Jan 11, 2018
In part 1 of this Q&A, Chris and Jason discuss the future trends of the serviced accommodation and buy to let markets, legislation, Section 24 tax changes, the 90 day rule and mortgages for serviced accommodation.
Keep an eye out for part two next week.
Show Notes:
The Serviced Accommodation Podcast is a show brought to you by
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Transcription:
Hi I’m Chris
Hi I’m Ritchie
And welcome to the serviced accommodation podcast.
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Hi this is Chris and today’s episode is extracts from a Q and A which I did with Jason Living not too long ago. I hope you enjoy it.
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Evening everybody nice to be back here again obviously been a few times because I live not so far away and I’ve been investing in property for about 26 years now. So most of that time it’s been a real mixture of everything, single lets, HMOs, all sorts, a bit of commercial The last couple of years I’ve been fairly focused on serviced accommodation, well it’s part of what I do, have a large portfolio in the northeast and of that we have now 17 units as serviced accommodation . I’m also involved in a serviced accommodation management business called Service Lets that provides, the easiest way I describe it is the back end of serviced accommodation so all the systems end of things and through that we’re managing around 150 properties now in London, Birmingham, Sheffield, Cheltenham and treading on your toes a bit in Southampton as well. So that’s what I do so if we can help you and answer a few questions I’d be delighted to.
So I’m Chris, I’m not anywhere near as experienced in property as you. I came straight into property as an entrepreneur so I’ve had different businesses down the years. Started off as a music producer and then funnily enough there’s not a lot of money in music so I started doing some other things to boost the income and ended up doing car repair business for five years and found myself doing serviced accommodation.
Obviously a natural progression.
Absolutely and I think a lot of the teachings are very good about starting small with single let’s, try an HMO, try to flip the development kind of working up. The point of that I shut down the previous business to focus on full time needed to get the income in. So with my business partner we started our property journey with a twenty nine bed hotel you know starting small for you. From there we’ve kind of built up that the business and moved on to a management business which is in Southampton and I run the serviced accommodation podcast with my colleague Ritchie as well as the mastermind groups and doing some consultancy in and around serviced accommodation.
I think Chris and I have always sort of seemed to sing from the same hymn sheet a lot of the time because you’ll understand with the whole sort of emergency serviced accommodation market and that being of obviously a hot topic and lots of people training around it and all the rest of it. You know there’s an awful lot of nonsense quite frankly that flies around some o it perpetrated by people who are held out as as experts. Chris is very much like me not taking stuff at face value and actually going, to be honest it doesn’t take an awful lot of effort to get on Google and actually research you know the truth behind you know just things like bits of legislation and whether it’s business rates, planning whatever you know I think the podcast is very very good and I like listening to it. So I think I agree with most of it whereas some of the other nonsense that’s flying around is just nonsense.
Someone said earlier we were long lost twins.
Q: What’s the podcast called?
It’s the serviced accommodation podcast
So what are we doing, I think we’re just going to answer my questions so fire away.
Q: My question is what is likely to happen over the next two or three years? We have been doing it for four years starting very small from one room in my house now I have 14 different listings. But you know in York, four years ago when I started we were one of 6 or 7, now a year ago I know there were 650 hosts on Airbnb, just on Airbnb I don’t know about booking.com. So obviously there’s something happening, a lot of people on board and I’d be really interested to hear what you think the next two years will bring in this particular field.
