What could renting look like in a decade’s time? Shifts in attitude from government and the Bank of England have jolted landlords and investors into taking a step back and looking long into the future. I speak regularly at events across London and in 2016 and 2017 I witnessed a fog of depression descend on many of my colleagues. This was also reflected in the NLA’s index of landlord optimism in their lettings business plummeting to an all time low. Worryingly still according to NLA research only 49% of landlords fully understand the implications of those section 24 tax changes that were sprung upon us by Osborne in 2015. But for those of us who have taken the pragmatism pills – and maybe after a bit of peer group counselling – we are taking stock and looking forward.
How much evidence is there that section 24 tax changes and Prudential Regulation Authority changes to buy to let mortgage lending are changing behaviour? 19% of landlords plan to reduce the number of properties they own in the next 12 months. Of course selling off the portfolio is a slow process as investors spread their capital gains liability over a number of tax years. The restriction of tax relief on finance charges to the basic rate of 20% is also being phased in over four years and 40% of landlords still only partly understand the implications. So we are going to see behaviour continue to evolve over the next few years. If you are waiting for the government to do a u turn, then forget it. In my view, these tax changes are here for a generation – probably until there is a welcome and complete overhaul of how property businesses are taxed. Removing section 24 would be headlined as restoring tax perks for landlords and that would go down like a political lead balloon.
15% of landlords are intending to increase their portfolio, 38% of them are buying new properties through a limited company. The evidence suggests that it is larger landlords that are seeing opportunities in the current market and want to continue expanding. One landlord in the NLA survey said optimistically that: “Rental income is better than income from safe investment elsewhere, and capital growth whilst slow at the moment will increase in time.” Low interest rates continue to make letting property profitable as long as you run it like a business and make sound well thought through decisions and stay compliant. 60% of landlords say that they are finding it harder to get mortgage finance. This is a challenge that is spurring a growing cohort of specialist lenders into action, a trend which will undoubtedly continue.
The size of the private rented sector in the UK is at an all time high of 20%. I don’t think we’re going to see any shrinkage in the next 10 years, I think we are likely to see this figure nudge up slightly. What we won’t see is 100,000 new landlords coming into the business every year as we have seen in this decade. We will see landlords with larger portfolios adjusting and expanding. I think many new entrants will be deterred and only those with their eyes wide open will take the plunge.
Part of what newer entrants are faced with is an unprecedented avalanche of regulation. The UK government’s agenda is to professionalise the sector in England. In the next 12 months, landlords are looking at the banning of fees to tenants, a redress scheme, changes to gas, electrical and carbon monoxide safety, a change in the definition of HMOs that will bring more properties into scope, fitness for human habitation legislation and minimum energy efficiency standards. That’s not including changes to data protection law and the onward march of discretionary licensing and article 4 directions to restrict HMOs. The government is also reviewing selective licensing, the HHSRS system which categorises housing hazards and is consulting on barriers to longer term tenancies. Come up for air and you quickly realise that it is only the organised business-like landlord who will stick with this. Many would argue that weeding out the flailing, non-compliant “amateurs,” is no bad thing. It may also provide more opportunities for those wishing to expand.
The UK government is also determined to “fully regulate” letting agents who must already be members of a redress scheme, will have to become qualified members of a trade body, follow a legally enforceable code of conduct and comply with client money protection regulations. Marlon Fox, Managing Director of London based Outlook Property told me that although agents are feeling “unloved” at the moment, he resented the fact that his head office was one of only 3 ARLA members on a street with 26 letting agents. He sees the requirement for all agents to be regulated as levelling the playing field and expects to see a thinning of the sector with a steadily increasing amount of business shifting online. Agents manage large tranches of property, so I see their regulation as being essential if we are to shift the culture in letting, improve management and hopefully property standards.
Another driver of poor standards in the PRS has been excess demand. According to NLA research, perceived tenant demand has softened across the whole of the UK over the past four quarters. 43% of London landlords report falling demand which means it is getting harder to let. One London landlord is clear about the causes: “in Central London it is the effects of Brexit with fewer investment bankers from the US or Europe moving to London. Many owners are deterred from selling because of stamp duty increases and are letting their properties. This has led to an excess of properties in Central London.” The governor of the Bank of England says that Brexit is causing UK economic growth to slow and I think a knock on effect will be less demand for rental property over the next 10 years. I see this as positive because it will give consumers more choice and force any complacent landlords to improve poor quality accommodation.
