Navigating the holiday let market in the face of increased regulation



Paresh Raja is the founder and CEO of Market Financial Solutions (MFS) – a London-based bridging loan provider

Amid much talk of a ‘staycation boom’ throughout the pandemic, it is only natural that many property investors would consider the holiday let market as a means of complementing an existing buy-to-let (BTL) portfolio.

With 39% of Britons saying they would be more inclined to holiday in the UK post-pandemic, the ‘boom’ looks set to continue. Although it is worth pointing out that the domestic tourism sector was already in rude health before Covid-19 emerged; in 2019, 123 million Britons chose the UK as their holiday destination, compared to the 93 million who travelled abroad.

However, exasperation regarding the housing crisis and incidents of “over tourism” have forced many local councils to consider increasing regulation on holiday lets. It poses interesting questions, with prospective investors needing to balance the opportunities and challenges in this market.

The threat of regulation

The possibility of regulation in this sector has already been implemented in London, where landlords are required to have planning permission for properties in which guests stay for more than 90 nights a year. Marketing platforms such as Airbnb have built this into their technology, not allowing landlords to exceed the limit.

Similar action is being considered in other areas of the UK that have a high-level of holiday lets, both as a means of controlling the available residential homes and also keeping a squeeze on the number of incoming tourists.

For example, holiday lets in Edinburgh alone account for a third of all short-term lets in Scotland, forcing many locals out of the market and exasperating the capital’s housing crisis. Consequently, the local council is introducing legislation that will require landlords to apply for a license before they start letting their property, with many applications requiring planning permission for properties change of use. There are also plans in the pipeline for a tourist tax on Edinburgh’s visitors, which many holiday let owners have criticised as a “perfect storm of restrictions”.

Whatever one’s take on such regulation, these plans could make holiday let investments more difficult for investors, creating a period of disuse as landlords apply for the relevant documentation and affecting the properties initial profitability.

Further challenges in the holiday let market

Investors must consider other potential challenges, which differ slightly from a BTL property.

The initial cost of a holiday let, for example, is notable. If landlords choose to buy a holiday let in a popular tourist location, it is likely that they will be forced to pay an inflated price for the property in. On top of this, the renovation and furnishing a property may require in order to qualify for various tax benefits (more on this to come), can leave landlords with potentially substantial overlays. The upfront cost of a holiday let before income starts to roll in from holidaymakers is therefore a potential obstacle for many investors.

Another pitfall landlords should be aware of is that there is no guarantee of guests staying in their property. As such, it is unlikely that a property will be booked at full capacity all year round, even if regulation allowed it.

Holiday lets cannot, therefore, offer the same stability of a BTL property that may be let for one or two years at a time.

Consequently, finding the finance for a holiday let investment can be difficult, forcing landlords into the specialist loan market. Along with their brokers, landlords could consider financial backing from lenders who underwrite on a case-by-case basis, allowing for the complexities of the holiday let industry. But they should be aware that holiday let lenders often require larger down payments and only offer variable discount rates with high interest. These financial decisions should be considered alongside the property hunting itself.

The benefits of the holiday let market

The above risks painting a somewhat negative picture of the holiday market. That is not the purpose – while there are unique challenges with this type of property let, investors are right to consider the option, given the potential upsides.

As mentioned above, holiday lets can qualify for some rather attractive tax reliefs, that traditional BTLs are not entitled to. A Furnished Holiday Let (as defined by HMRC), can offset the cost of energy, gardening and general maintenance against their profits, as well as claiming Small Business Rate Relief. This allows landlords to avoid the cost of council tax or business rates on their property and reduces the overall tax bill substantially.

Given the nature of the stay, holiday lets also yield 30% more than their BTL counterparts on average and can aim for a return of 8% annually and an average profit target of 30% (rising to 50% on properties without mortgages and letting fees). The ‘staycation boom’ has increased holiday rental prices by 41%, reflecting the growth and profitability the market has to offer.

Another major perk of acquiring a holiday let during a pandemic is the prospect of an easy getaway. To qualify for their tax reliefs, holiday lets must be available for at least 210 days, allowing the landlord to use the property themselves for up to 22 weeks of the year. With the shift to online working, a holiday home in the country could be regarded by landlords as a worthy investment if they ever want to escape their usual place of residence.

In the months to come, it will be interesting to see how the holiday let market reacts to talk of increased regulation, and the general fluctuation in demand as Covid restrictions are peeled away. For many investors, the benefits of a holiday let could outweigh the potential pitfalls, but it is clear that thorough due diligence is essential.

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