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The rise (and rise) of UK holiday lets

UK holiday lets are proving an increasingly popular investment strategy for professional landlords and property investors.


In April 2023, The Times reported that landlords and investors were turning to holiday lets as an alternative to traditional long term rental investments, and that during 2022, some 2,426 holiday let companies were incorporated, compared with a mere 592 in 2016. Enquiries from new holiday let owners looking to list their holiday lets have increased 173% compared to 2019 (source: Sykes Cottages).


What are the factors driving this trend?

 

1. The impact of rising interest rates

UK Property
The Cotswolds, England. A four bedroom holiday let in this area earned an average of £36,000 during 2022 (Source: Sykes Cottages).

The Bank of England's record-setting fourteen consecutive base interest rate rises, from 0.1% in December 2021 to 5.25% in September 2023, have squeezed margins and made it more challenging for those with leveraged property investments to make positive returns. Between March 2009 and May 2022, the Bank's base rate remained below 1% - pumping cheap leverage into the property market, pushing up house prices and

supercharging returns on investment when compared with keeping those savings in cash.


During that period, against a backdrop of low interest, a 5% gross yield from a traditional long-term let, could be considered a solid return, particularly when coupled with capital appreciation in the same period; between March 2009 and May 2022, the average UK house price increased from £154,452 to £281,282 in May 2022, an increase of c. 82.11% (source: ONS).


With the Bank of England base rate now expected to increase for a fifteenth consecutive time to 5.5% during September 2023, the delta between revenue and cost of borrowing has shrunk significantly, eating into cash flow and resulting in landlords increasing rents to bridge the gap. Recent analysis from Savills suggests that in Q1 2023, the average net profit for a 40% taxpayer investing in a traditional buy-to-let with a 70% loan-to-value mortgage had fallen below 4% of the gross rent received.

graph showing falling profits for UK landlords
Source: Savills Research.

As well as increasing rents (annual private rental prices increased 5.1% in England, 5.8% in Wales and 5.5% in Scotland in the 12 months to June 2023 (source: ONS)), some landlords have turned to holiday lets as a potential solution. During peak season, a holiday let can generate more income in a week than the same property would generate in a month under an assured shorthold tenancy, as guests expect to pay a premium for a nightly, or weekly stay. UK holiday let management firm Sykes Cottages has reported that the average annual turnover of their clients' UK holiday lets was £24,000 in 2022, with larger properties generating an average income above £50,000 per year. Such income would be difficult if not impossible to achieve through a long-term let of the same property, given holiday lets are often located in more rural areas, away from centres of employment that generate high rental demand. Dependent on several factors, gross yields of 8% to 10% or higher are achievable, generating positive cash flow after deducting mortgage costs from revenue.

graph of average annual turnover of UK holiday lets
Source: Sykes Cottages Holiday Letting Outlook Report, March 2023.

2. Changes to tax legislation


Section 24 of the Finance Act 2015 removed the ability of landlords who held property in their own name - as opposed to through a limited company - to deduct the full cost of mortgage interest payments from their rental income and replaced it with a simple 20% tax credit for mortgage interest. The 20% tax credit partially mitigated the increased tax burden on landlords, but was not sufficient to fully offset the impact for many, particularly those with higher levels of mortgage debt and those within the higher rate tax brackets. This resulted in a net increase in the overall tax liability for many landlords, contributed to the perception of a heightened tax burden on property investors and reduced profitability of buy-to-let portfolios.


Furnished holiday lets, however, constitute an exception to Section 24, as they are effectively treated by HMRC as a trading business. As such, mortgage interest payments related to a property in use as a furnished holiday let can still be fully offset against the tax payable, even if the property is held in the landlord's own name. This exemption has made holiday lets a more tax-efficient investment option, enticing landlords to diversify their portfolios or switch to this type of property. To qualify (among other matters) the property must typically be available for short-term holiday lettings for at least 210 days per year and actually let for at least 105 of those days.


Holiday let UK investment
Bamburgh Castle, Northumberland. An increasingly popular tourist destination, tourism is worth an estimated £1 billion a year to Northumberland's economy, and 15% of the county's jobs are tied to the industry (Source: Visit Northumberland).

3. The increasing popularity of the staycation


Contemporaneously, a rise in demand for staycations within the UK has constituted a boon for holiday let investors and resulted in increased revenues.


Despite the lifting of all pandemic related international travel restrictions, the holiday-let market remains highly active, with increasing numbers choosing to holiday in the UK. Sykes reports that Bookings for their UK holiday lets were up 48% in 2022 when compared with 2019, and bookings for 2023 up a further 9% versus the same point in 2022.


