Why investment in buy-to-let still holds appeal

Buy-to-let investment | Supplied

The latest Buy-to-Let Mortgage Market Update, published this month by UK Finance, which represents firms in banking and financial services, revealed that there were 52,648 new buy-to-let loans advanced in the UK in the fourth quarter of last year, worth £9.6 billion. This was up 39.2 per cent by number (47.2 per cent by value) compared with the same period in 2023.

Focusing on Scotland, specialist property lender Together told Scotsman Money that between 2019 and the end of 2024, its BTL lending north of the Border increased by 50 per cent in volume and 177 per cent in value.

Together added that post-Covid figures also look good with lending volumes increasing by 110 per cent between 2021 and the end of 2024, and values seeing a130 per cent growth.

While Together’s Scottish BTL lending dipped by2 per cent in value to£49.5 million between 2023 and 2024, it increased by 16 per cent in volume.

Meanwhile, its average loan sizes in Scotland fell by 16 per cent to £149,871 last year. According to Together, a trend of an increased number of lower value loans suggests savvy Scottish investors were targeting less expensive properties than they had previously.

But Together added that legislation and regulation could also explain the fall in total lending value. Changes included an increase from 4 per cent to 6 per cent in the Additional Dwelling Supplement (ADS), an added tax on top of the Land and Building Transaction Tax (LBTT) introduced at the end of 2022. The Scottish Government again increased this tax on rental and second homes to 8 per cent with immediate effect in its Budget last December, in a bid to encourage more first-time buyers into the housing market.

Critics have claimed increased tax will make it more difficult and expensive for tenants remaining in the rental sector – who are likely to have to foot the bill through higher rents – as well as landlords.

Together has called on the Scottish and UK governments to look into reforming their tax policies when it comes to landlords.

lender also recently surveyed 1,000 BTL investors to uncover which UK city they think holds the most opportunity for investment. It found that 8 per cent of respondents believe Edinburgh has the greatest potential.

Steven Clark | Supplied

Steven Clark, corporate relationship director at Together, says: “Edinburgh has always been resilient. In terms of property prices, it’s a bit of a safe haven. There’s continued investment into Edinburgh. Glasgow and across the Central Belt have also continued to do well.”He explains that mortgage availability is keeping the property market fairly strong, coupled with a shortage of good quality housing.

Drilling down into the Together’s survey findings in Scotland, in the next12 months some 13 per cent of landlords say they plan to buy more properties. Meanwhile, 15 per cent of landlords in Scotland will be reducing loan sizes and/or increasing their deposit size to reduce borrowing costs, and15 per cent say they will be refinancing their properties to support their other business objectives.

However, due to cost and wider market pressures, 17 per cent of landlords in Scotland will be exiting the market altogether and15 per cent say they will be disposing of some investments

.Steven says: “Over the last few years, hurdles have been put in the way of small and medium-sized landlords who were, in effect, being squeezed out. Things like legislative changes and additional costs have meant that rather than BTL providing an additional source of income, it was actually costing them, so they started to dispose of properties.”

As a result, he says, many properties are being pushed into the corporate landlord space. Steven adds that in contrast to landlords with smaller portfolios, corporate landlords will not have a personal relationship with tenants. He believes there is a misunderstanding of who landlords are, pointing out that many have small portfolios and should get more legislative protection.

In Together’s survey, landlords have identified opportunities in the coming months, with 30 per cent citing investment in eco/energy efficient homes – or houses with the potential to be made more energy efficient.

Some 20 per cent referred to potential in such areas as social housing, and 20 per cent recognised opportunities in the private rental sector.

Looking ahead, Steven says he will be surprised if there was a new influx of new landlords, but he expects to see people looking at different types of property ownership. For example, to meet demand for accommodation from students or social housing.

He explains that many landlords choose to take a loan from specialist firm Together rather than a high street bank because of its flexible and fast approach.

He says: “You can’t over-emphasise how important it is to have somebody working for you. From the outset we’re trying to find a solution for people. It’s about that old school way of lending and building relationships.”

CASE STUDY Garry Wallace of Walmac Property, Dundee

Garry Wallace | Supplied

Garry Wallace is a former mechanic who has built up a property portfolio totalling 40 sites in Scotland worth £3.5 million since deciding to take up property investment full-time. He is now one of a quiet army of investors who track down empty properties, turning them into good-quality homes for rent.

Garry uses short-term bridging finance from Together, usually secured against other properties, to buy in the Dundee, area as well as Fife and Glasgow.

Once he’s renovated the properties, he refinances them using a specialist mortgage broker to source longer-term BTL mortgages at a lower interest rate.

Garry recalls: “I bought my first flat when I was 21 because I wanted to get some of the savings I had working for me. It was only when my son came along in 2019 that we bought another site. Then we did some property training and got a coach. That soon catapulted us on a journey where we used private investors to fund deals and later started using bridging finance from Together to complete a lot more deals.”

One method Garry, co-owner of Walmac Property, used to expand his BTL portfolio was securing finance against properties he owns that are “unencumbered”, meaning they have no mortgage against them.

He says: “I always keep unencumbered properties in my portfolio, so we can use companies like Together to provide a loan secured against them releasing funds to buy the next flat or house.

“In Dundee, we know the area, we know the sales prices and end values of property and we know how much it will cost us to do the refurbishments, therefore understanding what kind of profit we can make.”

For example, Garry picked up a flat in the city for £39,000 and spent £22,000 on refurbishment costs. The renovation took about eight weeks and afterwards, the flat was valued at £80,000.

He says: “The flat will rent for £695 per month, which is really good, because it has been refurbished to a high spec. The average going rate is probably £525 to £650 for the area so the finish needs to be higher quality to command a higher rent.”

Garry says there is a huge number of similar homes standing empty in Scotland and across the UK, with about 1,200 in Dundee alone.

Despite the increased tax and legislation, Garry remains committed to investing in BTL. He says: “Being a landlord has become more difficult and we have got to be on the ball with changing legislation.

“A lot of the amateur landlords don’t want to be in the game anymore. That will leave more space for professional landlords like us to build our business.”