of property portfolio, by UK residential landlords versus total sample, February 2020
PROPERTY INVESTORS’ SHORT-TERM PLANS 
Twice as many property investors plan to buy as sell property within the next two years…
…but the outlook is much less positive if all those who intend to exit the market are taken into account
Figure 30: Property-related plans over the next two years, February 2020
Remortgage activity could fall over the next two years
4% are planning major renovations
Just 2% expect to renew or apply for an HMO licence
DIFFICULTIES EXPERIENCED AND POTENTIAL IMPLICATIONS
One in 11 property investors are struggling to yield a decent profit…
Figure 31: Method of property management, use of incorporation and difficulties experienced by property investors, February 2020
…but this could increase in the months ahead
13% have considered selling up as a result of regulatory and tax changes
Most property investors use a managing agent
PROSPECTIVE INVESTORS AND SECOND HOME OWNERS
Just 1% of non-property investors expect to enter the market within the next two years…
Figure 32: Potential second home owners, buy-to-let investors and property developers, February 2020
…while 2% are planning to buy a second/holiday home
APPENDIX – DATA SOURCES AND ABBREVIATIONS 
Abbreviations
Consumer research methodology
APPENDIX – MARKET SIZE AND FORECAST
Original (non-adjusted) total market forecast
Figure 33: Forecast of new buy-to-let mortgage advances (non-adjusted) – Fan chart, 2014-24
Figure 34: Forecast of buy-to-let advances (non-adjusted) – Best and worst case scenarios, 2019-24
Original (non-adjusted) house-purchase sector forecast
Figure 35: Forecast of new buy-to-let house-purchase advances (non-adjusted) – Fan chart, 2014-24
Original (non-adjusted) remortgage sector forecast
Figure 36: Forecast of buy-to-let remortgage advances (non-adjusted) – Fan chart, 2014-24
Forecast methodology