**Podcast Transcript**
Hello, and welcome to another episode of the Essential Property Podcast with your hosts, Amanda Woodward and Paul Samuda. We are on episode 40 today. I was just noticing that we are almost three years into the podcast now. It's gone quickly, as the years do, and our three-year anniversary is in February. I think we'll put together something special for that.
In the meantime, we are at the end of 2023, another eventful year. Just like anything in the property world, there's so much going on, nothing stands still - lots of news, activity, and updates. So we want to take the opportunity today to reflect on the year gone by and look forward to the following year. We'll share our insights, experiences, and thoughts on what may or may not happen in the year ahead.
Over the last few days, that strange period between Christmas and New Year's when I always spend a bit of time fine-tuning our business plan for 2024 (which we generally start mid to late December), about the second or third page has a section to reflect on the year gone by so we can take lessons - learn from what went fantastically and also from what didn't go so well throughout the year.
So posing the question to Paul to kick off this episode: reflecting back on 2023, just from a macro standpoint, both the highs and the lows, share your perspective and thoughts on how the year has gone in the industry with our listeners.
Paul: Okay, it feels like I haven't done a podcast forever. You've taken the reins, Amanda. But I plan to be back for 2024. You can go all the way back to pre-COVID, and 2023 has been no different from the previous years going back as far as 2019, because there has never been a dull moment in the sector.
The whole of government policy has been directed at influencing the private rented sector - tenants and landlords. To be honest, I think landlords have ended up with the short end of the stick, be it tax or anything else. So 2023 was a bit interesting on one side.
The big elephant in the room was the massive hike in interest rates, which started in 2022 but really jumped through to the summer of this year. We're pretty good at forecasting and fixing or not fixing interest rates. But I don't think anybody saw this coming at the speed it did. As a country, we hiked probably faster and quicker than anybody else because of inflation.
So that was the macro backdrop - high interest rates, which let's face it, increased costs. It was high energy prices, which affected everybody. We had a bit of a subsidy from the government, but that obviously dried up at the beginning of the year.
The contrast to that was that rents jumped - we were able to increase our rents because of demand. I think I've said in a previous podcast, I think the government made a bit of a mistake by giving landlords such a hard time. Landlords said, "Don't play this game anymore," which meant less property on the market. So rents could only go one way.
First-time buyers weren't buying because interest rates were sky-high, and they were nervous, rightly so. So there's been a real squeeze, I think. And those famous last words, I think the government has realized that maybe squeezing landlords in the way that they had is probably not a good idea for a group of people, small, medium or large landlords, who look after almost four-fifths of the population in terms of rentals.
So I think 2023 started off more of the same - a bit negative, high interest rates, people a bit nervous, tough decisions. I think I did a paper or a comment somewhere where I said property is a long-term investment. We treat it as a business, and we always encourage investors to see it as a long-term investment.
Years go by, so you get these blips when you get these one or two-year blips where interest rates do jump, there are changing legislations. We toughed it out. We want our landlord partners and all landlords to tough it out as best they can because we firmly believe there is no better long-term investment like property.
Now, just going back to why I think things might be changing, there were a few changes. We were all expecting Section 21 to be scrapped, and that was paused. We were expecting that EPCs were going to be forced upon us in terms of the energy efficiency standard properties would need to meet, and that was thrown out or paused.
In the last budget in November, the government allowed conversions of retail commercial buildings into two flats above without planning permission, and conversions of houses into two flats without planning permission, to broaden permitted development rights - their way of saying, "We need more housing, we want to help you as best we can."
So all in all, the second half of 2023 had a bunch of positives. It's up to us as landlords to see which ones suit us best, how the numbers look not over 12 months but potentially long-term, and jump on board.
One thing the Labour government has said is that they are pretty positive about relaxing planning permission and planning consent rules. Then they might tweak a few things at the edges because they don't want to take the Tory policy on board wholesale. But as far as I know, they're okay with loosening up the planning regulations.
So for larger landlords who want to do conversions, I think that's got to be a plus. Combine that with increased demand for serviced accommodation - that's been a positive too. While things get a bit difficult, it would be unfair for us to scream and complain loudly because we've had some good years as well. We've got to take the wins and move forward to 2024 feeling that we've got a bit of a breeze behind us and be positive.
