The October 2012 Newsletter for the Private Rented Sector

Our New Quarterly Newsletter (January 2013) will be out within the next ten days. If you would like to go on our list to receive it, please email me.

Meanwhile, here is a shortened version of our last newsletter (which was first published on 1st October 2012)…….


Regulation

In previous newsletters I wrote about the increasing interest in the private rented sector (PRS) from government, pressure groups, the trade unions and the man on the Clapham Omnibus.

In 1996, when the term “buy to let mortgage” was coined few people had any interest in the activities of private landlords. At that time, the PRS was still small and had grown slowly from its low point in 1988 (when it was just 8 or 9% of all housing stock). Of course, it’s got a lot bigger since.

In fact, in 2011 the PRS overtook the “social housing sector” in terms of total housing stock. (The social housing figure includes all council and housing association owned property).

When something gets big it always attracts interest – often from government trying to tax and regulate it more and from competitors trying to muscle in on the action. The PRS is no exception.

But we think that government – central and local – often displays a poor level of understanding of the PRS – a sector that’s heavily regulated already but one in which the mosaic of regulations sometimes don’t work as they should with too many rules bought in without enough thought to their applicability, their workability or their enforceability.

Newham

The work of Newham local authority in London bears this out. In Newham, from January 2013, landlords who operate without a valid landlord license can be prosecuted under criminal law.

Of course, it will be interesting to see how Newham’s plans work in practice and what the Crown Courts make of the cases bought before them, but the fact that Newham has taken this course is partly due to their perception that the existing regulations do not allow them to deal effectively with the worst type of slum landlord.

Or perhaps, Newham is really driven by a deeply borne dislike of landlords combined with a desire to build an empire of box tickers who will be kept very busy processing applications from honest license-acquiring landlords who will dutifully pay their fee and register. Newham local authority denies those kinds of claim but it doesn’t stop many landlords making them.

As a consultant who has a business advising organisations about how to use the private rented sector better, I will have sit on the fence on this issue, for now.

Scotland and Letting Agent Fees

There are many clear cut cases of a failure to understand the private rented sector around and the government in Scotland can provide some good examples.

Scotland’s existing scheme to license all private landlords was criticised, even by their own consultants DTZ, who the Scottish Government bought in to evaluate it in July 2011 (We wonder if Newham took note).

In August 2012, the Scottish Government announced a new plan to ban letting agents from charging tenants any fees – even the costs of failed reference checks.

We agree that some letting agencies charge fees to tenants that are far too high and I’m in favour or regulation of all letting agents over deposit and other moneys held. But it seems to us that tenants can always exercise their consumer rights to ask for a written statement of what a letting agent’s fee is, before they choose to use a particular letting agent.

And if they don’t like what they hear the tenants can presumably go to another agent or even direct to an agent-less landlord (there is no shortage of providers after all). So, we think that we don’t need special rules covering tenants’ relationships with letting agents. Surely tenants just have to be told how to exercise their rights as consumers.

Squatters

Another potentially unworkable law that came in last quarter was the new law on squatting. Whilst the right wing press cheered on the new law, we are not at all convinced and we think it may prove easy to get around and eventually become un-enforced. To read more on this, please see our blog under the category, “Squatting”.

Stratford, Thamesmead and No Money Down

As it was Olympic year, one of our blogs also covered Stratford, the home of the Olympics. We showed how returns to lots of the new build stock have underperformed the rest of London over a five or ten year time period, principally due to oversupply.

Another area we also looked was Thamesmead in south London. Like Stratford, Thamesmead saw a lot of new build throughout the 1990s and Noughties. Both places saw a lot of activity from the first wave of “Get Rich Quick with No Money Down Investors” – back in those days No Money Down usually involved getting hidden discounts on flats sold by big builders.

No Money Down Investing

Of course, the UK’s mortgage lenders eventually woke from their slumber – finally requiring full disclosure of the true net price actually paid by buyers to developers. This meant the first No Money Down party was over and NMD advocates had to find pastures new – which they duly did in Sale and Rent Back (until SARB was regulated and lenders eventually banned Next Day Remortgages) and then much later on, in Lease Options and Joint Ventures.

The fall out for punters was sometimes severe. A lot of the new build stock failed to reach anywhere near the potential rent the promoters had claimed and, in Thamesmead in particular, there were catastrophic falls in flat and house values. Many other parts of the UK suffered a similar fate.

Another consequence of the bad lending was that lenders also faced a heap of mortgage fraud which was so bad it even led to the demise of some household name UK lenders.

New Competitors for Private Landlords

In the last quarter, following the Montague Review, the government predictably moved to ease the planning requirements for new build housing – making it easier for institutional investors to build big developments for private market rents.

This follows earlier changes to REITS and Stamp Duty Land Tax – both of which were also partly designed to make the PRS more attractive to big investors.

If lots of new build stock for private rent actually gets built, it will mean new competition for the UK’s private landlords. However, it could still be that the returns are just not sufficient for the big investors who will always find it hard to compete with the efficiency of knowledgeable individual private landlords. The jury is out on this one, for now.

What Drives House Prices

In another blog, we looked at the old chestnut of what really drives house prices.

Capital Economics is one consultancy who has been saying for a very long time that house prices are too high and are due big falls. This is a bit like predicting the end of the world; like any half decent guru Capital has learned that the trick is never to give an actual date for the event to occur, lest your disciples demand their money back!

We challenged Capital’s rather simplistic tendency to link earnings to house prices which fails to address issues of land supply shortage, planning constraints, an ongoing low interest rate environment, the tendency for home ownership to soak up a greater percentage of disposable income as people get wealthier and the emergence of a yield hungry investor class of landlords. These are among some of the reasons why we still feel that house prices and rental yields are well underpinned in general, though future returns very much depends on specific location.

The Town Halls and the Private Rented Sector

Our blogs continue to challenge the lack of understanding of the PRS at the town halls. We regularly point out that few senior housing staff in the local authorities possess a rich background knowledge of private renting – and it sometimes shows in a lack of strategic thinking.

Town hall attempts to procure stock from private landlords for LHA dependent tenants and for the homeless often suffer from a failure to understand the marketing triggers that private landlords respond too. Failure to secure supply of housing for the more vulnerable from private landlords has led some councils to move people “out of borough” to place where they have no family connections. In our opinion this is expensive for the taxpayer and usually totally unnecessary too.

For tenants seeking homes in the PRS as well as for their landlords, the quality of information at many local authority websites also falls far short of what it should be.

There is much more that could be done here and I’m pleased that my challenges of the town halls at the Guardian’s website drew commendation from many junior housing officers who are deeply frustrated by the lack of direction from senior councillors and managers and the straitjacket in which they are sometimes forced to work with tenants and private landlords.”


Our Work at LettingFocus.com – Seminars and Consultancy

Though much of my work today involves advising organisations – both public and private sector – that have products and services for the private rented sector, I still benefit from my work with private landlords. (I provide independent one to one consulting advice and occasional seminars).

It is partly from my own experiences as a landlord and partly through working with other private landlords that I always learn something new that can be applied to my work with organisations.

We have now expanded the annual seminars for private landlords and others with an interest in the PRS from London and into other major UK cities, starting in March 2013.

Following the success of our London events, we will be running our very first seminars in Manchester, Leeds, Birmingham, Cardiff and Southampton in March 2013 as well as another one in London. So, let us know if you want to book a place at any of these. More details about the March events are at this link: Next Event

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