I think you know obviously I think it’s a growing market anyway and I think part of the growth in numbers is simply driven by demand and a lot of that demand I think is driven by awareness in the sense that the way always sort of describe it is that I dont think were directly competing with hotels but we’re fishing in the same pond. So I think what we provide is different from what hotels provide and I think part of their marketing is to differentiate that. But I think a lot of people who are now beginning to use serviced accommodation were using hotels because they just didn’t have an awareness around serviced accommodation and quite frankly I’d put myself in that bracket you know going back two or three years if I went down to London to pick a hotel. Now I’d hardly ever book a hotel in London and I would always stay in serviced accommodation and that’s just because I’m aware it’s out there. So I think there’s this generic growth and if you look at Saville’s produce a study every year you know they’re talking about a massive growth in serviced accommodation partly fuelled just by growth and partly fuelled by nicking business off hotels to some extent so that’s fueling that growth. And obviously the whole section 24 situation in terms of property investment and whether people are aware that if you operate a property as what HMRC defined as furnished holiday letting which a lot of serviced accommodation would fall into then you can still offset all of your mortgage interest as a cost. Which if you’re doing buy to let and you’re a higher rate taxpayer effectively you can’t so that’s undoubtedly also fueled some people getting into it you know plus the fact that it’s just within the property world became the latest sort of hot topic bandwagon, whatever to jump onto because potentially there is great cash flow. So all of those things inevitably have fuelled it and there’s you know there’s no doubt there is concern in some areas as to the extent to which it’s going to start removing housing stock from the normal housing stock and everyone’s forever banging on about the housing crisis, haven’t got enough stock.
Well if you’re now actually finding a way to diminish that stock then then there may well be a concern and you know if the growth carries on as it is then it wouldn’t be a great surprise if they start looking at ways of legislating and I think planning legislation is the obvious way to go. You know in a lot of people were in a sense confused about the London situation and what people term the 90 day rule, in London actually since 1973 you have required planning permission to do short lets, any lets under 90 days so that’s just in Greater London hasn’t ever been anywhere else and actually the 90 day rule is a relaxation of that. So what they’ve now said is rather than saying Right you have to get planning permission for any lets under 90 days. What they’ve now said is we’ll let you do short lets for 90 days so you know most people think that was a clamp down actually it was it was part of the deregulation act. In fact it was a de regulation or a release of the legislation but I don’t think it would be a great surprise if they took that and tried to put that out nationally.
But I suspect they would probably do it in the same way that they’ve done C4 and HMOs whereby they will probably say you can switch from one to the other so they might create a new use class for lets of let’s say less than 90 days because that’s the London model but I wouldn’t be surprised just like HMOs where they say nationally you’ve got permission to develop rights to go from you know C3 residential to short term accommodation and back again but then any council can bring forward an article 4 direction which obviously they have in a lot of areas about HMOs restricting that change probably from C3 to short let, probably won’t restrict it going back unless they particularly want to say it wouldn’t be a great surprise but then with HMOs if you’re already operating a short let then that is your lawful use. So you’re not suddenly going to have to apply for planning permission, you will already have that as your established use.
I don’t know what your view on all of that is?
Yeah yeah absolutely. I think we are probably going to see quite a lot of change in the market over the next two or three years and this is just very much personal opinion. I think for me it’s not so much legislation driven but market driven because as you’ve kind of touched upon before with Section 24 changes, with a lot of the changes which are coming to clamp down landlords what it means is we all know it’s becoming less and less profitable to be a landlord in this day and age. We’ve seen reports where you know half a million landlords are looking at selling up. And I think what’s inevitably going to happen is actually the pool of rental property in this country is going to be decreasing now.
Which is good news for rents if you’re a landlord that wants to hang on.
Hopefully it is. And that I think is the key change we’re going to see, the rental pool if you like is going to be decreasing. We’re still seeing a continuing trend particularly in younger people towards renting as opposed to purchasing so there’s only one thing which can happen here when of course the rules are going up for landlords and the demand is being driven is that you’re going to see a substantial increase in rents. And for me I think over the next two or three years I wouldn’t be surprised if you saw that maybe 20 25 percent increase in single rents as a reaction to everything that’s going on in the market, it might take a little bit longer to kind of settle at that level but that really wouldn’t surprise me at all because we’ve seen such fundamental changes in the market. I don’t think we’ve really seen the impact yet. If you look at what we’re doing in serviced accommodation, I mean I call it arbitrage. You take it from one market and you sell it on another. So we are entirely dependent on the single let market in order to generate a profit. Now if that single let market has gone up by 25 percent then it makes it a lot harder for operators to come in and make a profit. So while yes we’ve seen a massive amount of growth in the number of properties over the last couple of years it’ll start to equal out as more and more areas are going to become marginal when it comes to profit. So the stock’s going to dip a bit. Prices are going to go out and as always happens in markets there’ll become a kind of equalization point when you have a reasonable number of operators offering fair value on the market. Now if you want to look at a model of that and we were discussing this a little bit earlier then I think London is a good one because already in most areas I see in London are extremely marginal you know you might make a profit on one or two units but as soon as you start scaling up you start hitting VAT thresholds, you start having to have bigger teams, higher overheads your profit is gone.
