An example of the difficulty of prediction is the conclusion to a detailed study recently published on the private rented sector by the London School of Economics (a study commissioned by the NRLA)
“Individually and cumulatively, the recent tax changes have reduced the incentive to be a landlord in England. But predicting the timing and magnitude of the effects on landlord behaviour—and on the sector itself – is challenging, as is assessing them in retrospect.
“Equally other factors such as changes in regulation or the rate of inflation or house prices may enhance or offset some of these pressures. Differentiating the various incentives cannot be done easily and we lack the detailed data required to build formal statistical models.”
In other words – this may be unfair – they don’t really know!
One thing we do know: it will not get any easier for landlords operating in a business that’s always in the public eye, and bedevilled with mass media negativity, changing taxation, regulations and red tape, all of which would appear motivated more to discourage than encourage private landlords.
Despite all of this, landlords generally make a success of the rental businesses, not least because demand for renting exceeds supply, by a considerable margin in most locations. And property prices have kept powering ahead, despite Covid.
With next to zero returns on cash deposits, investing in rental property still looks an attractive option to many people. With average rental returns easily outpacing inflation – now, we are told, running at 4.2% – when capital appreciation is factored in, total returns have been outstanding.
Rising house prices are still sustainable
Despite the doom and gloom and the uncertainty that Covid brings, unlike this time last year the experts are predicting that the housing market will remain resilient though 2022. Early last year we had the stamp duty boom which helped defy the predictions of a Covid collapse, but this time the market seems to be sustaining itself.
Last year the work from home (WFH) migrations shifted demand patterns, with shortages accelerating house prices to such an extent that some rural and provincial locations saw eye watering increases – Taunton in the south-west, for example, reportedly saw average prices rise by 21.8% in the year to October 2021. (Halifax, Bank of Scotland)
With house prices likely to continue their steady rise this year, though its not likely at anywhere near the Taunton figure, getting onto the housing ladder will continue to be a herculean task for most first time buyers. This will push more demand onto the rental market. It is likely rents will continue their steady rise, by around 3% predicts rental letting agent and property services firm Leaders Romans Group (LRG). Some locations, where supply is constrained, could even reach 10% LRG thinks.
Location is the key to property investment success and ’twas ever thus. Being in the right place at the right time is sometimes more about luck than good judgement, given the illiquidity of property. But doing your research thoroughly and anticipating change is still vital. Usually, the writing is on the wall well before the market is seriously affected, giving investors time to change direction if need be, to get out while the going is still good and look for greener pastures – see UK’s leading tech hubs attracting record investment and jobs
The threat of build-to-rent
US hedge funds and private equity funds as well as some home grown financial institutions are moving into the build-to-rent business in the UK. The market for purpose-built rental accommodation is gathering pace in Britain and to some extent poses a threat to the small-scale landlord. This sort of large scale investment in rental housing is well established in the US and the model is being replicated here in the UK.
The British Property Federation says there were around 64,000 build-to-rent homes in the UK by last autumn, with a further 141,500 currently under construction or in planning. This is still quite small beer given the millions of small rentals owned by private landlords, but the numbers are growing and in some locations they are beginning to have an impact on the rental market. There are an estimated 4.4 million privately rented households in England.
The likes of US private equity firm KKR recognise that demand for renting is likely to grow significantly following last year’s surge in property prices. Home purchase is now well beyond the researches of a big chunk of the younger population – to take an extreme example, it is said that in London home ownership is out of reach for all but the top 10pc of workers, that’s according to research by Nationwide.
The build-to-rent investors generally operate at the top end of the rental market catering in the main for professionals and families, while some are now looking at delivering “next generation build-to-rent neighbourhoods” setting new standards for style and service, professionally managed units, blocks and small estates meeting what they claim is the growing demand for high quality rental housing.
What LRG says of build-to-rent: “This is set to expand next year with real estate heavy hitters, such as Lloyd’s and John Lewis & Partners, diversifying some of their portfolios from commercial property into build-to-rent residential property, sending a signal to landlords that there is strength in the sector. But the market needs a far larger supply of units in the build cycle to keep up with demand and this is a strong time to invest in build-to-rent.”
The Renters’ Reform Bill
Last October the UK Government announced it was pushing back to this year its planned white paper on rental reform. The announcement came after the autumn reshuffle when Michael Gove became Secretary of State for the Ministry of Levelling Up, Housing and Communities, formerly the Ministry of Housing, Communities and Local Government. The Government now wants more time to develop its proposals with the benefit of the new regime under Gove and to await the outcome of the forthcoming National Audit Office review of regulation in the sector.
The NAO brief includes looking into a housing market estimated at 4.4 million privately rented households in England, one which has doubled over the last 20 years, facing, according to the brief, several challenges:
- On average, private tenants spend more of their income on housing (32%), compared with those living in their own properties (18%) or social housing (27%).
- The market is increasingly populated by low-income groups, benefit recipients and families, whose access to other housing options may be limited.
