Karl Griggs gives a snapshot of the current property investment market, answering questions from landlords.
What changes have there been to underwriting due to COVID-19?
- Increasingly in-depth review of applications
Overall, lenders are asking many more questions of landlords, which means that the underwriting process and approvals on applications are taking longer than before. This more in-depth application review is having an impact on the commercial lending process, particularly on HMOs, HMO conversions, and multi-let properties.
- New COVID-19 questionnaires and declarations
Lenders are bringing in new documentation to find out more about investors’ plans. COVID-19 questionnaires looking into business models; the locations of properties; plans going forward; and what precautions investors are putting in place in case of further lockdowns.
Some lenders are introducing COVID-19 declarations, which ask investors to confirm that they have appropriate plans in place for further pandemic-related developments such as lockdowns or tenants not being able to pay rent. Underwriters are also asking more in-depth questions about investors’ future plans and how they expect to grow.
- New requirements for tenant type details, property locations, and business plans
- Tenant types: Lenders are now asking for much more detail about the tenant profile because of the changing landscape due to COVID-19. For example, pre-COVID-19, investments near airports for business professional tenants were seen as a good investment by some lenders. Currently, with much lower levels of business travel, there has been an impact on the occupancy rate. Now, DSS tenants and the guaranteed income that comes with them, are seen more favourably.
- Property locations: Equally, the location of a portfolio is critical. Lenders want to look at the location of properties to determine what the tenant profile was and whether it will be there in 6-12 months’ time.
- Business plans: Lenders want to see what the original plan for a portfolio was and how investors have followed through on it, as well as what plans for the future are. They want to look at how future growth plans will impact an existing portfolio, in line with the current stress tests.
- Increased funds and resources for voids needed
Lenders want to see proof of funds to cover longer void periods. Underwriters are looking much deeper into savings and if investors have enough to cover 3-6 months of voids. They will also be looking at the spread of risk in a portfolio. A void period in a single residential buy-to-let property has much larger implications than an HMO with six tenants, where only one tenant leaves.
- Detailed analysis of payment holidays and Bounce Back Loans, past, present and future
Banks will be looking very closely at recipients of payment holidays, and whether they applied for the right reasons. Lenders are asking for bank statements covering any potential payment holiday periods. They are also looking forwards to see what the impact of a payment holiday would be on a portfolio in the future. Some banks have brought in declarations for clients to sign saying that they are not intending to and will not take out a payment holiday in the future.
Equally, with Bounce Back Loans, lenders are looking at whether investors have taken them out for the right reasons and used them in the right way. We have seen investors who have two businesses and take out a Bounce Back Loan as their retail business and then use it to put down a deposit as their property business. This is seen in a negative light by lenders as it is not the intent of the Bounce Back Loans.
If an investor has taken out a Bounce Back Loan as a property company, lenders are also asking how they plan to repay any loans next year. Lenders are considering how these loan repayments, on top of mortgage payments, will impact the viability of affordability across the portfolio.
What will happen to valuations if there are lockdowns?
Valuers are operational once again, except for where there are local lockdowns. Rolling closures will likely remain the norm for the foreseeable future and change on an ongoing basis. This will add complications for property valuations in those areas, but aside from that, valuations are getting back to normal.
New arrangements will need to be made ahead of time to comply with COVID-19 regulations for the valuation of HMOs and multi-block properties. This includes valuers carrying out a detailed government safety assessment with the property owner to ensure that their requirements can be met and reassure them about the safety procedures. This will require a certain amount of coordination from all parties to ensure that the valuation can be completed in a single visit and the valuer does not need to return, incurring additional cost.