Just what will the rented housing offer look like in 10 years time? Will the government’s pledge to build more general and social housing materialise? I hope we will see a larger social sector in 10 years time. I think the PRS is stretched to the limit trying to provide housing for vulnerable tenants and households with children who in previous decades would probably have been in social housing. Frozen housing benefit rates often don’t cover the market rent and with direct payments to tenants resulting in increased arrears, many landlords have sadly vacated this part of the sector. 35% of PRS households are families with dependents and I think many landlords do an excellent job, but the PRS and local authorities need social housing to play a greater part. Social housing no longer looks like the concrete brutalist blocks that I grew up in, we are seeing better quality newbuilds and I hope we will continue to learn from catastrophic events like Grenfell. We will continue to see a trickle of build to rent and I think this is providing a positive contribution to the mix of rented property on offer with co-located communal facilities targeted at young people. I hope we will see more developments that enable older people to downsize and free up under occupied homes.
One landlord commented in NLA research that she saw “significant future risk holding rental properties.” She went on to question “the future demise of s21 and the introduction of rent controls? I see little or no financial tax or regulatory upsides in being a landlord over the next 5-10 years,” she said. Just how gloomy should we be about the prospect of destructive regulatory forces? Like any good campaigning organisation, Shelter will continue to lobby for the removal of no fault eviction and the introduction of mandatory three year tenancy agreements in England even though on average tenancies last 4.5 years according to the English Housing Survey. The government is consulting on barriers to longer tenancies, but landlords are opposed to the loss of flexibility and control that either of these measures would bring. I think we would see more leaving the sector if they were introduced unless there were a considerable reduction in the average 42 week court process for that rare occasion where we need to evict tenants.
An anti-business, anti-landlord Corbyn government is another potential risk. But given how accident prone and indecisive the current government has been on matters such as Brexit, we would expect Corbyn to be ahead in the opinion polls – not five points behind – if he were on the verge of power. The Conservatives are united on one thing, preventing him from becoming PM. Corbyn may well fail to win a 2022 election and at age 73 could finally stand down as leader. Sheer membership numbers mean that the hard left will stay in control of the Labour party but I think there will be considerable pressure for there to be a woman leader. Prospective leadership candidates like Lisa Nandy are not as hard left as Corbyn so we may see the Labour Party edging nearer to the centre and then trying to win in 2027, assuming the general election cycle isn’t altered by events.
I think house price and rental affordability will have also improved by then. Prices in London fell 3.2% in the first quarter of this year according to Halifax. Savills research predicts capital growth will be 18% in the North West over the next 5 years and only 7.1% in London: a cyclical rebalancing from south to north. Wages are now growing at a higher rate than inflation. Rents have risen by precisely 0% in Greater London in the 12 months to April 2018 which means that they are actually well below inflation which was at 2.2%. All of this means that headline grabbing affordability pressures in London will ease and take some of the wind out of the sails of Generation Rent’s arguments for rent control. The Mayor of London also wants powers to introduce rent control, but he’d probably need a hard left government to let him do that. Most studies have discredited rent caps and proffer controlling in-tenancy rent rises, so I think the worst we will see in the next 10 years is mandatory 3 year tenancy agreements with indexed annual rent rises. You would think it unlikely we’d get that from a Conservative government.
Scotland and Wales have landlord registers, will England follow? I would much rather see a £35 per head light touch register than expensive bureaucratic local authority licensing schemes. By allowing sharing of tenancy deposit data the government has in effect introduced a register that can be used for law enforcement purposes and it sees no need for an England register. Would they want all landlords to be members of trade bodies like agents? That is a measure that I would support as I think it would improve management standards. I think a Labour government would almost certainly introduce mandatory local authority licensing.
So what will renting look like in ten years’ time? We will see better standards of management and property conditions. “Professionalised” agents and landlords could all be members of a trade body. Larger landlords may predominate, structured to accommodate tax and regulatory changes and benefitting from wider availability of specialised lending products. A reduction in demand and improved affordability could also drive out the worst end of the market and mute calls for rent control – though the risk of mandatory longer tenancies remain. There will be a more diverse lettings offer which will include an increase in build to rent and social housing. Adapt and thrive – I think the prognosis is positive.
Originally published on 2 July 2018