Most of us will have at some time had a lovely holiday in a charming location and thought “Wouldn’t it be nice if…”. Whether this is a Caravan on a resort, a seaside flat, or a cottage in the country, ownership of a second ‘holiday’ home is something that many Brits often aspire to. The decision to purchase may also (often) be unwritten by the “we’ll rent it out when we’re not using it” assuring yourself that the ongoing running cost (and often even the debt against it) will be covered by a third party.
The real answer to this is ‘possibly’, but we believe that you first need to look at the situation solely as an investment, then make adjustments for any emotional influences (e.g. who to rent to and how often / do we want to keep summer holidays and Easter for the family).
There is no standard ‘Holiday Home’ that can be clearly defined, so we have studied three qualifying options. These include;
- A Freehold Country Cottage (Permanent Residential Use);
- A Seaside Flat – Long Leasehold (Permanent Residential Use);
- Site based Holiday Lodge / Chalet (Restricted Use)
The Country Cottage
The most versatile and arguably lower cost (running cost that is), a freehold cottage can of course be let as any other buy-to-let (BTL) investment and unlikely to be governed by any restrictive terms or covenants. Letting long term using an AST type agreement of course would remove any usage for the owners (except during void periods) and reduce the per night (or week) yield in line with most other BLT assets.
The per night or per week rate will of course depend hugely on the location and demand (remember resorts can go in and out of favour from year to year) and you will usually need to have a greater involvement in both the Marketing and Management of the property – albeit enjoying a greater share of the income as a result.
The popularity of UK self catering holidays and the success of private rental websites (such as www.cottages.co.uk) have made this a more manageable (and profitable) option, giving the owner much more variety in how the property can be used. However there is of course a larger capital outlay, as you are effectively not buying a “Holiday Home” as such, but a standard residential dwelling house, which you intend to let primarily to holidaymakers.
The analysis below shows an actual example of a property we studied. This does not of course take into account any discounted purchase price, of which many can be found around the UK, particularly in the form of distressed sales. However, given the limited restrictions with this type of property, which has nothing to prevent a standard residential or BTL mortgage, the sale price is still likely to be less affected than other types of holiday home, where usage (and as such debt funding) is limited. As such, no account has been made for future capital uplift.
The Numbers:
Purchase Price £250,000
Rental (full time on AST)
£1,250 (per month) £15,000 PA
Approx Outgoings £2,500
Net Income £12,500
Yield 5%
Holiday Let (c50%)
£400pw (average) £10,500 PA
Approx Outgoings £3,000
Net Income £7,500
Yield 3%
The Seaside Flat
The second of our options, again not limited to holiday use only, the seaside flat will undoubtedly represent a higher capital outlay than a restricted use unit and something on the seafront should encourage reasonable demand throughout the year. Cost of course will depend greatly on location, with a well presented flat in Blackpool available for as little as £25,000, but with a similar property in Brighton costing as much as ten times that amount. For our analysis below, we have used a £100,000 Eastbourne (Sussex) property.
A number of Victorian ‘resorts ‘are also making a comeback. Some parts of Kent have fared particularly well for example, with places such as Ramsgate and Whitstable becoming sought after second home locations. Like any other flat, you’ll need to consider the communal (shared) costs and any restrictions contained within the lease, whilst also considering the opinion of neighbouring properties in respect of short –term lettings, particularly if all others in the building are owner occupied.
The Numbers:
Purchase Price £100,000
Rental (full time on AST)
£600.00 (per month) £7,200 Approx PA
Outgoings £2,200
Net Income £5,000
Yield 5% Holiday Let (c50%)
£250pw (average) £6,500 PA
Approx Outgoings £3,000
Net Income £3,500
Yield 3.5%
The Holiday Home (Lodge / Bungalow / Chalet)
Perhaps more typical of the holiday home investment, situated on site designed for holiday use, usually with amenities such as a Swimming Pool, Restaurant & Bar and a Gym etc.
During the property boom of the early noughties, these homes (along with just about every other holiday home type) attracted a high premium, with good sites achieving in excess of £100,000 (even £150,000) for some better quality built, permanent units. Finance (Mortgages) were possible, often arranged via the seller, but many were also bought with cash, typically equity released from main residences.
When the Credit Crunch came along and, swiftly turning into a global financial tsunami, the sale of such luxuries were among the first to grind to a halt. Firstly, new unit sales all but ceased, followed by an abrupt halt in resale figures and then came the repossessions. It will probably make perfect sense that, if given the opportunity of loosing your main residence or the holiday home, the keys to the weekend getaway will undoubtedly be the most likely to be handed back. In addition, we have seen evidence of the sites themselves having operational difficulties, both through a lack of unit sales, a reduction in the rental market and less occupation from holiday home owners.
