Unlocking value: The role of refurbishment in buy to let
Sep 23 2019
Landlords spend £12,000 per refurbishment as PRS housing quality improves
- The proportion of non-decent homes in PRS has fallen from 44% to 24.5% in last decade as sector professionalises and landlords undertake refurbishment
- 70% of landlords who have refurbished property did so to improve quality of the property, with 45% doing so to boost financial returns
- Landlords more likely to undertake small refurbs to secure rental demand and appeal of property; however, larger development works add more value to property
- Refurbishment proves profitable, buoying average rent by 8% and average property by £13,000
- Less frequent large-scale “heavy” refurbishments add average of £96,000 to property’s value from £40,000 outlay
Landlords’ spending on refurbishment has seen the quality of accommodation in the private rented sector (PRS) drastically improve in the last decade, according to the latest report Unlocking value: The role of refurbishment in buy to let by InterBay Commercial, part of specialist lending group OneSavings Bank.
The standard of accommodation in the PRS has significantly improved in the last decade as the sector has expanded and professionalised. The proportion of homes in the PRS in England deemed non-decent by the ONS1 has fallen for ten consecutive years, decreasing to 24.5%2 from 44% in 2008, and closing in on the level seen among owner occupied stock (18.7%). In spite of the sector growing by
45% over the period, adding 1.5m homes, the number of non-decent homes has fallen in absolute terms too; down by 275,000. While there is clearly more work to do, the improvement is significant and sustained. As a result, the latest English Housing Survey shows that the vast majority (84%) of private renters were satisfied with their current accommodation.
Landlords’ commitment to refurbishing to improve properties has been a key factor in this improvement. A survey of more than 700 property investors, conducted for InterBay by research house Savanta, shows 70% of landlords who recently undertook a refurbishment did so to improve the property, be it its presentation or the quality of the accommodation for tenants. Meanwhile, 45% of landlords cited increasing a property’s capital or yield as their reasons to refurbish.
InterBay’s analysis shows that landlords typically spend £12,0003 per refurbishment. This varies considerably on the type of refurbishment. Typical spending per heavy refurbishment (substantial works such as conversion, extensions and often requiring planning permission) on average stood at £40,000, compared to just £7,000 on a light refurbishment (typically including modernisation or redecoration).
Many landlords take a “little and often” approach to refurbishments, seeking to ensure they maintain rental income and the quality of the property, while a minority seek more significant and costly works to add value or convert a property. Indeed, just 18% of those who had recently refurbished a property had undertaken a heavy refurbishment, and of these, nearly two-thirds undertook the works to add value to the property. Overall, 28% of landlords spent less than £5,000 on their last refurbishment, and 43% spent less than £10,000. At the other end of the scale, just 13% spent more than £100,000.
Unlocking value: the financial benefit of refurbishment
As well as ensuring a property is in a good enough condition to rent, refurbishment typically bolsters a rental property’s value and income potential. 74% of those who undertook a refurbishment said it enhanced the property’s value, and 82% saw monthly rents rise. The average rent for a refurbished property rose by £81 per month, up by 8%. Even after accounting for those who did not see the value
of their property rise, the typical refurbishment added £13,000 to a house’s value, meaning landlords more than make their money back on the capital gains alone. For those that saw the value of their home rise, often those undertaking larger-scale development, the increase was substantial. These landlords estimated refurbishment boosted the value of their property by 9%, adding around £20,000.
The larger the renovation, the larger the average increase in value too. While a light refurbishment typically adds around £9,000 in value, compared to an outlay of £7,000, a heavy refurbishment, involving a £40,000 spend on average, adds £96,000 to a property’s value.
Darrell Walker, Head of Sales, InterBay Commercial commented: “It may be an easy target for political point-scoring, but the private rented sector has been a success story since the financial crisis, catering for a growing proportion of the population that either cannot or chooses not to purchase a home. As the PRS has grown, it has also professionalised. As it has done so, the standard of accommodation for tenants has improved drastically too.
“Refurbishment has been central to this improvement. It is a win-win for tenants and landlords. Tenants see better quality accommodation, while landlords improve the rent they receive and maximise the value of the property. And with interest rates still bumping along the bottom, those borrowing to support refurbishment can access historically cheap funding to enable improvement works.
"Nonetheless, continued investment in the sector is not a foregone conclusion, and it must be supported rather than undermined. Landlords have been buffeted by the headwinds of policy change since 2015, and costs have risen for investors. Should this rate of change continue, it will weigh on landlords’ decisions to spend more on their portfolios, and risks undermining a decade of progress.“
1 A property can be deemed ‘non-decent’ for a lack of modern facilities, heating and insulation, disrepair or posing a hazard under the Housing Health and Safety Rating System
2 The latest ONS English Housing Survey data refers to 2017
3 Median averages have been used throughout the analysis
Notes to Editor
Unless otherwise stated, all data is based on analysis of survey of 720 landlords conducted by research house Savanta in August 2019. Median averages have been used in the analysis to mitigate the impact of any outlying figures or skew in the distribution of data.