Traditional tourism has been superseded during this ‘boom’. As hotels saw more than a 50 per cent slash in revenue, self-catered holiday rentals were the accommodation of choice for a fifth of domestic tourists in 2021. With spending on rentals at a 1- year high, many property investors now regard holiday lets as an intriguing alternative to established buy-to-let assets.
Other investors might be wary, fearing that the ‘boom’ will naturally be followed by a ‘bust’. However, we need to consider the bigger picture here; namely, the millions more britons who chose to holiday in the UK in 2019, against those who favoured travelling abroad.
This snapshot of pre-pandemic consumer habits suggests that the so-called ‘boom’ should perhaps be regarded as a small uptick in a very secure market that’s worth over £1.6 trillion.
As bookings for holiday lets in 2022 grow, investors must consider the pros and cons of a holiday let before committing to a potentially lucrative alternative property opportunity.
The benefits of the holiday let market
There are some serious benefits to be had in the holiday let market. With 30 per cent more yield than a buy to let, holiday lets can aim for a return of eight per cent annual and an average profit target of 30 per cent (rising to 50 per cent on properties without mortgages and letting fees).
With increased tourism to areas such as Scotland and the Northwest, holiday rental prices have increased by 41 per cent, reflecting the growth and profitability of the holiday-let market.
From a tax perspective, landlords should consider how to manage any holiday let investments carefully. For example, Furnished Holiday Lets (as defined by HMRC), can offset costs like energy and gardening against their profit, decreasing their tax bill. Qualification for this tax relief will also allow landlords to claim Small Business Rate Relief, avoiding council tax and business rates.
Perhaps the most attractive benefit is the prospect of an easy and cheap get away. Holiday lets must be available to rent for at least 210 days, leaving landlords 22 weeks a year to use it themselves. Whether it is by the beach or by Ben Neves, landlords can choose a property that they would like to holiday in themselves, making them an intriguing option for landlords.
The potential drawbacks
We must also acknowledge that there are some potential drawbacks of holiday lets that investors should be aware of. Holiday lets can be more expensive initially and therefore take longer to make a profit. In popular tourist spots, property prices are often overinflated, and landlords might also be forced to renovate and furnish extensively to qualify for the aforementioned tax benefits. The upfront capital expenditure is often significant before income from holidaymakers starts to come through.
The running of a holiday let can also be both more expensive and more complicated than a traditional BTL. With the cost of utilities falling under the landlord’s remit, investors might also be forced to hire a letting agent to carry out day-to-day management of the property; agents fees for short-term holiday lets are higher than a typical rental property (owing to the added administrative burden) often coming in between 20 and 30 per cent.
These expenditures, on top of the cleaning costs that a regular turnover of guests entail, must be factored into the profitability of a property.
Investors are also wary about the profitability of a property that is unlikely to be at full capacity all year round – indeed, in many instances, this is a legal necessity (more on that below).
Despite companies like Airbnb making the marketing of holiday lets much simpler, there is certainly no guarantee of guests, and the industry is reliant on a thriving economy. Covid-induced uncertainty and a cost-of-living crisis have led to Britons reducing holiday budgets by 1.52 per cent on average. The result of a lack of guests could be catastrophic to landlords, as holiday lets must be let for a minimum of 105 days to earn their potential tax benefits.
Thorough consideration and due diligence required
Investors should consider the location of their property with care, considering whether they are able to run it remotely and have the local expertise to make their venture a success. A change of consumer habits should also be noted; holidays to rural and coastal areas have flourished, so investors must consider where their property might be most desirable to guests.
Indeed, a property in these areas could be a worthy investment, but considerations should also be taken for the facilities offered. With Britons seeking outdoor activities free of Covid restrictions, museums have seen a 76 per cent decrease in visitation as activities such as paddle boarding and cycling have grown in popularity. As a result, 46 per cent of tourism providers have developed outdoor activities and experiences in a bid to attract more guests. Of course, it will be critical to manage these trends in the months to come as Covid-related restrictions and concerns evolve.
The possibility of increased regulation of the holiday-let market should also be noted by investors. London has already capped short-term lets to just 90 nights a year unless landlords have planning permission, and areas like Cornwall and Bournemouth, which have seen major ‘over-tourism’, are likely to bring further regulations in.
Finally, without the security of long-term leases, investors will struggle to find high-street lenders that are willing to back their investment. Many lenders only offer variable discount rates, charge high interest, and require large down payments, so investors and their brokers ought to consider their financial options at the same time as hunting for the property itself.
In the months to come, it will be fascinating to see how much interest holiday lets receive from property investors in the UK. For those landlords considering to diversity their portfolio beyond BTLs, they should consider the various points outlined above to ensure they are fully prepared for the different challenges the holiday let market presents – those who do so successfully could certainly open the door to many new exciting opportunities.
* Paresh Raja is the founder and CEO of Market Financial Solutions *
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