Storm Doris: are your properties safe?

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Storm Doris has been wreaking havoc across the country today. Winds of 94mph have ripped off roof tiles, felled trees and fences and flung bins through the streets, with one woman in the Midlands killed by flying debris. Insurers have been inundated with calls following the storm, which has been officially upgraded to a weather […]

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Thinking inside the Box

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Anyone can invest in commercial property: all you need is the cash or enough cash to get a mortgage. Anyone can invest isn’t the same as becoming an investor. To become an investor, one needs to think like an investor.

Investment is about becoming better off than you are now. For a property investment to go up in value, the price you pay when you buy it must allow for that possibility. To assume that it does is a mistake. It is easy to overpay, especially if you are the sort of investor that thinks that buying an investment property automatically makes an investor.

Commercial property has two values: a value if the property were vacant and a value if the property were let. Unlike residential property which is generally more valuable when vacant than if let, commercial property is generally more valuable when let than if vacant.  The difference in value between vacant possession and let on an existing lease is the premium that buyers in the market for the particular type of property are willing to pay.

Whether that premium and how much of it is worth it depends upon the bottom-line. Successful investors protect the bottom-line: what’s the worst that could happen?  For investors generally, most of whom are not successful beyond if luck would have it then just about keeping up with inflation, the worst doesn’t bear thinking about so they don’t. Instead, they imagine that they would be able to manage regardless, hoping that when everyone’s in the same boat help will arrive for everyone. In the meantime, with the market generally behaving itself, they assume that if the property were vacant then it could be let or sold or developed for reletting or sale, and if the property were let already then the tenant would pay more at rent review or on expiry of the lease or if that tenant goes broke or quits at the end of the lease then another tenant would be found and at least pay the same, possibly more. The fact that those assumptions normally incur non-recoverable costs that when added to the purchase price reduce the yield is just one of those things that is a part and parcel of ownership; and the kudos of being an investor.

In the market for commercial property investment, the seller is likely to know more about the property and its potential than the buyer. Whether advised or not, the seller is likely to have considered all the options and concluded that even if the possibilities were to materialise, it would save a lot of effort, time, hassle, to sell and take advantage of high prices whilst they last, rather than risk exploring the possibilities and in the process missing out on peak pricing. When investment conditions are favourable and the premium in the market such that almost if not all of the potential for growth can be sold in advance, it doesn’t make commercial sense to hang on in the hope of doing so much better.

To attract a high price, the proposition needs to be packaged attractively. The marketing of commercial property investments has become much more shrewd in recent years. For single lots, as distinct from portfolios, The target market is the tsunami of inexperienced investors. With glossy brochures high quality photos, floor plans, loads of information handing inexperienced buyers answers on a plate such that the proposition becomes convincing, marketeers for sellers know that they are more likely to get away with hiding the reality.

With vacant property, the reality for inexperience is generally not as disappointing as the let-down that can come from buying a property with a tenant in place.  Standing between the potential in the minds of the investor is a tenant that doesn’t care a jot about the new landlord and the existence of a lease whose terms and conditions are unlikely to favour the investor’s objectives. The landlord and tenant relationship being what it is conceals the tenant’s indifference: the lease, however, does not.

I find it fascinating that many apparently otherwise intelligent people that buy into the commercial property investment market don’t seem to have much idea what they are letting themselves in for. It is all very well thinking it’s property so it must be a safe bet, but what they don’t seem to understand is that the property system isn’t interested in providing buyers with a better return on the investment than the premium price that the seller achieved for the sale. They think that the potential in their choice of investment was something only they themselves spotted, when more likely it was a set-up, engineered by the seller to obtain peak price.

The commercial property market is unregulated. Auction catalogues can lead to misconstruing without any come-back:  caveat emptor. In money matters, no one likes to admit they’ve been made a fool of. To buy the potential in advance without any certainty of achieving it is a feature of the unsuccessful investor. When the premium paid for the investment proposition is the sum of the parts, a great deal hangs on everything falling into place.

It is challenging to think like an investor in the prevailing market. Once upon a time, a lower yield was commensurate with capital growth: not nowadays. Investor sentiment is for yield and willing to pay a hefty premium.  Opportunities for rental and capital appreciation, known as investment performance, are few and far between.

Michael Lever
The Rent Review Specialist
Established 1975

… LandlordZONE.

