This Autumn sees the usual round of political party conferences and the launch of the 2015 election campaign. What does this bode for landlords and how should you be adapting your business? First a quick look at the context. The regulatory landscape of the private rental sector was transformed by the introduction of Assured Shorthold Tenancies in 1989 and buy to let mortgages in 1997. It was the 2004 Housing Act that sent out the first ripples of increased regulation with a new definition of HMOs and the mandatory licensing requirement of larger HMOs. Local authorities could also introduce selective licensing designed to deal with low housing demand or anti social behaviour as a last resort. Newham took these powers to mean borough wide licensing which it introduced in 2013, followed by further borough wide schemes in Barking & Dagenham, Waltham Forest and Enfield. Meanwhile, Scotland introduced a national registration scheme in 2006, followed by a ban on letting agent fees and the 2013 Welsh Housing Bill proposes mandatory registration and accreditation across Wales. In 2010, the last Labour government introduced a new HMO planning use class which allowed local authorities to make article 4 directions banning shared housing. These more recent developments provide an important backdrop for the political party policies. Changes this autumn will see the introduction of landlord immigration checks – initially in the West Midlands – and compulsory redress scheme membership for letting agents.
The 15 September 2014 Lord Ashcroft poll shows Labour and Conservatives neck and neck at 33% with the Lib Dems at 9% and UKIP at 14%. Recent polls have given Labour a narrow lead likely to result in a Labour and Lib Dem coalition. Housing issues that have been making the headlines over the past few months have been rising house prices and rents, particularly in London, mortgage availability, so called retaliatory eviction and a call for longer term tenancies and rent controls. The anti-landlord media bias continues, as does the small minority of criminal landlords which feeds this narrative.
Labour launched its revised PRS policy in May 2013. It wants to regulate letting agents, ban letting agent fees and bring in a national register of landlords. It proposes a minimum of three year tenancies set initially at a market rent, followed by annual indexed rises, though with no details about how the index might be created. Labour is targeting the many undecided voters who rent in the private sector.
Lib Dems say they want a better deal for tenants without placing undue burdens on landlords. The party supports further energy efficiency measures, family friendly tenancies and improving protections against ‘rogue landlords’. Lib Dem MP Sarah Teather working with Shelter has put forward a private members aimed at stopping retaliatory eviction. Over 90% of tenancies are ended by the tenant and the vast majority of those ended by landlords are ended because of arrears. A tiny minority serve section 21 notices after tenants report arrears. Teather’s bill would provide for a moratorium of six months if a section 21 notice is served where a local authority improvement notice has been served on the landlord for repairs at that property. It is possible that the current government may support the bill to reduce the potency of Labour’s manifesto commitments.
The Conservatives favour a free market approach with minimum regulation. Their approach tends to be reactive rather than pro-active and they are likely to prefer quick easy wins such as compulsory electrical certificates. However, the current government’s consultation document ‘Review of property conditions in the private rented sector’ did not favour this as an option, though it did suggest preventing further borough wide licensing schemes and is opposed to a national register. Notably there is no mention of Article 4 directions. All of these policy assertions tell us more about how the parties think they might win their vote than what they would do in power, as radical proposals could well get watered down.
What impact have recent changes had on our businesses? Measures like the deposit protection schemes have been implemented fairly smoothly and have had limited impact. Many HMOs are two storey and have been exempt from mandatory licensing. The Green Deal may start to bite as tenants’ right to request Green Deal improvements takes effect in 2016 and when F and G rated properties become unlettable after 2018. The National Register in Scotland has resulted in a paltry number of prosecutions of landlords and the ban on letting agent fees has caused a modest increase in rents.
In England, Selective licensing has not been a huge problem so far if you are compliant, pay the early bird fee and don’t have too many properties in the licensing borough. But 10 or more properties and you are looking at a very steep bill. There is no doubt that licensing has deterred some landlords from investing further in licensed areas and the stranglehold created by the combination of additional HMO licensing and Article 4 directions is a big problem if you specialise in shared accommodation. To prepare your business you need to get ready for compliance in areas where licensing might be brought in and you may decide to develop your HMO business in alternative geographic areas. Approaches differ widely depending on the borough. Newham’s approach was light touch unless they had reason to suspect a problem, whereas Barking & Dagenham are attempting to inspect every property.
Going forward what impact might proposed changes have on our businesses and what can you do to prepare? The big question about a national register is how it would interact with licensing and whether the two run in parallel? It would seem logical for the register to replace licensing. In Scotland registration costs £55 per local authority area plus £11 per additional property, fees which are a huge improvement on the £500 plus per property levied in England. A register may well be preferable if it were light touch. A recent Resolution Foundation report has proposed tax incentives for accredited landlords and indeed the Welsh experience might make a Westminster government minded to make accreditation in England mandatory. That would require the processing of some 1.4 million landlords. I recommend you get accredited right away to avoid the rush and be ahead of the curve.