Now that I think is probably a pattern you’re going to start seeing over the country, over the next couple of years as those single let rents increase, I think that’ll probably stabilize the market a little bit so for me it’s a sustainable market.
No it’s interesting so effectively what you’re saying is that there’s a flow of stock from the single let market into the SA market because the margins are perceived to be higher in the serviced accommodation market but as you say if those margins get impacted and at the same time and as you say it’s either if people are rent to renting their margins are being eroded by the higher rent. But even if they’re not even if as I am operating properties you own then you know if your rent suddenly suddenly goes up 25 percent and your SA doesn’t or is perhaps slightly under pressure, you may say I’m better off getting back to single letting anyway. So as you say you know the market will self correct in that way.
That’s just my personal opinion but I think you see the logic behind that. Great question to kic us off thank you.
Q: Can I ask you a question about funding? We’re in the buy to let market, single let HMOs and buy to let mortgages appropriate to those markets. SO we’re sitting there thinking we’re going to use some of these as services accommodation but what will a mortgage broker say? Mortgage companies say sod off, they don’t allow it. So do we have to change so basically buying the property ourselves? And if we’re going to do rent to rent to do it we’ve got the same problem because almost certainly starting from a piggy back position where the actual owner is either on a residential mortgage, unlikely but possible, or a buy to let mortgage and once again can’t do it!
So that’s just my personal opinion is that thousands of people out there are winging it on the back of buy to let mortgages, they’re breaching their mortgage terms which also means they’re breaching probably invalidating any insurance policy in place and the shit’s about to hit the fan!
Thank you for that it would be interesting to get your viewpoint because obviously you own properties in your own name, how are those funded?
They are on commercial mortgages. And interestingly I think the loan agreements were not worded in such a way, obviously they were they were worded before any idea of serviced accommodation and all the rest of it. Now I’ve looked through it and the particular terms in my loan agreements says that if you create any tenancy then it has to be an assured shorthold tenancy. But I’m not creating tenancies.
Mine and you know I know I’m splitting hairs legally because clearly that wasn’t what they meant but you know I think a strict interpretation, and they are commercial loan agreements, they’re all with Northern Rock, one’s with IBS. I don’t think they’d have an issue with them if push came to shove. I think I’d have a conversation with them saying I’m actually generating more money, I’m better able to pay you but with a commercial lender you can, I’ve had run ins with them but it’s not it’s not the sort of computer says no.
Having said that yeah I mean you’re absolutely right that you know I’m pretty sure there’s an awful lot of people out there particularly those operating sort of individual units in blocks where they are buy to let mortgages so technically it is a breach of terms and conditions.
There’s one particular distinction that it’s worth making. I’ve repeatedly said when this has been discussed sort of on Facebook and those sort of things I’ve repeatedly said to people I’d be very interested if anybody has got any instances you like not man in the pub sense but anybody can actually tell me of an instance they genuinely know of where a lender has called in a loan on a buy to let mortgage that’s been serviced accommodation and I’m not saying they haven’t. But nobody’s managed to come up with that.
