Small Buy to Let Landlords v Institutional Build to Rent Landlords

Why Small Buy to Let Landlords Deserve More Respect than Institutional Build to Rent Landlords

 David Lawrenson of www.LettingFocus argues that most small landlords have just one let property and have been unfairly maligned in favour of big institutional build to rent landlords.

In the last few years, the smaller landlord has been under attack due to a combination of increased regulation and increasing costs.

 

Barmy Conservative think tank, Onward, in an untidy and much criticised report (see blog of 15 July here),  proposed further tax changes to dampen investment in buy-to-let homes. And mortgage firms are saying that more and more landlords are setting up as limited companies.

The size of the private rented sector shrunk by 46,000 units in the last year under the sustained tax assaults of recent years – the cutting of the loans cost allowances, the specially high capital gains tax rates and stamp duty land tax rates for landlords and the ending of the wear and tear allowance.

In an interesting article first published in Residential Property Investor magazine, Residential Landlords Association (RLA) policy manager, John Stewart reflected on why “Our collective love of all things independent does not extend to small landlords. We all love small and independent businesses, except, it seems, in the PRS”, he says.

It is true, we love to back small, local independent businesses like coffee shops, craft breweries and boutique hotels. Increasingly we avoid the tax-dodging majors like Starbucks, bland products like Carlsberg and the predictable any-city sameness of Premier Inn.

Institutional Build to Rent Landlords Love-in

Yet, when it comes to private renting, he says, “Everybody wants to kick the small, independent providers.

The Government, councils and tenant groups are falling over themselves to back huge corporations and institutional investment in the housing market.”

“Even social housing providers are getting in on the act, too. Many are already massive organisations managing tens of thousands of homes, and their directors taking home six-figure salaries.  Even their names sound more corporate than charitable – Affinity Sutton, L&Q, Gentoo, Halo. And increasingly, they are moving to provide new build housing at market and premium market rates, directly, through subsidiary companies, or in partnership with banks and pension funds”.

So why is this happening?  Why, when it comes to housing, are the very small independents that would be welcomed in any other sector, under attack?  (An oddity is Airbnb, which the middle classes love, but which is surely just small landlords doing very short term lets, but I digress).

Mr. Stewart has a number of theories.

Firstly, there is the image perpetuated by tenant campaigners such as Generation Rent and Shelter, picked up by the media and politicians, of greedy landlords with dozens of sub-standard, dangerous properties, cramming in tenants at sky high rents.

While there are undoubtedly criminals in the sector, they are a very small minority and local authorities now have the powers they need to root out the worst operators. But of course, as we all know, the councils simply don’t have enough staff to carry out their powers effectively, so the criminals continue to operate with impunity. Only Newham Council has had a proper go at rooting out the rogues.

But while the focus of housing lobbyists and the media is on the very worst of the sector there is little public sympathy for the vast majority of independent private landlords who obey the myriad rules and regulations and pays his or her taxes.

Secondly, there is the impression that renting property is easy money. All landlords have to do is sit back and rake in the cash – there’s even tax relief on the mortgage payments! Rents are supposedly rising “out of control” and if tenants can’t afford it, they can always be evicted and replaced with another who can pay, supposedly just like that. (The reality is that it takes about 6 to 8 months to get rid a of a tenant, if they decide to wait until the bailiffs come, which is exactly what most local authorities, with no social housing to offer, advise them to do!)

The fact is that the length of tenancies in the PRS is growing. (It is around 4 years now with 90% actually ended amicably by the tenant. No sensible landlord wants to hike rents for fear of losing good tenants and incurring costs to find a new tenant). In many parts of the UK, rents are not out of control – for years they have been just rising in line with wages and below inflation. These are the realities that are the inconvenient truths for politicians of all persuasions, desperate for votes from “Generation Spend Today”.

Why Small Buy to Let Landlords Deserve More Respect than Institutional Build to Rent Landlords

The truth is our government doesn’t really like people taking their future into their own hands by investing in property, instead of say, in stocks and shares. The government see private renting as passive investment that does nothing to boost the economy, and they want to redirect that cash to boosting productivity in industry.

This ignores the fact that many investors are putting cash into new builds which would not otherwise be built at all or instead, refurbishing dilapidated properties, which would otherwise sit as eyesores on the landscape.

All these small scale landlords have done is look to property as a way of getting away from the lousy returns from savings in the banks, and from their mistrust in pension funds, bonds and shares following the financial crisis. For those who can, investment in rental property provides a better return and a secure asset.

The majority of private landlords actually have just one let property.

They are just ordinary people seeking to let a home and get a decent, if unspectacular return. And they are doing a decent job. The most recent report from the English Housing Survey said tenants in the private rented sector are happier with their landlords than social housing tenants of local authorities or housing associations – another inconvenient truth.

