The perks and perils of furnished holiday lettings

Furnished Holiday Lets have become one of the leading investment options in the property investment sector today. Michael Johns, Senior Investment Consultant, has addressed many of the questions he hears daily when talking to clients about FHL’s or ‘furnished holiday lets’. Michael has been with Residential Estates for over 7 years and has approximately 20 years in the property industry. Working daily with investors globally Michael, along with the rest of our team of experienced consultants, are available to help investors create and expand a bespoke portfolio to help them financially, be it for pension plan or as residual income.

The 2021 Budget has certainly looked to encourage growth in all areas of the UK property market. The residential home-owner market boosted by Government guaranteed mortgages requiring only a 5% deposit, and the whole market boosted by the extension of the stamp duty holiday.

The buoyant market has certainly encouraged property investors, but with a 10% decline in the economy and lending at its highest level since war-time, salaries have not increased despite many areas of the UK experiencing a significant increase in average property values.

This has meant that, as AST (Assured Shorthold Tenancy) rentals have not increased in line with the property values, high-returning standard buy to let investments have been more difficult to find, and with the number of new-builds dramatically reduced as a side-effect of the pandemic, the UK property shortage continues to limit options for the investor.

Will Holiday Lets Decline in Popularity Post-Coronavirus?

With investors looking to maximise their income, many have been drawn to the Furnished Holiday Let market which has been hyped up with the obvious increase in domestic holidays / breaks. Some investors are not so keen as they see the market having a limited life-span as UK holiday-makers are likely to return to sunnier climates once restrictions are lifted.

This may be true of some sectors, but not all.

For those looking to capitalise on the “cheaper” end of the market, investing in run-down holiday resorts such as Blackpool, Skegness etc, these visitors are likely to flock in their numbers in search of a low-cost beach holiday for one of two weeks of the year, for the next two to three years before returning to Benidorm on their £500 all-inclusives. These UK resorts will see little investment and while prices may increase in the short-term, the long-term benefits are limited and drastic value losses may follow the short term price hikes.

The key here is to look at areas where tourism is already booming, regardless of the effects of the pandemic. Areas which target a better tenant profile should also be your focus as well as the reasons for the visits. The “higher” end of the market is not only easier to manage, they also experience a higher number of repeat visits and it is easier to demand a higher rate during busy periods as this profile of tenant is more interested in location and quality than price.

One very relevant sector which has seen rapid growth is the outdoor recreation market. Even before March last year, the number of people focusing on living a more active life and having outdoor based hobbies it at its higher ever level. Cycling, running, walking, climbing, kayaking, canoeing, wind-surfing, fishing and golf are all extremely popular activities which have contributed to the boom of the “staycation” market.

Will future development over-saturate these locations?

With our main focus being the more exclusive end of the market, we tend to focus on areas where planning restrictions are in place. For this reason, many of our best opportunities are renovation projects, using existing buildings and converting them into luxury apartments. This means that they can be brought to market quicker and there is less chance of the construction being delayed.

In the “cheaper” locations where tourism has historically seen severe declines over the last few decades, the local councils are almost desperate for developers to undertake new projects to give the area a much needed face-lift. Many of these coastal towns have a dated look and feel, and the inclusion of a new apartment building is likely to encourage potential tourists to visit. However, these are usually built to a low standard as they are targeted at a “cheaper” market. They also usually come in big volumes to keep the costs down.

The future of these two extremes are very different. The “cheaper” locations will experience short term growth followed by a steep decline in popularity and therefore, also, value. Whereas, in the more “exclusive” areas where tourism will continue to be high, and where supply continues to be limited to smaller “boutique” style luxury properties, over-saturation is highly unlikely.

Should investors worry about the lack of mortgage options currently available for FHL’s?

This time 2 years ago, we were selling Furnished Holiday Let properties where the new owners were able to mortgage at 60% to 70% Loan-to-Value and were paying interest rates of over 6%. However, because of the tax benefits, the ability to off-set all of their mortgage interest against their tax liabilities, and the high returns, the overall picture was still far more favourable than standard buy-to-lets and on average, these investors saw 2 or 3 times the net returns as they would have done in standard buy-to-let properties on AST rental contracts.

With the recent hype surrounding holiday lets, and the popularity of these investment opportunities amongst investors, more lenders are offering dedicated FHL or STL mortgages and this has pushed the LTV’s up and the interest rates down. We are now seeing offers of around 4% interest with a 75% LTV which is only around 1% higher than most are achieving with their standard buy to let mortgages.