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White Paper or White Wash?

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Viewpoint

The government’s action plan for property looks as though it was watered down so much that even former Tory housing minister Grant Shapps has admitted it will make barely any difference at all.

With the government under pressure on many fronts this month, its failure to grasp the housing agenda, which the Housing White Paper clearly shows, particularly with respect to renting, is on display again this week as the government is bounced into promising help for high street firms hit by its controversial revaluation of business rates, in the face of a major Tory rebellion.

The Housing White Paper published early February sets out the direction of the government’s policy on the housing market. Whether you see the UK housing market as “broken” or not, or the proposed new direction the correct one, the paper does not mince its words on the matter: “The housing market in this country is broken, and the cause is very simple: for too long, we haven’t built enough homes.”

Nothing new here as it’s been common knowledge that government after government, of whichever colour you choose, has missed its set housing targets by miles. This study however, sees the problem as threefold:

• Not enough local authorities planning for the homes they need;

• House building that is simply too slow;

• And a construction industry that is too reliant on a small number of big players.

The laws of supply and demand dictate that in any market, where supply is short, prices rise, it’s just a fact of life in a free market economy. This, coupled with asset price inflation resulting from pumping credit into the system (quantitative easing and ultra-low interest rates) means that the result is quite predictable: since 1998, the ratio of average house prices to average earnings has more than doubled – from under 4:1 to almost 8:1.

The shortage of supply in housing is compounded by demographic changes that have increased demand:

• Migration / immigration, where net migration has reached unprecedented levels in recent years.

• More single living, coupled to divorce and longer living

• Worker migration from the poorer regions of the country to regions where job creation has brought more opportunities, but consequently expensive living.

• An economy that has grown faster than any other in Europe, resulting in record employment, especially in the south-east.

These changes, which have accelerated over the last 20 years, and have resulted in a situation where owning a home has become a distant dream for millions of people, and that dream, it would seem, is getting further out of reach for many. “Generation Rent” has become a familiar term in the UK media, though we should bear in mind that Britain is not alone, the problem is far from unique to us, though in Britain it is perhaps more acute on a relatively small land space: nearly every western country, from North America to New South Wales, has an almost identical housing problem.

However, public opinion started to move against the private landlord in the UK when some of the more extreme and unsavoury antics came to light: media stories of instant riches and paper “millionaire” buy-to-let landlords, many of whom were not really landlords but speculators and chancers, and another cohort of “slumlords”, housing illegals and no-income tenants in squalor. This all produced a plethora of media stories which turned the public right off.

According to the White Paper, 28% of homes are now non-decent, though the situation has improved compared to the 37% figure from 2010. It claims that “an increasing number of private tenants (65%) are happy with their tenure, compared to 48% in 2004”, but what it does not say is that private tenants have almost always returned higher levels of satisfaction that council (social) tenants in cross sector surveys undertaken.

There is no doubt that, as the paper says: “in areas where the housing shortage is most acute, high demand and low supply is creating opportunities for exploitation and abuse: unreasonable letting agents’ fees, unfair terms in leases, landlords letting out dangerous, overcrowded properties.”

The Council of Mortgage Lenders has predicted that by 2020 only a quarter of 30-year-olds will own their own home, whereas, again according to the White Paper, in contrast, more than half the generation currently approaching retirement were homeowners by their 30th birthday.

With most young people needing help from the “Bank of Mum and Dad”, it’s perhaps not surprising, that a large section of the community resented the possibility that buy-to-let landlords were pushing up prices for first-time-buyers.

The government, as governments do, took up the popular mantle, introducing several measures to tackle the rogues in the industry, exactly what was needed, but more worryingly, to “cool down” the buy-to-let market.

Prompted by all of the above, and a large overhang of buy-to-let lending debt, the Bank of England warning the then Chancellor, George Osborne, of the growing risk, he acted by restricting mortgage availability and increased taxes on rental property income, severely hitting profitability for some.

The White Paper indicates a radical shift away from the traditional Conservative policy of home ownership, to one of recognising that renting is going to be a major sector in the future, needed to house those unlikely to be able to afford to buy. But they see this housing to be supplied more and more, not by small-scale landlords but by institutional investment and large block management.