Whilst the site fees and ground rents (assuming they can collect) are written into the leases or deeds, thus representing a relatively secure income, without high occupation, the sites simply don’t generate the turnover required to operate, often resulting in lower service levels and subsequent disputes with holiday home owners over service charges.
In our research we focused on a few sites in the South of the UK, from Cornwall to Kent, where real propportunities have been found – Please refer to current propportunities for details. We defined this sector into two distinct groups, based on the lease term and tenure, with short leases (50 years or less) and longer leases (99 years or more) or freehold ownership (albeit with restricted deeds). Regardless of the tenure and term, there will usually be some fairly restrictive covenants and terms included, such as:
- No permanent residency (e.g. occupation limited to 30 days at a time);
- Service Charge Contributions – usually far higher than non-site holiday homes;
- Restrictions on rental (e.g. via site operator) or indirect penalties for direct management;
- Restrictions on re-sale (e.g. site has first option / commission however sold);
- Availability of Services – many facilities close during winter affecting rental figures;
This list is neither statutory nor exhaustive, but appears to be typical of the sector and generally applies to both the shorter term and longer term ownership tenures.
The Short Lease Chalet
The first sub-sector we looked at were the shorter leases of 25 years or below (any arguably shorter lifespan) chalets, which can be found across the country at most coastal locations where tourism still contributes significantly to the local economy.
Our research has resulted in an approximate cost of around £50,000 for a good quality two bedroom site-based chalet on a lease of 25 years, with typical ground rents and service charges being between £2,500 and £5,000. However, like much of the property markets, propportunities can be found in these tough times.
We found a number for re-sale, but still with around 20 years remaining at around £25,000. However, two units on a well known (and popular) Kent site went through a local auction at £12,000 and £15,000. Taking into account the cost of a basic refurbishment, we have used a budget of £20,000 to calculate the potential returns below:
The Numbers:
Purchase Price £20,000
Holiday Let (c50%)
£350 pw (average) £9,000 PA
Approx Outgoings – Ground Rent & Services £3,000
Approx Outgoings
Marketing & Running Costs£3,000
Net Income£3,000
Yield 15%
The Long Lease / Freehold Lodge
The second sub-sector analysed were those properties on a more typical long lease or even offered on a freehold tenure. As expected with a longer term, these units are ‘built to last’ and range from timber framed lodges and terraced homes, through to stone bungalows or apartments within period buildings.
Our research identified an approximate cost of a ‘site sold’ unit still being around £80,000 to £100,000, with some units on popular sites still being marketed at over £125,000. We focussed on Cornwall during our research and found a number of propportunities within a small leisure group, which itself was up for sale. Four bedroom units at a premium coastal site were being marketed locally for around £80,000 and 3 bedroom lodges at a separate site close to a National Park were be advertised at around £65,000.
However, a number of ‘distressed’ have come onto the market in the past eighteen months and, probably helped by some uncertainty over the operation of the sites, failed to meet anywhere near the usual market value. A number of the coastal four bedroom units have sold for under £50,000 and two of the 3 bed lodges at the sister site have gone for just £42,500. All these units were permanent structures and sold on a Freehold basis.
We have taken an average and allowed for some minor cosmetic upgrades in arriving at the following calculations. Whilst this particular propportunity may have passed, we believe this remains typical of the current Holiday Home marketplace:
The Numbers:
Purchase Price £50,000
Holiday Let (c50%)
500pw (average) £12,500 PA
Approx Outgoings – Ground Rent & Services £4,000 PA
Approx Outgoings
Marketing & Running Costs £3,000
Net Income £5,500
Yield 11%
The Propportunity
The fact is that there are propportunities in each of the segments identified, although simply pointing towards the highest yield is not the real answer; its more about your own requirements and appetite for risk;
The non-site options are, in practice, standard buy to let investments that also have a holiday rental option, based on their location. Despite yielding less than the alternatives identified, they will be more liquid from a resale point of view, have (typically) a lower fixed cost and flexibility are the most flexible in respect of usage options.
The short lease chalet option should provide the best immediate return in terms of % yield, although there is of course a depreciating capital value to factor in. However, given the relatively low initial capital outlay and benefits of owner use (e.g. site facilities), this option may be the best entry point for anyone not looking for a long term investment, but more of a family facility which should, if managed correctly, pay for itself and provide a small income during its (limited) lifespan.
The final option is perhaps a mix of the two, with a higher capital outlay and fixed cots payable, but offering a good (longer term) return and good potential capital appreciation. The sites on which these types of holiday home are located are generally more desirable than the shorter lease units and their popularity in the UK is making something of a comeback. If a distressed or discounted sale can be secured at the levels identified during our research, this route would be our preferred choice as a good long term propportunity, with an element of family fun thrown in too…