From the owner side, 55% of surveyed holiday let owners have started letting within the past three years, and 84% reported that bookings in 2023 remained "stronger than ever, and expect this trend to continue over the next five years". Notably, 24% of those surveyed formerly ran their property as a long-term let but decided to switch to holiday letting. Airbnb has reported that over a third of their UK hosts use income from Airbnb to help with the rising living costs, which have increased significantly across the UK since the start of 2022 (source: https://www.airbnb.co.uk/d/ukcallforevidence).


Several factors have driven increasing demand for staycations, including:

  1. COVID-19: The significant restrictions imposed on international travel during the pandemic, as well as increased uncertainty posed by frequent changes in quarantine rules and health and safety concerns associated with air travel led many people to favour of UK holidays. The increase in domestic vacations introduced UK residents to new areas of the UK, and eradicated some of the stigma that some had previously attached to UK holidays.

  2. Cost considerations: Staycations eliminate the need for expensive international flights, foreign currency exchange and visa fees, making them a more cost-effective option, particularly for families. This is of particular pertinence in the context of the UK's ongoing 'cost of living' crisis, fuelled partly by high inflation and increasing mortgage costs.

  3. Vacation rental platforms: The rise of online vacation rental platforms, such as Airbnb and Vrbo, has made it easier for staycationers to scour different areas in the UK for, and book, holiday let properties quickly and efficiently. Such platforms have also made it easier for property owners to market their properties and manage bookings efficiently.

  4. Rise in remote work: The rise of remote working has made it possible for some individuals to work from anywhere with an internet connection. This increased flexibility has allowed people to extend their vacations or work while traveling within the UK.

  5. Personalised experiences: There has been a recent trend toward tourists seeking unique and personalised experiences when they travel. Staying in a holiday let can offer a more distinctive and authentic experience compared to a hotel.

  6. Environmental concerns: Some travellers have become increasingly environmentally conscious and opted for staycations in order to reduce their carbon footprint.

And the trend is somewhat self-perpetuating - the above factors have in themselves increased the number and quality of holiday lets, meaning there are now a larger number of high quality options for UK residents and international tourists visiting the UK than ever before, increasing staycation popularity further.


UK holiday let investment
Cornwall, England, where a two bedroom holiday let earned an average of £23,000 during 2022 (Source: Sykes Cottages).

4. Greater flexibility and the impact of the Renters (Reform) Bill


The proposed Renters (Reform) Bill, currently in the early stages of its passage through the Commons, purports to dispose of the Assured Shorthold Tenancy (AST), meaning it will no longer be possible to create fixed term tenancies. Only monthly periodic assured tenancies will be possible, and tenants will therefore no longer be tied into fixed term contracts. Importantly, the abolition of ASTs means that Section 21 Notices - used by landlords to implement a “no fault” eviction (typically at the end of an AST), will also be removed.


In place of the Section 21 notice, landlords will only be able to terminate a tenancy by establishing, among other grounds, that the landlord (or a family member) intends to occupy, sell or redevelop the property, or that the rent is unpaid for at least 1 day on at least 3 occasions in a 3 year period. While the abolition of Section 21 Notices is counteracted by widened and additional grounds for landlord possession, it is possible that it may become more costly and time-consuming to regain possession, particularly if the ground is disputed by the tenant.


This stands in stark contrast to holiday lets, which are typically let to a single occupier for no longer than one or two weeks. This has several advantages. First, any 'problem' tenants are required to vacate the property in short order (while the extent of such problems, by the nature of the short stay itself, are likely to be limited). Secondly, the property is typically professionally cleaned thoroughly very regularly. And thirdly, the property is available for use and occupation by the owner themselves. Given holiday lets are typically in pleasant locations by the sea, in the countryside or within cities of significant cultural or historical interest, the latter point poses a considerable pull factor for investors. The short-term nature of the commitment for the holiday let owner also allows them to reassess their overall rental strategy (e.g. pricing) or make changes to the property (e.g. upkeep and renovations) more frequently compared to a long-term lease.

 

Conclusion


Several factors - both 'push' and 'pull' by nature - are resulting in UK holiday lets remaining an area of increasing focus for investors and professional landlords.


If you are looking to invest in property, a holiday let can prove to be a lucrative business. It is crucial, however, that you undertake sufficient due diligence to understand the potential revenues and costs, as well as the advantages and challenges of the industry, to ensure you are best positioned to profit from your investment. Potential investors should also seek expert tax advice in connection with any investment.


Oxstone has significant experience in sourcing, analysing and managing holiday let opportunities in the UK. We assist our clients by locating suitable properties, providing cutting edge, data-driven financial information and industry specific guidance to assist them in making informed and successful investments.


Oxstone also has a deep networks of connections with all relevant industry professionals, including tax advisors, mortgage brokers, accountants, solicitors, surveyors and property management companies.


For more information click 'Get Started', above.




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