Indeed, reports of a ‘staycation boom’ have consumed large sections of the media over the course of the pandemic. As such, one might infer that domestic tourism was less than popular in pre-pandemic Britain, despite the fact that more people chose to holiday in the UK than abroad in 2019. As such, perhaps the ‘boom’ should be more accurately regarded as a reflection of an already established industry that’s worth over £1.6 trillion.
Nevertheless, there has been a trend of more landlords and developers considering holiday lets as an intriguing alternative to a traditional buy-to-let investment, and a potentially lucrative way of diversifying their property assets.
Investors can be encouraged by the fact that 39% of Britons would be more inclined to holiday in the UK post-pandemic, with an increase of 62% in domestic bookings for 2022 compared to last year, suggesting that the country’s tourism industry is set to go from strength to strength.
However, it’s important that investors are aware of both the challenges and opportunities of holiday let investments before making a move.
What has Covid changed?
The most apparent shift in the domestic tourism sector has been away from traditional tourism providers such as hotels. With early changes in restrictions only allowing holidays to self-contained, self-catered accommodation, hotels saw more than a 50% slash in revenue as one-fifth of domestic tourists opted for a holiday rental in 2021. With spending on rentals at a 10-year high, it’s clear that holiday lets are now the accommodation of choice for many.
The locations Britons are choosing for their holidays have also changed, with cities seeing a decrease in tourism. In their place, rural and coastal areas have seen a sharp rise in bookings due to the availability of restriction-free activities as the popularity of outdoor past times like paddle boarding and cycling has grown.
As such, 46% of tourism providers have developed outdoor facilities and experiences to accommodate for these changes in consumer habits. Of course, it’s critical that investors are aware of these trends, especially as restrictions begin to lift completely, and could consider catering for these new consumer habits.
The shift to online working and the difficulty of international travel has perhaps caused investors to look to holiday lets as an asset that they’re able to use themselves, too. Legally, holiday lets must be available to holidaymakers for at least 210 days, allowing landlords the freedom to use their property as their own holiday home for as many as 22 weeks a year. For investors living in cities or big towns, the option to work from the countryside or coast is a very attractive benefit.
Financial options for investors looking to acquire a holiday let have also increased during the pandemic, with a 45% increase in mortgage options in August 2021, compared to August 2020. As
such, one might assume that finding finance has never been easier. However, despite the success of holiday lets in the last two years, there are still some obstacles that investors should consider before buying.
Potential obstacles to investors
The insecurity of a short-term lease, when compared to a long-term lease, means that high street lenders are wary to back holiday let investments. Therefore, holiday lets often require lenders who review applications on a case-by-case basis and don’t underwrite automatically, but who often charge high-interest rates and require large down payments. So, investors and their brokers should carefully consider their financial options alongside property hunting to secure the best deal that works for them. Indeed, the conditions for holiday let finance packages may be too restrictive and can create too big an obstacle for some investors.
Moreover, holiday lets are most profitable in tourist hotspots, where demand is high. However, this increases property prices in these areas, meaning landlords can expect to pay an inflated price for the property, thus limiting the profits the property can make in the short term. On top of this, to qualify for the tax reliefs that holiday lets are entitled to (more on this below), landlords should factor in the cost of renovating and furnishing their property. These initial costs may prove to be too much for investors before income from holidaymakers starts to roll in, and running costs only add to this problem.
Due to the high turnover of guests, holiday lets are much harder to manage than a BTL, forcing many investors to employ a letting agent to manage the day-to-day business of the property. These agents charge between 20-30%, and on top of the costs of cleaning and maintenance, this eats into the profits of the property.
The benefits are still plentiful
Despite these issues, landlords can expect 30% more yield than a BTL, and could aim for a return of 8% annually and an average profit target of 30% (rising to 50% on properties without mortgages and letting fees).
This is aided by the tax reliefs available to holiday lets. A Furnished Holiday Let (as defined by HMRC) can offset costs like energy and gardening against their profit, reducing a landlord’s tax bill. Holiday lets even qualify for Small Business Rate Relief, foregoing the need to pay council tax or business rates and reducing outgoings.
Finally, landlords with established portfolios can help reduce risk by acquiring a holiday let, as it will react to market fluctuations in a different way to a traditional BTL. As many experts suggest, diversifying assets is never a bad idea and a property that investors can enjoy themselves makes holiday lets an intriguing option.
As restrictions lift completely, it will be fascinating to observe how the holiday let market reacts to the potential return of international travel. For some investors, holiday lets offer them an interesting way of diversifying their portfolios beyond BTLs, but they should consider the obstacles outlined above to ensure that they are prepared for the dangers of the market and any Covid-induced complications that might arise. Those that can overcome these obstacles could reap the rewards that this sector has to offer.
