Five ways landlords can navigate the crisis

Buy-to-let investors are shifting strategies in response to soaring energy bills and the cost of living crisis.

The steepest drop in real incomes on record will hammer tenants’ ability to pay rent just as energy prices soar. Landlords face the extra challenge of grappling with the Government’s energy efficiency targets.

But buy-to-let is an effective way to hedge against inflation, and the red-hot sales market means there are opportunities for those who want to upgrade their portfolios. These are the best ways for landlords to manage their costs and boost their profits.

HEDGE AGAINST INFLATION Landlords are taking on more debt to hedge against inflation. This is because as inflation rises, investors will see the real value of their loans fall, especially if they lock in for a long time at a low rate.

Max Armstrong of North East Property Investment, which manages a portfolio of 400 properties, said 75pc of landlords in the North East were buying with debt, up from 50pc in December.

“Inflation is up and interest rates have not caught up yet, so there is a window for people to take advantage,” Mr Armstrong said. Landlords are betting that long-term house price growth will outstrip inflation.

SELL VICTORIAN TERRACES Landlords must grapple with energy issues on two fronts. First, rocketing utility bills are threatening tenants’ ability to pay rent. Second, plans to introduce a minimum band C Energy Performance Certificate for newly let rentals by 2025 (and for existing rentals by 2028) mean hefty upgrade bills are in the pipeline.

Adam Kingswood of Kingswood Residential Investment Management, which manages a portfolio of 450 properties across Nottinghamshire, said: “We are seeing landlords capitalising on the high house prices and getting rid of properties that will cost tens of thousands to upgrade.

“They plan to divest from inefficient homes now and reinvest in efficient ones later when house prices cool.”

As an example of landlords taking advantage of rising prices, Mr Kingswood said a dilapidated Victorian terrace had sold at auction for £120,000 despite a guide price of just £45,000, showing demand was still strong for these properties despite looming EPC targets.

Victorian terrace properties – once core buy-to-let housing stock – will be the hardest to upgrade as they do not have cavity walls. Many also have loft conversions that make insulation more difficult.

WAIT TO BUY WHEN HOUSE PRICE GROWTH COOLS Consider waiting to invest, advised Mr Kingswood. “A lot of our investors are sat waiting. I think the housing market will slow down with the cost of living crisis in the second half of this year.”

Demand will cool as buyers grapple with rising costs and mortgage rates. Sellers will also come to market as their bills become unaffordable.

“People who moved during the stamp duty holiday boom – and stretched themselves with a mortgage that they could afford then but can’t afford now – will need to take a back step, especially with the price of everything going up,” Mr Kingswood added.

‘Inflation is up but rates have not caught up. There’s a window of opportunity’ MAX ARMSTRONG

GET GUARANTEED RENT Tenants are facing a crunch on bills and landlords face a rise in rental arrears. Those who want to protect themselves can get high yields and guaranteed income by letting out properties to local councils.

“I am buying social housing that I can let out to local authorities with guaranteed rent on five- year or 10-year leases,” Mr Armstrong said. These typically cost around £100,000 in the North East and bring in yields of 8pc or 9pc – two percentage points above the regional average of 7pc.

Rent on these properties is underpinned by local government contracts and will not be affected by falling real incomes, he added.

INVEST IN ENERGY EFFICIENCY TO GET HIGHER RENTS Rising gas bills mean renting efficient property has become a priority for tenants. “Energy efficiency has only come to the forefront for tenants in the past year. Now they are asking what the running costs are,” Mr Kingswood said. “Very soon, I think energy efficient properties will attract premium rents.”

There is a window of opportunity to make upgrades now, before demand for works surges ahead of the planned EPC deadlines, Mr Kingswood added. “The cost in a few years will be astronomical.”