BTL lenders that make ample ESG headway will have a 'huge competitive advantage' in next two years

In recent months, there has been a rise in ‘green’ mortgage products to encourage landlords to make their properties more energy efficient and fit for EPC requirements.

During a recent B&C virtual roundtable on the changing appetite of BTL investors in partnership with Octopus Real Estate, its head of BTL sales, Steve Matthews, urged the conversation to be extended beyond energy efficiency. “I would like to see the market not purely fixated on EPC — it’s an important part, but that’s not the definition of a green mortgage.”

D’mitri Zaprzala, head of residential at Octopus Real Estate, agreed, reinforcing that environmental, social, and corporate governance (ESG) is here to stay and has transitioned from simply a “nice to have” to actually negatively impacting a business if they don’t get it right. “We as lenders probably have the primary responsibility to find ways to do that. I think those lenders that innovate better and quicker than others will have a huge competitive advantage in the next 24 months or so.” 

Octopus has recently achieved its B Corp status — which means it is legally required to consider the impact of its decisions on its workers, customers, suppliers, community and the environment. “We have seen a sea change across the group,” D’mitri stated, suggesting the lender will be launching more initiatives in this area in the near future. 

Last week’s discussion was chaired by Medianett editor Beth Fisher, who was also joined by David Williams, managing director at Results Asset Management Limited; James Perris, director at De Villiers Chartered Surveyors; Alec Chohan, senior manager for commercial finance at Knox Capital Solutions; and Matthew Rowne, director at The Buy to Let Broker.

During the event, which identified the influx of changes BTL investors have witnessed and adapted to over the past year, James outlined how geographical and WFH living trends have impacted how landlords have invested since the start of this year, especially as people scramble for larger homes in more suburban areas as a consequence of the pandemic. “The one-bed flat in London offers a very poor return and, with so little capital appreciation likely to happen, it’s going to be unappealing for anyone except those with very low debt levels,” he said. 

However, James is doubtful this will be a long-term trend. “I think people want to move to London for a reason. They want the vibrancy and culture — everything about it that makes it exciting. I think what we’re going to see is a lot of people move back and, as people start to go back into the office, you will get this ‘fear of missing out’.” 

D’mitri agreed that attitudes are changing extremely quickly, referencing how, at the start of the pandemic, many thought it would spell the end of HMOs due to a heightened risk of infection. “As [time has] gone on, that sentiment has changed. More people are desperate for social contact again — [making] an HMO perfect.” 

While he believes there will be continued transformation, both in terms of location and types of property in the BTL market, “the reality is, we’ll probably return close to what we were pre-pandemic, but with a few changes that will stick”. 

The geographical shift hasn’t just been a result of the health crisis; Steve emphasised that this has been occurring over the past few years. “Investing in property needs to be treated as a business — you need to make a profit. That is ultimately why there has been a [surge] of landlords from the South looking further afield to sweat those assets and try and create that yield imminently.” 

The revitalisation of the high street has also been a big topic of conversation, especially since the government confirmed PDR changes to support this. David insists that young people will want to live in these areas, surrounded by restaurants, cafes and nightclubs. “I think it makes total sense for people to move into town centres.”   

When discussing where else landlords should be investing their money this year, Steve mentioned that a “really buoyant” area is currently in run-down secondary properties coming to market which need a bit of work to buy, refurb, rent and refinance (BRRR). Accordingly, adding value to property in this way is currently the most popular reason for customers taking out bridging finance with Octopus.

Alec is noticing this trend to a greater extent in the first-time landlord market, while more experienced investors are looking at specialist, high-yielding assets, such as HMOs and MUFBs. “There are different parts of the market that are booming for each type of landlord.” 

In 2020, 78% of The Buy to Let Broker’s BTL purchase transactions went through a limited company structure, evidencing how landlords and accountants are becoming more responsive to the tax changes that have been phased in over the past few years. 

Matthew said that the landlords and brokers which have embraced these and been agile in their approach will continue to thrive. “The landlord has proven to be a very adaptable animal, and, certainly, the modern landlord has to in order to survive.”

He also noted that committed, professional landlords who have welcomed change are usually the ones that require specialist BTL lenders, because it involves manual underwriting and an understanding of the proposition. “It’s where specialist lenders and brokers really add value to situations. They can look at the plausibility of a case and whether they should lend on its merits.”

The full roundtable can be viewed below. 

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