Holiday lets grow despite summer market slump

The housing market may be suffering a summer torpor, but it seems one area – the second-home, holiday let market in the UK – is still strong. A new report from estate agents Knight Frank shows that the number of second homes in Britain rose by 2.6 per cent in 2009 – despite the recession – to reach a record level of 245,384, and Liam Bailey, the agent's head of residential research, expects to see a further rise to 250,000 this year. Economists also predict that the money spent by Britons holidaying in the UK will grow by 2.6 per cent this year, as they avoid the expensive eurozone.

"The recovery from the recession has coincided with a trend for taking holidays in the UK despite a succession of three damp summers between 2007 and 2009," says Mr Bailey. "The fashion for 'staycations' has been inspired partly by a weak pound and partly out of travel concerns."

Mr Bailey believes this growth in demand means that the owners of good-quality holiday homes can expect typical gross yields of between 5 and 7 per cent, with greater prospects of year-round occupancy. "The potential investment returns from holiday lets is a huge draw," he says. "Increased demand for self-catering accommodation throughout the year has enabled buyers to look upon a second home as an investment rather than a luxury."

Kate Stinchcombe-Gillies of HolidayLettings.co.uk, an online agency that has more than 7,000 UK homes on its books, recognises the general trends in Mr Bailey's report. "Last year we saw a phenomenal rise of about 80 to 90 per cent in inquiries, and took on 800 more properties. And although this year hasn't been quite so strong, we are still seeing growth."

If this looks like a market soon to reach saturation point, Ms Stinchcombe-Gillies has some good news. "Demand is growing across the year, with May-June and September-October – not traditionally high season – particularly popular.

"The growth in the number of holiday homes is more than matched by the number of people wanting to let them. The geographical spread is also getting larger. Although still concentrated in the South-west, lettings are thriving all over the country," she says.

If you want to be part of the UK's tourism industry but have yet to purchase a second home, your first and probably largest hurdle will be finding a mortgage lender that will allow you to let your property. "I believe the majority of people with second home loans are knowingly – or being misled into – ignoring the exact terms and conditions of their mortgages," says Norman Phillips, a director of Enhanced Wealth, a mortgage broker.

"This is a niche market. There are only two lenders who allow short lets even with the buy-to-let market. And of those offering a second or holiday home mortgage, most stipulate that the home can be let for only up to four months a year. There are mortgages out there, but they are in short supply, especially at the moment with banks concentrating on mainstream residential loans, but they will cost more in interest rates, admin fees and underwriting."

Mr Norman also warns that because there is such a dearth of lenders, potential buyers should be careful when trying to buy into a holiday let development. "Most lenders will want to restrict their exposure in one development. Lender A will only mortgage 20 per cent and lender B 25 per cent of the units, which leaves the other 55 per cent virtually unmortgageable." This will also have an impact on future resale value of the apartment.

Once you have bought your holiday let, one of the next largest expenses will probably be insurance. This may not be easy to find, according to David Gaskell of Schofields, a specialist holiday home insurer. "Many people go to their household insurer and ask for cover for the second home, and are told yes. What they don't realise is the extent of the exclusions that make the policy virtually useless. We have come across a householder who tried to claim for £15,000 of water damage from a burst pipe, only to be told that his policy said that the house had to be inspected every 24 hours by the policy holder even though he lived 200 miles away."

Mr Gaskell has also seen a huge rise in the number of thefts from holiday homes, in some cases when the home has been cleared out by criminals booking with a fraudulent credit card. Mainstream policies usually stipulate the need for a forced entry. But insurance, when accepted as a business expense, can be found: the premium for a small cottage with a rebuild value of £150,000, contents up to £17,000 and including public liability could cost up to £340 a year with Schofields.

Other outgoings will include marketing, cleaning, maintenance and a checking in and out system. Many of these services can be provided by agencies, but their fees have to be weighed up against the time and expense of private arrangements.

Be aware that although you don't live in the home full time, you will still have to contribute to local council taxes. Furnished holiday homes will be liable for council tax but will have a 10 to 50 per cent discount because no one lives there on a permanent basis. The level of discount depends on the policy of the local authority where your holiday home is located.

Invariably holiday lets come furnished and this can bring tax advantages. Because the taxman treats these homes as a business, you can claim capital expenditure and wear and tear through your self-assessment tax form when declaring your rental income.

At sale time there is capital gains tax to consider. Profit is subject to CGT provided it is over the annual tax exempt threshold of £10,100 a year. But as many Britons treat these homes as a future retirement home for themselves, no CGT would be liable on sale.

But whether business or investment Ms Stinchcombe-Gillies says many of Holiday Lettings' new clients are determined to maximise the profits from their holiday home and treat it as a business, not just a family retreat.

"The key to being successful seems to be having a cool head for business, but a warm heart for making holiday-makers feel relaxed and comfortable while they are in your home," she says.

Expert view: Enhanced Wealth

By Norman Phillips

The returns on a holiday let are much greater than buy-to-let, but they come at a cost. Someone has to do the cleaning, gardening, laundry and checking in and out. The marketing is also more expensive and harder to get right. Buy-to-let agents will charge about 10 to 15 per cent of the rental value, holiday agencies anything up to 25 per cent. But having said that, the yields are so much better on holiday lets.