 Institutional Build to Rent Landlords

Now, think about the big pension firms for a moment. They were probably hopping mad when Gordon Brown bought in legislation allowing people to take 25% of their pensions as tax free cash. Suddenly a whopping chunk of fat, annuity income was “going west” into property investing and not into the pension firms coffers.

At the same time, these very pension firms and other global corporate investors were looking jealously at the steady returns from investing in property to rent in the UK and decided they would like a slice of the pie, again. (I say “again” because they used to be in this business before, back in the 1950s/60s, but got out when rent controls and other restrictions came in – Note to Corbyn!)

And so, led by their umbrella organisation, the British Property Federation, they persuaded the government to give themselves lots of tax perks and subsidies. The other part of their strategy was to keep putting out in the media a message about how the product they offer would be so much better than that offered by the pesky Mom and Pop landlords. They made much of the fact they offer long term tenancies in admittedly bland, high rise samey flats. Many in the media just gobbled this stuff up.

Many of these big pensions firms and other corporates are donors to political parties and are well used to offering out the canapes at sponsored lunches on the Palace of Westminster terrace to MPs and yes, to journalists too. The schmoozing policy worked. The Government was soon taking a number of steps to boost institutional investment in private renting. Their Build to Rent Fund provides up-front cash to spur the development of major schemes, albeit recoverable at commercial rates and there is expert advice and guidance available through the Build to Rent Taskforce. Corporate investors are exempt from the restrictions imposed on small independent landlords claiming mortgage interest relief. A move to also exempt the big boys from the additional stamp duty rate on second homes was reversed after pressure from the RLA.

Their product is seen as high-rent, high-quality new build development, offering a range of services in addition to a roof over your head. As the RLA point out, “Many build to rent developments have spun out of a successful student market in large-scale purpose built rental accommodation. With an eye on a fixed yield and regular returns, it’s anticipated that build to rent will offer longer tenancies as standard, providing security for renters. Dedicated maintenance contracts means tenants should expect a responsive repairs service, and many will provide a range of communal services such as gyms, cinemas and social spaces”.

“But even with the enthusiastic backing of government there have been fewer than 20,000 completions and only a further 50,000 homes in the pipeline  – a fraction of the additional private rental housing that traditional landlords have supplied over the same period – and a fraction of what the country needs”.

Volume is key. Much like social housing of the 50s and 60s, and suburban new build, developments may lack diversity of design and location, and speed of construction can compromise quality, leaving tenants ongoing issues. (The excellent, independent Rugg Review back in 2008 found lots of evidence of poor quality housing and service in the 1950s and 60s from the big boys, so this is nothing new).

 Institutional Build to Rent Landlord Product

And build to rent, even when undertaken by social housing providers, is aimed squarely at young middle class urban professionals. Sure, some of the product is professional and expensive – a stepping stone from student accommodation to eventual home ownership. But don’t expect a build to rent offer for low and even average income families, rural communities, and those on in-work benefits, and there is nothing for the out of work or on long-term benefits – the very areas where demand for PRS accommodation is growing fastest.

Figures just out from Molior London show the big players like to play at the high end of the market and gobble up distressed assets from time to time from cash strapped developers for whom the sudden loss of the Mom and Pop buy to let landlords (due to the tax hits) has been a hard blow. (House builder Berkeley and others have highlighted that they have been hit hard by the attacks on traditional landlords, leading them to build less new houses and flats). Almost four in ten sales of newly built homes in London in the three months to end of June 2018 were to bulk corporate buyers, many in build to rent, but this is likely to be temporary.

Meanwhile, back in the more bread and butter end of the market, the traditional buy to let private rented sector is expected to take up the slack from failed housing policies, while the Government encourages institutional investors to cherry-pick low risk tenants.

The Mom and Pop buy to let landlords continue to provide accommodation for working families and those on benefits who are locked out of a shrinking supply of social housing. This despite massive welfare cuts to housing related benefits and huge additional regulation and an increasing tax burden. This, they must endure, whilst all the time being castigated for an amplified failure of the authorities to deal with the small number of criminal landlords in their midst, who continue to take advantage of the scandalous lack of resource at the councils to deal with the rogue operators. Many have had enough.

So while build to rent will be an important part of the housing mix, it’s certainly not the solution.

The independent private landlord will continue to be crucial to meeting housing need, particularly for those shut out of owner occupation and high end rentals.

According to John Stewart of the RLA, “It’s time to re-evaluate the private rental market, to bring the same caution to big development as we do with retail, and celebrate the small independents who can be the heroes of the housing crisis”.

I agree.

Many thanks to John Stewart of the RLA who provided the idea and template for this article.

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