This has been an interesting week for government, after a turbulent nine months since the original Brexit date.  Since the vote to leave we have seen various ups and downs in the property market, but the last few months have seen a definite shift in the way surveyors and lenders are looking at the market.  What they expect to happen over the coming months and years is having an effect on lending decisions.

We can split this into three categories; how surveyors are viewing properties, how lenders are interpreting this, and how their own view on risk is changing.

How are surveyors changing their valuations?

The biggest issue we are finding, surprisingly, is the commentary around demand for property.  This can create a number of issues.  The demand for resale is a major consideration for a lender, as they will always be concerned with how quickly they can dispose of the asset if they ever have to repossess it. Pre-Brexit we would expect to see 3-6 months as a standard sale period, but we are increasingly seeing this move to 6-9 months.  This means that the standard ‘restricted sale period’ of 6 months may have a lower value, and the lender may use this rather than the open market value.  We have seen a couple of properties with a likely resale period of over 12 months and this falls outside of many lender’s criteria.

As investors, you need to be mindful of this when looking for property.  What affect has the uncertainty had on your area, as this is very location dependant? There are plenty of resources available to check the demand, so use this to do as much research as you can and give this to your surveyor.

The other part to demand is for lettings, so how likely is it that you will be able to let your property quickly once you have bought it.  We used to be able to value a vacant property on the assumption that demand would be sufficient and the surveyor would use market rent.  This is changing, mainly for commercial property, as surveyors become more cautious and letting retail units particularly becomes more challenging.  Businesses on the high street are finding life tough with current business rates and an increasing preference for online shopping.  We are seeing a trend towards more services in local areas, but there are often planning restrictions.

We need to be mindful of local conditions when thinking about when to value a property, and this again comes down to research and due diligence.  We have one opportunity for a valuation with each lender, it is so important to get it right first time.

How are lenders changing their view on this?

Lenders will always look at a case on a worst-case scenario basis – their main concern is risk!  When you are using commercial or specialist lending they are far more focused on the property than they are the client, so it’s no surprise that we are seeing a bigger change in the way specialist lenders are looking at property than the high street.  Where the demand is limited for a property (the resale or letting period is long) then there is a bigger risk to the lender and they may well want to reduce this risk.  The most frequent restriction is on the loan to value, but we have had part of the loan moved to capital repayment and cases declined.

What has changed more recently is an overall reduction in risk from lenders.  It is moving from a case-by-case basis to a broader criteria change.

Over the last few months we have had a number of lenders increase their minimum loan, and restrict their maximum lending on single assets.  History tells us that when there is a house price adjustment then it is the top and bottom of the market that fall first – this is generally low value properties, often flats, and large detached houses in affluent areas.  Putting a restriction on these type of properties means that the lender is less exposed should this happen.

We are also seeing a more conservative view on refurbishment projects.  Not only are valuers being more cautious on what we call the residual value (the lowest price the property will fall to when you start the rip out) which can affect the overall lending, but we are also seeing the maximum day one loan reduce slightly.  The lender wants the investor to put in that little bit more to reduce their risk.

Despite all this, the market is remaining buoyant and there are so many deals out there.  I think that investors need to factor in these changes when looking at their purchase price, refurbishment costs and end value, as it will affect them.  Profit is key, and you have to factor the finance costs in when calculating your day one offer.

In addition, uncertainty in the market is unlikely to go away any time soon so the demand for rental is likely to stay high.  The long term rental market is what investors should be focusing on, so if that means adjusting short term profit then maybe that’s another shift that needs to happen to help keep the demand strong!

This week, with all the drama of the possible end of the Brexit discussions, this week we have some good news! One of our clients Skei Management have completed on the refinance on their first HMO with us – and it’s a beautiful property!

What was the deal?

After purchasing a portfolio of single lets, the clients decided to explore the HMO route to look at a higher yields and to diversify their portfolio. They found a property to purchase for £135,000. They worked with their mentees to work out how best to redesign the property to ensure that it allowed en-suites to all rooms and generous double bedrooms. The priority was to ensure that the quality of the property was completed to a high enough standard to ensure a high yield and to attract long term tenants.
The works were planned at £70,000 but with an inevitable overspend budgeted, as we seen with many of our projects now, with the total spend was finally coming to £108,000. This was a total rip out of the property and a very high-end finish. The priority is changing though, and we are seeing that clients are focusing on creating a property that will not need to be touched for a longer period. This helps attract tenants who are looking for a longer-term property, avoiding void periods.
The client refinanced after 10 months, and achieved a valuation of £240,000. We were able to lend £180,000.

How did the finance work?

We were able to use Shawbrook Bank for the bridging loan to initially purchase the property, and then to refinance, so the client only had one arrangement fee to pay and minimal legals on the move from short term to term. Importantly, we did have another valuation completed as this provides an accurate figure reflecting the work the client has put in. This is particularly important where we have such a high end finish.

Generally, we are able to lend 75% to purchase the property. There are some circumstances where we can lend 85%, but this is a case by case scenario and only for light refreshments and where you have experience. The bridging finance allows the client to carry out the refurbishment works and bring the property up to a licensable standard. As soon as these works are completed, then we can move to the term mortgage and this process takes about 4 weeks. We can generally lend 75% of the new value at this point, as long as the rental is sufficient. This is not usually problem on multi-let properties.

Why does this work as a long-term investment?