Proposals for longer tenancies raise many as yet unanswered questions. Presumably those of us with mortgage conditions that don’t permit tenancies longer than 12 months would be exempt. About 40% of landlords have mortgage finance and this restriction is a standard buy to let term. Student lets are typically for 9 months so it’s difficult to see how this market could be adapted to a minimum three year term. Would legislation take account of subletting as the prospect of letting a property to a carefully referenced tenant for 3 years who then sublets to somebody else after a few months could be hugely problematic? This policy could have a very negative impact on the supply of housing from small or ‘accidental’ landlords who will be reluctant to let their home during a temporary job move for 3 whole years, for example. Will there be exemptions for landlords wishing to sell their property or use it as their own residence? Indexed annual rent increases may be a bonus for the majority of landlords who only increase rents inbetween tenants. A bigger unknown is the benchmark index that will be used, particularly as the BMRA rates provided by the Valuation Office for local housing allowance are no longer updated on a monthly basis, only annually in line with CPI inflation. On section 21 notices, a big concern about the proposed moratorium is the prospect of vexacious claims by tenants and worries about how readily local authorities will serve improvement notices to help a tenant stay in their property, perhaps to mitigate their duty to rehouse them. Landlords already suffer the common practice of Local Authorities advising tenants to stay put until they are finally removed by bailiffs.
To prepare for these possible changes, you could build indexation into your tenancy agreements. Agents I have spoken to advise between 3 and 5% per annum, I increased rents on my long term tenants by around 3% this year, but I currently only review rents every two years. A good customer service approach to dealing with repairs will avoid straying into problems around section 21 moratoriums. It’s basic stuff that most of us follow: make personal contact with your tenant at the beginning of the tenancy, encourage repair requests and deal with them promptly and thoroughly. Conduct regular inspections to identify repair issues, so you catch a leak before it becomes too serious for example. In terms of longer tenancies, you will need to risk assess your business to identify in what circumstances you might get stuck with a difficult tenant and how you would manage a 3 year scenario. There’s no doubt that landlords will continue to be wary of taking on tenants in receipt of benefits because of the increased risk of arrears. We may see an increase in the use and availability of rent guarantee insurance and a longer tenancy will underline the need for tenant reference checks. Many agencies offer low cost rent guarantee insurance where prospective tenants have passed their tenancy check.
Agency reference checks – costing less than £25 per tenant – are also likely to provide the best solution for dealing with landlord immigration checks. If these are rolled out nationally after the 2015 election, landlords will need to check passports or residence cards and in some cases one other form of ID or face fines of up to £3,000 per tenant who is not legally entitled to be in the UK. Other regulatory changes around the corner include possible regulation of letting agents. This is broadly supported by reputable agents and would be best served by ARLA, RICS and NALS agreeing on a model which the government could take up. Whether regulation will change the commission driven culture of agents and subsequent frailties I would suggest is unlikely. A ban on letting agent fees in England could put upward pressure on rents, but this will depend on the state of the lettings market at the time. I think a cartel like response from letting agents where they all put up their fees to landlords is unlikely as many are already under pressure from the £99 service offered by the likes of Upad and I detect a greater willingness from high street agents to offer a negotiated fixed fee service to experienced landlords. The introduction of minimum EPC requirements for letting at E or above from 2018 means that you should start ensuring you put efficiency measures in place now, or consider when to sell your property if it cannot be made more energy efficient. Take advantage of any Green Deal options, though some landlords are still nervous about the impact a debt attached to their electricity meter may have on the future viability of letting the property.
How might a change in government affect property prices? This is impossible to predict, but there are indicators that suggest a likely softening of prices in any case in the next year or so, especially in London. Here the likely introduction of Capital Gains Tax on overseas investors in April 2015, the possibility of a mansion tax plus an increase in the number of sellers coming forward is likely to have an impact. Savills expect UK prices to rise by 9.5% this year, 4% next year but remain flat in 2016. The mortgage market review and rising interest rates will also take their toll. In the benefits market, we are likely to see an increase in social lettings agencies and more enthusiastic and creative marketing by social housing providers to entice landlords to lease their properties for 3-5 year contracts with nominated, often vulnerable tenants. The introduction of universal credit and all the worries about direct payments to tenants and capping is likely to ensure this sector becomes a niche area for a small number of landlords in London or in other areas where there is little alternative. The spread of Article 4 could well reduce the number of HMOs in areas affected and we have yet to see whether 3 year tenancies will apply to multi-lets, where tenants are often more mobile. Rent to rent continues to grow, but if lobby group Generation Rent continue push this up the agenda, we could see this area brought into letting agency regulation or new controls on subletting. One opportunity in London is the proposed lifting of local laws restricting short lets. A liberalisation of this sector along with the increasing popularity of AirBnB could open up this market and make inroads into the traditional business of the hotel sector.