I think 2024, if we get a bit of heat from the new potential government and what they have in store, that might be contrasted with dropping interest rates. Everybody's betting that interest rates will fall going forward, so that's going to be a win for landlords with mortgages and those without.
Looking forward into 2024, I don't think we are buying anything in the first quarter because we're finishing off our biggest challenge in 2023 - managing our 19-bed HMO development ourselves while ensuring the management business takes over. But we're definitely looking for another conversion in 2024, whether it's that large or flats - I don't know. Yeah, that's what I really have to say on 2023.
I'm really excited about the fact that we had the HMO tax changes related to council tax being charged per room rather than by the property. A lot of individual landlords were suffering in silence, some not so silently. Some didn't make the cut because of that additional cost. So now that gives us more flexibility and encourages people to invest in HMOs.
The one thing I would say is that in our portfolio, we have a mix of HMOs and single-let properties, and HMOs have really been put to the test in my eyes - firstly by COVID, secondly through the energy increases. They've been solid, like a brick wall - they haven't budged. They've been able to absorb the increases because obviously, we increase the rent. But the fact that we're able to spread the cost across a number of rooms really helped us.
We seem to have a bit more flexibility than the single-let landlord. I had a single-let in London where the tenant wasn't paying me, and I went through a few issues. He was a good tenant who had been there a while. But there were two months where I didn't get any rent because I was totally dependent on that one tenant. When things are tough, that can be a real problem.
So HMOs have stood the test of time, and they've been able to come through relatively unscathed - not unscathed, but relatively strong as a result of this. So the news of council tax not being charged per room was just reaffirming the strength and the beauty of owning HMOs. The lenders still like them, and they realize that HMOs have advantages.
We take a bit of a hit on utilities and energy costs because we have to pay those. But notwithstanding that, I think HMOs are great investments. We're certainly continuing to invest in that area.
I think that was a great summing up of 2023. I have a couple of questions for you. You mentioned the EPC regulations, Section 21, and HMO council tax changes - the government had many U-turns last year across various policies.
Paul: You mean there were too many governments?
Amanda: Yeah, exactly. But there were those three key U-turns, and we had Wendy Whitaker on the podcast recently talking about the HMO council tax issue. When would you say that was probably the biggest highlight or positive of 2023? Have we had any other highlights or positives, because it has been quite a challenging year, as you said? It was only towards the end that we had a few wins. Are there any other positives or highlights that we can share, perhaps in our own business from a micro standpoint as well as the macro perspective?
Paul: The biggest win has to be the hiking rents, the jumping rents, and the ability to do that because of the supply and demand squeeze. There's limited supply, so demand goes through the roof, and that sort of plays into our hands. To be fair, if we weren't able to do that, we'd be out of business. Many landlords would be out of business and selling up because they can't do the same.
So I think that's the biggest win because it's just the economics of the situation taking over, and the economics were in our favor - i.e., HMO council tax charged by the room is obviously only relevant to HMO landlords, potentially because most HMOs don't have this issue. It's only HMOs that are either converted from commercial to residential or particularly large HMOs.
So there's only a small percentage that it will affect, but that small percentage would be very happy, either if they were already paying council tax by room, and we know of any landlord who's in an acquisition situation, or new areas that we're involved in like Derbyor Burton-on-Trent, also in that position. So that's a big win for them because it's an immediate boost to their cash flow.
I think the fear was around Section 21 - what do we do because courts are clogged up? And that was the main reason they were going to scrap Section 21 - because they knew that they didn't have the infrastructure to support any new schemes that were coming out with replacements for Section 21 or improvements to Section 8 notices. So that's a tentative win. But we think long-term, it's definitely going to go.
But you know, I don't think we can underestimate how painful it is when your mortgage jumps from a few hundred pounds a month to two or three times that amount because you had a fixed rate that came up for renewal. We had one situation where we were paying £300 and something, and it jumped to £800 and something, especially with the smaller specialist mortgage lenders who aren't mainstream. There was a race against time to refinance, and we were looking at rates of 9% to borrow on an HMO mortgage when our existing rate was 3.8%. So the smaller lenders had really taken advantage of the situation.
I think like nothing can dull that pain if you're falling into that situation where you're paying extra. But a win's a win - we've got to take it and move forward to 2024 feeling that there's a bit of a breeze behind us and be positive.