Many inexperienced investors focus too much on the funding options instead of looking at the complete picture. Rates in this area will improve and enable landlords to re-finance in the near future anyway, and it’s important to understand that this is a relatively new market as most investors had previously ignored the terms of their buy-to-let mortgages, their landlord insurance and their property lease and just rented standard buy-to-let properties on a short term basis. Unfortunately, without permission of the lender, this is mortgage fraud and many landlords are being pulled up on this as lenders look to demand conformity in this area.

In summary, you should primarily look for the right property regardless of the lending options and then find a funding solution to fit. If you look for a property to fit with a funding solution you will not maximise your returns.

What if we don’t get the tenants?

The most popular worry for investors is the seasonality of some holiday lets and whether or not they will achieve their returns with short term lets, and this is purely down to the tourism market and the capability of their management company.

But the potential investor must understand that the FHL market is very different from the buy-to-let market and the right investment will give you enough “room” to feel comfortable about your investment.

For example, most of the costs involved with FHL’s are linked to usage, so if you are not using the property, you will not be using electricity and water. Management fees and booking commissions are linked to the bookings so if there are no bookings, there are no fees to pay….but let’s face it, you are not investing in a place to be empty!

The key here is to calculate how many nights you would need to rent the property out in order to achieve the same return as an AST rental would pay. This can be as low as 4 or 5 nights per month and most exclusive areas will normally book out for 15 nights per month in the quietest periods. We only target areas where we know that we can achieve occupancy levels of around 25 nights per month, all year round.

The current pandemic travel restrictions, and the boom of the “Staycation” market should encourage more investors to invest in this area. It is almost impossible to book an apartment in the Lake District for this summer. Most apartments are booked up until next year now. The same goes for Cornwall and many areas of North Wales, so this period of extraordinary demand will make it obvious to the masses that there are massive revenues to be made in holiday property for the next 3 to 5 years in the UK.

Should I look for a holiday property which is also popular with Corporate Lets?

If you can find a location which can deliver both then this could be of benefit to you, but to make the most out of a holiday let apartment, you should solely focus on tourism. Looking for properties which offer a bit of both will not necessarily give you a higher income.

Corporate lets can be more reliable and longer term, but they are usually charged at lower rates.

There are two very different markets in the serviced accommodation / short term let market. For “Resort” based properties where the bulk of your income will come from tourists, tourism should be your primary focus and corporate lets are a nice bonus but not something you should focus on. For “City” based properties, where the bulk of your income is from commercial activity, corporate lets should be your primary focus.

This is not only important when selecting a suitable property, but also when targeting an audience for marketing purposes, and also in design of the property and how you furnish and prepare the property for the tenant.

Can I manage my own property? 

Yes, of course. Many do, but most underestimate the work involved in doing so, and this is usually apparent to tenants when they stay in your property. It really depends on how close you are to the property and the time you have to dedicate to managing it.

We visit the properties we manage every day, and we will not offer it for rent if it is sub-standard. If something is broken, it is charged to the previous tenant and replaced immediately and there are several things we do in order to make the new tenant feel at home….I won’t give all of our secrets away though!

The market is driven by reviews and, as a management company with over 12 years of experience in furnished holiday lets, we live or die by these reviews. Investors who fail in this industry are, more often than not, those who try to do it “on-the-cheap”.

The use of a professional management company is not only likely to increase your revenue, despite their direct management costs, but will also increase the lifespan of your fixtures and fittings and can avoid the need for additional maintenance costs.

Should I be worried about the costs spiralling out of control?

With such high returns in this area, this is not something you should worry about.

But the difficulty in this area is forecasting both the costs and the income. There are so many variables that this sometimes scares investors as many like their income and expenditure to be clear-cut and stable. However, most costs are linked to usage and other costs are similar to those you would pay with a standard buy-to-let. If you are half-booked one month and then fully-booked the next month, then your costs will be higher…it’s obvious!

Having so many years of experience in this area, we know that the total costs equate to approximately 35% of the gross income. This varies only by +/- 5% at the very most, so your income, on average, is always going to be more than double than of your costs which makes this type of investment much safer than most by-to-let opportunities currently on the market.

In summary, the Furnished Holiday Let market is an extremely fruitful one and recent restrictions and changes in tourism behaviour have made this an even more attractive proposition with massive short term gains to go along with the long term growth and high rental returns which have always been associated with this investment type.

There are a number of small risks you need to avoid, but with the use of a good sales agent to identify the best locations, and a management company who is hands-on and capable of delivering the forecast returns, a furnished holiday let is now an essential part of any property portfolio.

The views, thoughts and opinions expressed in this article belong solely to the author, Michael Johns, and are not necessarily those of Residential Estates, or other groups/companies to which Michael Johns is affiliated.

If you'd like to speak to one of our expert investment advisors about how adding FHL to your portfolio could help you achieve your financial goals, please fill out the form below or call 01244 343355

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