There is reported to have been a ‘staycation boom’ in the UK during the pandemic. This would make sense; after all, international travel has been fraught with additional complexity and cost, if not being rendered completely impossible for long periods over the past two years.
Indeed, it was recently reported that 39% of Britons would be more inclined to holiday in the UK post-pandemic. But the appetite for staycations was already well established before we had ever heard of Covid-19. A quick glance back to 2019 reveals that while 93 million Britons jetted overseas, whilst 123 million chose to holiday in the UK, suggesting that the ‘boom’ is simply an uptick in a stable domestic tourism industry – one that is worth over £1.6 trillion.
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The strength of this industry, which is expected to grow further, has naturally impacted the property investment sector. Namely, more investors – particularly buy-to-let investors – are now considering holiday lets as a means of diversifying their portfolios. For those who fall into this camp, it is important to first understand the suitability of investing in holiday lets, including both the potential pitfalls and benefits that such an investment entails.
Reasons to be wary
Profitability – landlords acquiring a new property that they intend to use as a holiday let are likely to have paid an inflated price. Location is a very important factor in the success of a holiday let, and increased tourism in the last two years have pushed property prices up in tourist hotspots. Further, many properties will need furnishing and renovation to qualify as a holiday let. So, an initial outlay is common before income from holidaymakers starts to filter through; this could pose a potential barrier to some investors.
Running costs – with the cost of cleaning, energy and maintenance falling under the landlord’s remit, the regular turnover of guests creates some significant outgoing costs that can limit the money made on a property. Investors should also be aware that letting agents can charge between 20-30%, a necessary cost if they would prefer not to carry out the day-to-day management of the property. All these costs will eat into an investor’s yield.
Lack of guests – unfortunately, the old adage ‘build it and they will come’ is not a guarantee in the holiday let market. Despite sites like Airbnb creating easier platforms to market holiday lets, it is unlikely that properties will ever be at full capacity all year round. As holiday lets must be let for a minimum of 105 days to earn their potential tax benefits (more on this below), failure to attract guests could be disastrous to a property’s profitability.
Threat of regulation – with London capping short-term lets to just 90 nights a year unless planning permission is acquired, regulation in the holiday let industry is likely to increase. Areas like Cornwall and Bournemouth have seen incidents of ‘over-tourism’, and local councils may bring further regulation in to compensate.
Difficulty in finding finance – the relative insecurity of short-term lets makes borrowing from high street lenders difficult. As such, landlords could look for alternative financial backers. In doing so, lenders who underwrite on a case-by-case basis are essential to securing the best deal. Despite high-interest rates, variable discount rates and large down payments, investors and their brokers could consider their financial options as they hunt for the property itself in order to secure a deal that is most beneficial to their needs.
The benefits to be had
Those are the challenges, of which there are plenty. But that ought not to overshadow the potential upsides – again, there are numerous.
As many experts suggest, investment in different markets can maximise returns as each asset will react differently to market fluctuations. While it certainly does not guarantee against loss, diversification can reduce risk. The potential benefits listed below reflect why many landlords regard holiday lets as an increasingly interesting way to diversify their portfolios.
Tax benefits – if a property qualifies as a Furnished Holiday Let (as defined by HMRC), landlords are able to claim Small Business Rate Relief, thus avoiding council tax or business rates on their property and increasing the potential for profit. Furthermore, landlords can offset energy, cleaning and maintenance bills against their profits, reducing their tax bill further. If they choose to sell, they can even claim some capital gains reliefs, increasing the value of a holiday let as an asset.
Yields – as a result of these tax reliefs, and a rental price increase of 41% since 2020, holiday lets can make 30% more yield than a BTL property. With most aiming for a return of 8% annually and an average profit target of 30% (rising to 50% on properties without mortgages and letting fees), holiday lets begin to look like a credible alternative to an established portfolio.
Holiday home – the potential benefit that might have intrigued landlords the most during the pandemic is the opportunity to use a holiday let as a personal holiday home. To qualify for tax reliefs, holiday lets must be available to let for at least 210 days leaving landlords 22 weeks a year to use it themselves if they choose. With restrictions on international travel and a working from home order in place, the option to travel to a second home for free makes a holiday let an even more intriguing alternative to landlords.
As restrictions ease and international travel continues its revival, it will be fascinating to see whether staycations remain as prominent, both in the media and with holidaymakers. For landlords considering a holiday let, they should weigh up whether they are capable of navigating the various pitfalls of the market. Those who are successful could certainly start to reap the attractive benefits a holiday let has to offer.
By Paresh Raja
Source: Finance Monthly
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