Amanda: How would you sum up the sentiment for the industry going forward, or perhaps your personal sentiment in the space that we're operating in?
Paul: I think 2023 overall was a tough year for a whole bunch of reasons. 2024 should be better, subject to a change in government. We have interest rates forecasted to peak at 5.25%. I'd be very surprised if they're not less than 4% by the end of the year - so a 1.25% cut. People are suggesting that it really depends on the economy. We had a big drop in inflation, which is what hiked the interest rates. The government itself pays interest on its debt, so they want to see rates fall as well. But it's complicated.
I think if you're a landlord thinking long-term, you're going to take this win in 2023 and not want to go out and buy everything that moves. You're going to plan carefully, do your numbers carefully, and negotiate hard if you're buying. The property market has done relatively well - I think London stalled, but overall, the heavy 20% drop in property prices that were promoted by the press and exaggerated just didn't happen.
I think what they meant was that people were open to a bit of negotiation. I know my brother sold his house, and he dropped his price by about £10-15,000, but he was probably £10-15,000 too optimistic to start with. So he probably got the price the property was worth. People have been dropping £5,000 here, £10,000 there because they've made gains over the previous years, so they've been okay.
From an investor standpoint, I don't think the pocket deals that we've seen previously are going to be there. And with interest rates falling, I think that will just strengthen property prices going forward.
What I don't know is in 2024 whether landlords will continue to sell - and that's a problem for the government to address in the rental sector. Our government of the last few years was under the illusion that they could corporatize the private rented sector and have all these build-to-rent projects. It's a pipe dream - typical government big thinking because they copied other countries where culturally, people like to rent, like in Germany or France.
In the UK, people rent because they have to, not because they like to - people want to buy. So the build-to-rent sector is not going to take over 20% of the rental market. At the moment, it's like 2%, and maybe it will grow a bit faster, but if it gets over 5%, I'll be very surprised.
So I think for our landlords, maybe we'll be telling them to be cautious into 2024 - be very careful how you tie in your interest rates. I spoke to a broker the other day, and I went for a tracker product instead of fixing for two years at say 5% because the tracker was around 6.3%. So I'm paying a bit more now, but I expect a 1-1.5% drop by the end of 2024 and another 0.5% into 2025 - so 2% off. That brings it down to the low 3%s by mid-2025.
So when you're planning, you don't want to be in 2025 fixing a 5-year fixed rate at 6% if in 2025, interest rates are 3-3.5%. Be very careful in how you look at that. And for HMO landlords, I think the commercial sector is going to be a problem - there are still a bunch of empty shops. I don't think that's going to change anytime soon - there's going to be a lot of surplus space.
So what's good is that you can go in and convert properties to HMOs if the numbers work out, in the knowledge that you're not going to get penalized with council tax by the room. We've already introduced a couple of builders to people doing big conversions, and they're happy with them. So there's a lot that we can do to support landlords, although not for free - it's a paid service. But we have the experience to help and support.
I think we should start rebuilding again. A very good friend of mine in a foreign land always used to ask me, "How does he navigate the political scene with the frequent change of government?" And he says, "For I have my goal set, it doesn't matter what government, I'm going to hit my goals." I take that on board - we're going to hit our goals, our financial goals, our wealth goals, our income goals, regardless of the government and legislation.
Amanda: Well, you've almost answered my next question! My next question was going to be: let's group our listeners into two camps - new/small/inexperienced investors with zero or a couple of properties (group one), and experienced investors like ourselves driving portfolio growth (group two). What advice do we give going into next year for both groups?
So if we start with those very new or just getting started, what's your advice for that group for next year?
Paul: I think for the new group here with a couple of properties, everybody's situation is different. Let me give an example of where we weren't able to assist - some of our listeners may know we've broadened our management business to other parts
Paul: Let me give an example - some listeners may know we've broadened our management business to other parts of the country like Birmingham and Derby. I spoke to a landlord who had a couple of properties in Birmingham as flats. They bought at the top of the market, there were heavy service charges, their mortgage was all wrong. When I crunched the numbers, no matter what I did, for them to cover all the costs, the flats had to be running at 90% occupancy all year round at top market rents.