I’d look at it from a different point of view, from this side of the equation. Say there’s been an accident. I’m going to my insurance company and saying I’ve just had an accident, I’ve got landlord insurance. And they say, can you show us the tenancy agreement and your terms of your mortgage please. Because any insurance companies first port of call is how can we get out of this. And if that accident is bad, that’s bad enough in itself but the repercussions are that I could be in prison or wherever because I’ve breached those terms.
I agree and I would always say, I’m not in any way encouraging people to breach the mortgage terms and conditions. I’m just saying that the reality is that that’s what people do. But I absolutely agree with you and what I always say to people is understand the risks and the mortgage situation and I’m not I’m not saying do one thing or the other but the risks on the insurance side are far far greater and absolutely you know you need to make absolutely certain that you’ve got the right insurance and that you’re not in any way invalidating that all insurance claims.
On insurances and stuff it sounds very much like if there was a death, worst case scenario. They’re going to go through all your stuff, fire regs. If they found a breach of mortgage, would that have saved the person’s life? If someone for instance had a residential mortgage ad they were running, say it was a 5 bedroom serviced accommodation, has that breach changed anyone’s life? Because insurance companies, yeah they would look for ways around it but in my opinion they’re not going to be that bothered about the mortgage. Whether you know about something that was you.
They want a way to mitigate their risk and if you’re in breach of your mortgage terms and this should not have happened because what’s going on should never have been allowed.
Interestingly in residential you don’t need a carbon monoxide alarm.
I know you don’t and I’ve just had a house of mine looked at by a council who said put a carbon monoxide alarm in.
Do you think the lenders are going to start giving out more buy to let mortgages for serviced accommodation?
Yeah. They haven’t yet. I think that the impression I get is that they’ve they’ve looked at it they haven’t quite got their heads around, you know their perception is I’ve got a six month AST, the security of income then you know the reality is as we all know how secure that income really is is open to debate you know whereas they look hang on you’ll see here on day one and you’ve got an empty calendar for six months but yet you’re trying to convince me that you’re going to be able to pay the mortgage. You know we know as operators of experience that yes you know we’re comfortable we’re going to get those those bookings but they, looking at it from a very sort of productized basis they have not got their head around them. If you talk to the commercial lenders obviously who are used to lending on B&Bs or hotels or whatever and understand and not all but you know you may be paying higher rates they’re probably going to want to look at some experience of operation. You know it’s probably not going to be, high LTVs, there is a guy in London called Mannershar who’s trying to put together a buy to let style mortgage for serviced accommodation buildings. Yeah the number of lenders who they more come at it from the holiday end of things. But I think Leeds for instance won’t lend to you if you’ve got more than four properties full stop with any lender. So yes you can do you know if that’s all you’re doing you can do the first four with them. I think Cumberland have a holiday product, I’m not familiar with the details. Cambridge will do it who are more of a commercial lender. You know they’re up at 6 percent plus in terms of rates. I don’t know what their LTVs are on serviced accommodation. I think they stack it up on the basis of AST.
This is okay if you’re going to buy it and you’re making sure that your finance is in place.
I just want to go to them and say here’s what i’m going to do with it, this is the crack. Because when I’ve had a residential mortgage, years ago when I bought the first house intending to live in it then I decided to rent it out. I’ve now changed it to consent to let, is there anything similar?
They’re still scared about it not being let. It’s the uncertainty.
To answer your question, yes we’ve got landlords who we work with, with a management company who’ve got permission from the lender to operate as such. Yes there are lenders who will do it. So a lot of the Santander ones even five years, had specific terms in there around well if you’re going to use it as a holiday let then you’re not allowed anyone to stay in it for more than 30 days for instance so it was a clear you know allowing you to do it but with certain kind of conditions attached.
Santander is one that I’ve heard of that is quite compliant. Obviously you’re managing quite a few on behalf of people rent to rent
Cambridge, they’ll send a surveyor round, do a market evaluation even if it was an AST.
And that’s getting in at the front end but what about sort of existing mortgaged properties?
And it is actually surprising how many unencumbered properties there are. I mean there are certainly owner occupied I was trying to get the stats on investment properties and obviously they’re different but there are owner occupiers more than half are unencumbered which is quite surprising.