With the work the client has put into the property, they are achieving market-leading rent for the area and are confident that the tenants they’ve attracted are after a longer term let. The property has a lovely communal area to encourage the tenants to socialise. The generous bedroom sizes and en-suites also help to ensure that the clients have a comfortable living environment. This all helps keep tenants happy and encourages them to stay longer, keeping the void periods low and income high. HMOs traditionally attract people wanting a stop gap, but providing high quality accommodation with good communal areas and bedrooms that work for storage will mean happier tenants who stay for longer!

On Monday we all took a trip to Manchester ready for the NLIS on Tuesday. We took our very loyal customers, Rob and Aiden, out for dinner as a thank you for joining us at a number of our shows this year. We are all about getting to know our clients, and working with them as they grow and it’s great to be able to give something back.

Tuesday was a busy day! It was great to bump into a few of our existing clients and so refreshing to hear some great feedback from our social media followers. We are only 18 months into Baya, and watching our brand grow is so exciting – it was a great day to put faces to names! We also had the opportunity to meet lots of new potential clients, I’m excited to see how we can help grow their portfolios.

Jackie and I spoke about opportunities and threats in the current climate, and it was interesting to see how investors are finding the market at the moment. There are some great opportunities out there now, and some really good mortgage options around for the more unusual properties, which is a great help when looking at your return on investment. We also looked at the different purchasing methods such as auctions and modern method of auctions and how this is a great opportunity for investors. Generally people with a chain cannot make it work so it is far more suited to an investment than a home.

We looked at the inevitable threats in the market with all the uncertainty at the moment. The biggest issue as we have discussed previously is the valuation results we are seeing. Clients really need to be realistic in their expectations around return with current conditions. There are a number of other threats which don’t change though, and the biggest one of those is your power team. We heard so many stories on Tuesday about investors using brokers and solicitor particularly who have ended up adding additional time and expense to the process. It is so important to choose your team well and use recommendations and companies who have experience doing what you want to do!

I was at Watford PIN last night, as I am on the second Thursday of each month. It’s a fantastic evening and this month we had speakers discussing how to systemise your property business in order to help it grow, and also a layer explaining JVs. Networking is a great way to meet likeminded people and investors, and the PIN evenings are a good educational evening too. I would thoroughly recommend checking out your local PIN network, as well as others, and if you are local to Watford then it would be great to meet you there!

We also found out that we’ve been shortlisted for the LIS Awards Best Buy to Let Broker which is very exciting! It’s so rewarding when we are recognised for the great job we think we do.

Looking forward to November, we have the final NLIS Show on the fourth in Olympia, and then the final PIN of the year on the 14th. We also find out whether we have won the LIS Awards Best Buy to let broker on the 23rd – wish us luck!!

This week we are talking about what has been happening over the last quarter as we move into quarter 4. It’s been a busy few months, with many challenges!

What we have learnt from our lenders

Know your plan and make sure your broker does too so they approach the right lender. There has been so many changes in appetite recently with all the uncertainty in the market and we are seeing plenty of changes in criteria.  It is more important than ever for us to keep up to date with all those changes, and for our clients to know what their plans are, so we go to the right place in the first place.

Short term let criteria is changing. This has a lot to do with a crackdown on buildings insurance, with your usual residential insurance not covering business purposes in some instances. Leasehold properties also need consent from the freeholder which can be a problem.  I know I’ve said it before, but the rate really isn’t the most important factor. You need to know who is going to lend before you start spending money and they won’t necessarily be the cheapest! Short term lets and holiday lets are more profitable, but they are a higher risk from for the lender and that is why it is more expensive.

With the uncertainty in the market we are seeing demand periods for resale and rent fall. Lenders are becoming more cautious so it is important we balance this with certainty around everything we can be. Full disclosure is vital so that we can help you achieve this. Clients need to do their research around their exit and ensure they have some contingency funds to allow for down different opinions which could mean less money is available to buy the property. As always, you need to look at the overall picture though, and balance the lower prices you are able to negotiate.

We have been looking at longer bridges in response to this, it is far more cost effective to overestimate times at the beginning than it is to have to extend the bridge. We can look at part roll up and part serviced interest to ensure that you aren’t losing out on your day one loan too.

Property shows

After a break over the summer we’ve got a busy month ahead. We have the Manchester NLIS on Tuesday and then the Olympia show on the 5th November. It would be lovely to see as many of you as we can, so please come and say hello! Tickets are free and we will be speaking just after lunch at both events.
It will be interesting to see what the speakers have to say, especially the panel debate in London where we will have the opportunity to see Andrew Neil and Ian Duncan-Smith among others discuss the current market.  We are expecting a busy day in London, and it is such an informative event it is well worth a visit for all property investors.

We are looking forward to being back in Manchester next week, it’s such a big part of our client and property base. It’s a very different market to the south, and one which is full of so many opportunities.  The HMO market is buoyant, especially in the high-end professional let market which we know so well.  I am looking forward to meeting many potential new clients and see how they are finding the current market.

Expectations for the next three months

With only 12 weeks until Christmas and a looming Brexit date you would think things were starting to slow, but they aren’t! There are some great deals to be had, and we are seeing them through the door. It’s an investors market, and we are really seeing this with the growth of auction and modern method of auction properties, refurbishment projects and unusual properties.  We work with some incredibly entrepreneurial clients who are continually seeing great opportunities where others can’t, and our approach to mortgage broking allows us to make it happen!

Hopefully we will have some more certainty over the market and Brexit over the next few weeks, and I am hopeful that this will lead to more certainty over valuations.  Its going to be an interesting quarter and end to the year, we’re looking forward to it!