My point is, it depends on everybody's circumstances. But if you have a reasonable mortgage or no mortgage at all, the first thing is - am I profitable? Where am I making some money? Because everybody needs to get paid.
If you're profitable, then your job is to maintain that profitability. Keep an eye on all the costs, control things like your mortgage costs. If it's a single-let, then the tenant obviously pays the costs. Be very aware of your tenant - tenants have been stretched because of the cost of living crisis. So keep in touch, try to assess whether they have affordability issues. Because if they don't, it's just a matter of time before they say they can't pay the rent.
Keep an eye out - are they paying on time or a couple days late? A couple days late can turn into being several days late - that's a red flag, and you need to reassess at renewal whether you want to keep that tenant. Now that might sound harsh, but what you don't want is not to receive rent for 3-6 months because they've lost their job and got into difficulties, and you're the first creditor that goes unpaid because you can't evict them quickly due to the clogged court system.
If you have a couple properties and you're looking to buy, my mantra is: buy well. Do the numbers based on a 6% mortgage rate if taking a mortgage. Look at growth areas - are they desirable areas where people want to move to and will pay a premium because of good schools, hospitals, transport links, amenities? When you do your numbers, if you take a 5-year period, in the first year you expect this cash flow, but over 5 years you'll probably increase rents 3 times. Try to forecast future values too using data from sources like Savills.
We offer advisory services as part of our management package to help with portfolio planning and building. We can assist people, advise on where they're looking, or we can source properties for them, though primarily in Stoke, Newcastle and Crewe for this podcast. But we can definitely help advise people on their best options - just pay us a few quid to sit down and go through that.
For medium to large portfolio owners going into this market in 2024, what's your advice for that group?
Paul: I think look at the next 3-6 years - where do you want to be in 2030? Let's say you have 10 properties, a mix of HMOs and single-lets. Make a decision - do you want to add more single-lets or HMOs? Or do you want to go into serviced accommodation? It doesn't have to be one or the other, but do you want to double or triple your portfolio size in the next 2-3-4-5-6 years?
Once you decide that, then you know what you need from a capital standpoint. Or you could look at it the other way - this is what I'm making from my portfolio now, but I want to increase the income. That might steer you into what you should be doing.
If you've been single-lets all the way, you might go half single-lets and half serviced accommodation because you understand that serviced generates more income. Or you don't do single-lets anymore, you do HMOs because you know they're going to cost a bit more in upfront investment but you'll make 3x the income compared to a single-let buy-to-let.
Those are the strategic decisions you'll be making as a medium to large landlord, unless you're at that particular age where you think "I'm going to sell half and use that money to pay off the other half of the debt." You're probably going to hold and grow, looking at how you can squeeze more out of your portfolio. What direction do you go? More of the same? Do you diversify into different property types? Do you go for a different letting strategy like serviced accommodation versus buy-to-let?
When you have a larger portfolio, you have more flexibility in terms of managing interest rate changes. We've always taken the view that we want to mix our funding - so a chunk will be fixed, some on tracker because we're not sure what we're going to do with those properties long-term, or we might be expecting a drop so we leave those on tracker to take advantage before fixing.
You have to be fluid with how you finance your portfolio. The other thing to think about is whether you want to raise some cash out of the portfolio for bigger deals. So the type of financing you have in place, you may not go for a fixed deal because you might want to refinance and pull that money out. So you want a tracker for now so you can refinance down the road.
Those are strategies we can advise on. As our listeners know, I've mentored investors around the country for 10 years, so we can advise and help on that side of portfolio planning and building. But the key thing, whether you're small or large, is treat this as a business. Have rules, disciplines, budgets, forecasts - have a plan, even if it's one page, and stick to that plan once you've worked it out.
Amanda: As we close off the episode, I want to share an update that Paul leisurely dropped in earlier! After 12 years focusing on Stoke-on-Trent, Newcastle-under-Lyme and Crewe, we've decided to also operate in other areas. We're working with fantastic partners and have launched in Derby, Burton-on-Trent, Birmingham and some smaller surrounding areas like Tamworth.
We're providing HMO management services, serviced accommodation management, as well as buying and selling property in those areas. It's really exciting, and I hope to have our partners on the podcast at some point to share more about those locations and what we're doing there.
