Lets chance

With the Euro strong, the base rate low and more Britons staying home for their holidays, suggestions that the time is right to invest in holiday let properties are beginning to be heard. But the experts advise such an investment decision is not to be taken lightly. And if you do dip your toe in the water, do it in the most tax-efficient way possible.

Research from Haven Holidays published in March found that, despite the current economic gloom, nearly half of those surveyed were still intending to take a holiday in 2009. However, more than half of those potential holiday makers, 27 per cent, said they would be holidaying in the UK rather than abroad.

“We are in a period when bling is out, and modesty and financial restraint within the family is the order of the day,” says Nicholas Tucker Brown, director of home development company the Queenwood Group.

That, combined with the fact interest rates on savings have plummeted, is beginning to make investing in a holiday let appear attractive. Some specific holiday lets are even promoted as suitable for inclusion in Self Invested Personal Pensions (Sipps).

Stuart Law, chief executive of property investment advisers Assetz, says UK holiday lets generally offer significant income to an investor. Lets in the right areas, that are run professionally, can return gross yields of 10 per cent or more.

“Net yields on buy-to-let were around 3.5 per cent until recently, but acquiring distressed buy-to-let property can get you to around five per cent net yield. UK holiday lets are an alternative way of achieving this level of yield or greater,” he says.

Queenwood Group offers holiday properties as part of its Retallack Resort and Spa and Retallack Surfside development in Cornwall. Planning consent has been obtained for the development to be part of an aparthotel, meaning investors can hold the properties within their Sipp. There is also a guaranteed five per cent return for five years on offer, underwritten by Coutts & Co, with property purchase prices of £250,000 to £325,000.

Brown says he has recently seen interest from clients with maturing bonds who have been looking for better returns.

“This type of investment, whilst not right for everyone, may well be appropriate for those Sipp (members) who mistrust paper but need to obtain a high safe yield,” he says.

But investing in a holiday let is not necessarily as straight forward as locking cash away in a bank account or a bond.

Law points out that investors must remember that buying an individual property themselves and letting it out can be labour-intensive and akin to running a business. Running costs can also be higher than a standard buy-to-let property.

“It should generally be assumed that gross rental on UK holiday lets is reduced by 35 to 50 per cent. This represents greater marketing costs than a simple buy-to-let and lots of changeover costs each week or two weeks,” he says.

However, running a UK holiday let business has the upside of allowing investors to benefit from entrepreneurs’ tax relief. This means that the first £1 million of gains received is taxable at 10 per cent, rather than the standard 18 per cent capital gains tax (CGT) rate.

Buying in a holiday resort can make such an investment more hands off for an investor, but the CGT advantages are lost.

Evolve Financial Planning director Jason Witcombe is cautious of holiday lets as an investment option.

“If your main asset – like most people – is the house that you live in, it seems a bit crazy to be investing further money in property in the UK, irrespective of whether it sounds like a good deal today because of falling house prices and people staying at home in the UK,” he says.

Meanwhile, London and Country Mortgages head of communications David Hollingworth warns that finding a lender willing to consider a holiday let is likely to be a challenge. “The buy-to-let market has obviously tightened considerably and holiday lets were always a bit of a niche within buy-to-let in any case,” he says.

Hollingworth points out that liquidity is another issue for investors to consider, as lenders will require at least a 25 per cent deposit – money that is then locked into the property. The best mortgage deals for buy-to-let properties such as holiday lets, are often only available for those putting down a 35 or 40 per cent deposit, he adds.

Meanwhile, John Charcol senior technical manager Ray Boulger believes now is a good time to be looking at buying buy-to-let property generally, due to the reduced values, particularly for those who are not part of a chain and can afford to be picky.

But the obvious risk of investing in a holiday let currently is that property values may continue to fall. Boulger says this is a risk faced by all property investors.

“You’ve got to take a view. My view is that the market will bottom out later this year and the time to buy is when prices are still falling, but shortly before they’ve bottomed out,” he says.

“Clearly some people take a more bearish view and some are forecasting that prices will keep falling for at least another two years. If you take that view you’ll not want to buy just yet, and this is one of those discretionary purchases that you don’t have to buy.”

Boulger adds that lenders typically like to see three years’ worth of accounts for holiday let lending where possible.

In terms of including holiday lets within a Sipp, the rules are complicated. Standard Life senior pensions technical manager Andrew Tully says that while residential property cannot be included tax-efficiently, a hotel or student hall of residence can.

“The lines between these types of property are becoming blurred due to the intervention of buy-to-let rooms and aparthotels. There is no definition of ‘hotel’ in legislation so there is no clearcut picture,” he says.

Companies such as GuestInvest – which went into liquidation last year – and Assetz offer this style of aparthotel, as does the Queenwood Group.

In establishing whether or not such a property is Sippable, Tully says HM Revenue and Customs is likely to look for evidence that the property is a hotel rather than a residential property, by scrutinising such things as whether rooms are serviced and if there are shared services on offer, such as a laundry or restaurant facilities.

Properties included within a Sipp can only be used on the same terms as everybody else, according to Tully, so the owner would have to pay to stay there. He warns that if the Revenue were to decide the Sipp investment was actually a residential property, hefty tax charges would apply and the Sipp could be deregistered.

Another option for getting exposure to such an asset class within a Sipp is to invest in a “genuinely diverse commercial vehicle” such as a unit trust, open-ended investment company or Real Estate Investment Trust that meets specific requirements, Tully says.

Law says Assetz is launching its first UK holiday resort fund within the next month, which will offer investors exposure to holiday lets within their Sipp.

“The investor can achieve significant rental income via a fund with absolutely no work required whatsoever. Our fund is looking at yielding 5 per cent net and also targeting capital growth through acquisitions at currently very advantageous pricing,” he says.

For those seeing opportunities in holiday lets, the complexities of a bricks and mortar investment need not be the only way. But neither option offers the simplicity of a cash investment, particularly for those who would need a mortgage to make the investment a reality.

Holiday lets as an investment option

PMI Independent Financial Advisers director John Stewart describes investing in a holiday let as an “interesting” alternative to putting money in the bank.

He believes it is an investment option that makes more sense for those with enough cash to not require a mortgage, but says it is an investment decision that requires a lot of thought.

“To get a mortgage on it is going to be difficult. For those that have got the cash it’s a totally different argument. That actually may not be a bad idea because the returns on holiday lets can be quite good and clearly some of the property is at a depressed value at the moment, so there are deals to be had.”

But Stewart adds that along with the difficulty in obtaining a mortgage for those that would need it prospective investors need to factor in the extra wear and tear these properties are subjected to. There are also other costs to consider, such as utility bills and council tax. On top of this there is the risk of struggling to find occupants – something of particular concern for those who have taken out a mortgage. Carefully researching the right areas and demand levels is vital. Stewart also currently holds reservations about property investment generally at the moment.”(Investing in holiday lets) is an interesting avenue, but it’s not simple. It’s not like putting it in the bank and just watching it grow because there are issues and things go wrong with houses. Boilers go wrong, things get damaged and things get stolen.”