I think it’s around 50 50 with buy to let.
Is that right? I think it was the annual survey of English housing that I was looking at and certainly as I say owner occupier rather than the market overall but I couldn’t find a split down into investment property but it’s surprising. For instance I have two rent to rent well actually it’s exchange at delay completion in Sunderland neither of which have got a mortgage on.
We’ve found a lot of people are moving abroad and leaving their house here and if they go abroad for 6 months or something like that then they come back then they could have a block of 4 weeks, there are a lot of people who are doing that now.
So if I just come back to the original question again quickly about finance, I think we’ve covered off quite well what the situation is at the moment to again kind of look at a helicopter view of the market if you like we are really where we are with serviced accommodation right now where we were probably 4 or 5 years ago say with buy to let mortgages for limited companies you know it was very very hard to get hold of product. You know in fact limited lenders they had a lot of strict criteria about debt and the bottom line is when we’re talking about big picture stuff markets how they change well people want to do it, there’s money to be made. They’re going to move into those markets so in the same way that after the tax changes came in, the mortgage companies had to adapt and you look at how many of them do limited company mortgages. Now what I’ve often think so you know with a situation now it’s the mainstream but it takes them a while to catch up. Now that’s exactly where we are with funding for serviced accommodation right now.
Yeah they’ve got to be finding it difficult to get their money out. And similarly probably going back even further than that the HMO market if you go back probably perhaps you know 10 or more years. You know there were very few you know mortgages that you could genuinely use for HMO whereas a lot of the lenders said actually it’s a market we want to be in. You know we have a specifically different product or we’ll tweak our existing products and I guess you know the interesting thing will be as as those products do come to market whether those lenders who are currently being inflexible on buy to let mortgages might develop ability what’s going on then.
So if you’ve got something and say I want to use this as serviced accommodation will you let me and they say no you say okay that’s fine I’ll refinancing because there’s another company over here. They may all of a sudden decide to be a bit more flexible about it but yeah we are in a situation that’s not entirely know good really in terms of where we are with the serviced accommodation market because there is an obvious route to say yeah that’s you know that’s exactly how you do it and as you say you know the undoubted reality is there are a lot of people out there operating in breach.
One point I was going to make because I think it is you know somebody will say it again sort of splitting hairs but I don’t think it is as I have heard relatively first hand of an instance of somebody applying for a number of buy to let mortgages but with the express intention of using them for serviced accommodation, there was never any intention of using the buy to let and those mortgages being called in and that is mortgage fraud because you are applying for money under a false premise and I think that that is fraud because basically so you are gaining gaining financial advantage with express intent. And that’s mortgage fraud which is amongst other things a criminal offence.
Whereas some people say well is it really different but I think it is legally different. I’ve got a buy to let mortgage I have had for five years and I bought this as a buy to let, I’ve been renting it out for five years. I’ve now decided to do serviced accommodation oh I’m in breach of the mortgage terms and conditions which is clearly a civil matter, a contract matter and to me is very different you know in a way the overall intention.
Exactly exactly but I think that and that’s why you know I’d be interested to hear if people have come across instances of what what has happened where an insurance company has found out you’re doing serviced accommodation on a property that was originally by buy to let and now you’ve changed it. You know again having conversations with people who perhaps have worked for lenders in the past, their general view was you know you’re probably going to get a letter telling you to stop doing it and or saying well do you want to charge you more interest. Exactly the same as they tend to do with residential to consent to let, if you go ahead and do it I think it’s unlikely they’d just call the mortgage in. I think it’s more likely you’re going to get a letter saying remedy the breach but I suspect that’s what happens with serviced accommodation. But I’m hypothesizing to be honest and I’m just really interested in actual market feedback of actual instances of things happening and that information seems to be a bit thin on the ground these days.
It’s all about precedence, we don’t know what’s going to happen until something does.
That’s all for part one. Tune in next week for part two.