If you are listening and have property there or are thinking about those areas, we'll be sending more information through our database about our services. We'd be really keen to chat with anyone operating in those regions.
But we do also have some listeners who are quite keen, Paul, to understand the plans for our central businesses in 2024, whether they already work with us as investors or landlords, or those yet to work with us but interested in our business. Can you share some of the key things we have planned locally?
Paul: Going forward in 2024, as we both own and manage properties, we want to ensure they are always fit for purpose - dry, healthy, with all paperwork and certifications in place. We've taken on more team members to assist on the compliance side, which now covers not just certificates but a whole host of inspections and requirements.
In terms of growing the business, we're looking at different ways to bring in new business at a higher rate. Some of our landlords receive bookings from online travel agents and portals. In some new areas, we've seen rooms that would typically rent for £600pm as an HMO instead getting £150 per night because they provide towels, sheets, amenities etc. So that's much more profitable for the landlord - we'd like to do more of that.
We're going to work with more charities for our larger 7-9-10 bed HMO properties because the market has changed. We're going to be doing more property sourcing for existing and new landlords wanting to invest, which we used to do more of before growing the management side.
What else are we looking to do? Well, we're currently managing around 500 rooms, and we aim to increase that by about 30% this year, which is why we've brought on additional team members in anticipation and upgraded our systems.
We're also looking to introduce a certain amount of automation or AI into our processes to speed up communication with tenants and landlords, and reduce costs that we can pass on. That's a new area for us, but it's one of our goals - how can we leverage AI solutions and integrate them effectively?
I think the property market itself doesn't change massively often, it's more the legislation that changes. But the market fundamentals in areas like Crewe still show there is huge demand we need to address by creating additional rental accommodation. We are lacking fit-for-purpose rental properties in Crewe. We have charities, we have the demand from companies, we just don't have enough suitable rooms/properties.
So I think in the second half of 2024, we're going to really look at how we can push through the planning system to get more rental accommodation registered and available in Crewe. We had to go up against the planning committee before, so we can't wait to do it again! You want positive news.
Yeah, obviously you'd want positive news from it. But we do want to start testing their processes now, don't we, in terms of their stated decision to address the lack of rental supply in Crewe.
Paul: Exactly. Well, that was a good summary. As our listeners know, I'm quite private so I don't like to share too much detail on the ins and outs of our personal business plans. But I think that's been a great wrap up - reflecting on last year, some ideas and advice for next year.
Any parting words before we wrap up?
Paul: I think the second half of 2023 was in our favour. We can only hope that will continue through 2024, subject to any black swan events that come our way. I think we're over the whole COVID situation now. We need to look at building and expanding again, and I encourage landlords to view property as a long-term investment and start building their portfolios accordingly.
Probably more focus on commercial to residential conversions presents opportunities. Our last few purchases have all been commercial properties, and they've been great in terms of returns and how they look afterwards. Sometimes we can be a bit daunted by doing a commercial deal, but we can hand-hold people and assist them through the planning process or the conversion process.
We don't do it for free, obviously - it's a paid service. But we have the experience to help and support landlords looking to do conversions and expansions.
I think we should start rebuilding again. A very good friend of mine in a foreign country always used to ask me how I navigate the political scene with frequent changes of government. He says, "I have my goal set, it doesn't matter what government, I'm going to hit my goals."
I take that on board - we're going to hit our goals, our financial goals, our wealth goals, our income goals, regardless of the government and legislation changes that come our way.
Amanda: And on that note, I think that's a fantastic way to end the podcast. Thank you, Paul, for your words of wisdom. We really value your knowledge and experience, and our listeners can take a lot from that.
Going into 2024, we would love to hear more from our listeners. If there are particular subjects you'd like us to cover, whether big picture topics or local activity happening in Stoke, Newcastle, Crewe or further afield, then please get in touch and let us know. We'd love to make sure we're providing good, informative local content for you.
Until next year, Happy New Year to everybody listening, and we look forward to more episodes going forward. Thank you!
Paul: Happy New Year!
We hope you enjoyed today's episode, and if so, please hit subscribe and share with those who you think would enjoy it too. To get in touch with Paul and Amanda directly, please visit their website www.essentialpropertyoptions.co.uk for more information. We look forward to sharing with you on the next episode.
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