- In around 29,000 instances in 2019-20, households were, or were at risk of being, made homeless following an eviction that was not their fault.
- Many local authorities face funding pressures, which can constrain their ability to check properties proactively for non-compliance and therefore places greater reliance on tenants being aware of their rights and reporting problems.
- The sector is highly complex and shaped by intersecting policy areas across government that affect the supply and demand of rented properties. This includes areas outside the Department’s remit, such as energy efficiency standards, benefits and welfare, and judicial processes for tenant complaints.
The NAO says it recognises that these challenges within the sector will affect how it should be regulated as part of its planned large-scale reforms. It has committed to publishing a white paper in 2022 to set out the details, but we don’t know yet when this will be.
Direction of travel
Call me a cynic, but you can already discern the direction of travel from the wording of this brief. 29,000 no-fault evictions? Landlords don’t regularly evict for no reason, it’s in their interests to keep good tenants. There’s one reason and one reason only for the vast majority of evictions – non-payment of rent. Many of these evictions will also be the result of landlords deciding to sell-up because of the Government’s own actions, making the sector less attractive to investors.
Secondly, landlords are now expected to step in to local authorities’ shoes, housing low-income groups, which inevitably leads to more issues. And as for local authorities unable to enforce the regulations properly because of funding, you can go back 30 years and see the exact same issue, rogue landlords have always been allowed to get away with murder because there’s never been adequate checks or speedy enforcement.
As for tenant complaints and evictions, again there’s never been an adequate system for dealing with this, such as a housing tribunal system which would avoid the complexity of the judicial system. It’s easy to see why, the cost!
We do know from the Queen’s Speech in May last year that Government intends to publish the policy white paper ahead of the Renters’ Reform Bill to cover possession reform including effectively removing the shorthold tenancy, abolishing the Section 21 no-fault eviction process and reforming Section 8, the latter we’re told to be given more grounds and certainty for possession.
Section 21 has been one of the mainstays of the buy-to-let rental market and largely responsible for its rapid growth since the mid 1990s. This change, when it comes, will be a massive blow to the system for landlords, when they find there’s no mandatory eviction process. Section 8 is an adversarial process involving a court hearing, where both sides argue their case in front of a judge, not always the easiest system for obtaining possession.
The paper will also discuss the merits of a national landlords’ register, lifetime deposits and improved local authority enforcement actions. It will, when the Bill is eventually enacted, be one of the biggest changes to the private rented sector since the 1980s and inevitably carries risks to the private rented sector, landlords and tenants and the Government. It goes down a similar road to that taken by Scotland, and to some extend Wales and Northern Ireland, effectively giving tenants more power in the landlord-tenant relationship.
Make drastic changes at your peril
Quite drastic changes were introduced in the Scottish private rented sector under the Private Housing (Tenancies) (Scotland) Act 2016 on 1 December 2017.
Introduced as a tenancy system to establish a legal system that makes sure the private rented sector functions well and to the benefit of both tenant and landlord.
Well, three years has given enough time to test the new system out, but why then does David Alexander, chief executive of letting agency chain DJ Alexander Scotland say: “Don’t demonise [the] private rental market”
He recently wrote an article for the The Scotsman newspaper stating that “there’s too often been an antagonistic approach to the sector within the wider property market.
He makes a plea in his article for more “harmony” in the housing market in Scotland in 2022 and a recognition that homeowners, the PRS and social housing need to work better together.
“Demonising the PRS will not resolve Scotland’s housing problems and, if anything, it is likely to make it worse. The private rented sector is an essential part of housing provision in Scotland, he says, and goes on:
“What always seems to be forgotten is that many thousands of people choose to live in the PRS because of their lifestyle, location, convenience, and simply because it suits them.
“Legislators need to be wary of playing to the gallery in producing the simplistic argument that private renting is bad while social housing is good. Both parts of the rented sector, along with owner occupiers, serve differing needs of the population and you interfere with these systems at your peril. (my emphasis)
Mr Alexander also expresses his concern that rent controls may now be introduced in Scotland.
“Rent controls have never worked anywhere in the world and invariably lead to higher rents for new tenants and fewer properties on the market resulting in more housing shortages in the medium to long term,” he said.
“The fact that the PRS has grown significantly over the last 20 years is important and reflects tenants voting with their feet and moving into properties where they want and can afford to live.”
A vicious cycle
Private renting legislation in the UK has had a chequered history of swinging from one extreme to another.
Without going into the history here, what seems to happen is the legislators come up with new legislation every generation or so. We then go through years of testing that in the courts, precedents are set and then amendments are brought in. Things settle down for a while, then we get a major new set of legislation, as we are expecting now, and the whole expensive and frustrating process starts over.
Lets hope that this time the mandarins and legislators really can come up with something that works for both tenants and landlords, and that this can be backed by effective and speedy enforcement and resolution – don’t hold your breath!