Under the last Chancellor the PRS became a scapegoat; it has suffered since because of this and all the indications are that his actions will discourage small-scale landlords from investing in buy-to-let, a trend that many feel will create an even bigger crisis in the housing market.

The Royal Institution of Chartered Surveyors (RICS) says it had warned the Housing Minister at the time that “unless urgent action was taken there would be a 1.8 million shortfall of rental homes by 2025.”

With increasingly unaffordable house prices, says RICS, the majority of British households will be relying on the rental sector in the future. “The number of UK households renting property doubled from 2.3 million in 2001 to 5.4 million in 2014. Yet the previous Prime Minister took measures to dampen the demand for buy-to-let investments by introducing taxation policies that unfairly penalised landlords. This further reduced supply, arguably makes a 2025 rental supply crisis more likely.”

The focus on encouraging more and more build-to-rent would, on the face of it seems a good strategy to quickly solve the problem of shortages, particularly in the bigger cities. But building new housing alone is unlikely to solve the crisis. Not everyone will be able to afford the rents in a new apartment, so existing properties run by small-scale private landlords will still vastly outnumber the new provision, even if the institutionalisation project takes off as the government hopes.

A radical proposal in the White Paper is the “family-friendly” three-year tenancy for those tenants who want them. These it would seem are aimed specifically at the Build-to-Rent institutional investment market, though I would question whether these investors would all be looking to rent to families, over the more profitable and less troublesome single and couple professionals’ market.

The Paper says: “While we focus our long-term strategy on increasing overall supply, there is clearly also a need to intervene to help households now who are struggling as a result of the immediate symptoms of our broken market which are causing anxiety, hardship and unfairness for many households and communities.”

There will be help, the Paper says, for the over 4 million households who now rent their home from a private landlord, the around 4 million people with leasehold homes in England, and upfront costs including fees charged by letting agents to tenants. It is very likely that letting fees charged to tenants will be banned in the near future.

Protection is on the cards for a growing number of those who buy leaseholds. New houses sold on a leasehold basis are marketed at a reduced price, which looks attractive compared to freehold, but naïve purchasers are often not aware at the point of sale of the associated costs of buying a new leasehold house. Though solicitors should point this out to them, this is not always the case, and it results in the leaseholder facing higher long-term payments and a greater loss of value than anticipated.  The Law Commission has been asked to identify opportunities to incorporate additional leasehold reforms as part of their 13th Programme of Law Reform.

The government is to continue its efforts to bring up safety standards in the private rented sector, and to drive out the rogue landlords. The measures introduced in the Housing and Planning Act 2016 will bring in banning orders to remove the worst landlords or agents from operating, and enable local councils to issue, in effect, on-the-spot fines, as well as prosecute.

The new energy efficiency regulations setting out minimum energy efficiency standards (MEES) for England and Wales will apply to buy-to-lets from April next year (2018), meaning a property cannot be let with an EPC rating below E.  There are plans to extend mandatory licensing of Houses in Multiple Occupation from the current 5 unrelated occupiers over 3 stories, to all HMOs, and there are also ongoing consultations regarding the introduction of mandatory electrical safety checks for rented properties and client money protection for letting agents.

All very laudable aims, many of which have been said before, but nevertheless, creditworthy and most industry experts in the private rented sector would support them. However, a lot determination will be needed to apply these principles in practice, some of which have been tried before, if any impact is to be made to tackle the housing deficit that has built-up over decades.

It still leaves a void as far as the average private (buy-to-let) landlord is concerned. It is unlikely that institutional investment, which today represents less than around 3 percent of the private rental market, will provide the whole solution, so where is the encouragement and support for the small-scale landlord, why is the focus of the Paper purely on the negatives for them?

What I find most surprising about the White Paper is that, apart from the negative comments, there is no mention of the massive contribution small-scale private landlords make to the UK housing sector.

When challenged, housing ministers always emphasis how valued the private landlords’ contribution is, but when it comes to policy statements and action, they seem to do the exact opposite – it just seems so hypocritical. Right now the whole government emphasis appears to be away from helping the small-scale buy-to-let landlord and towards encouraging the institutional investor. The Paper also indicates that local authorities are to be encouraged to become private landlords, to invest in private rented housing to let at commercial rates, in direct competition with the private rented sector (PRS).

A London School of Economics report (https://goo.gl/NI4IV8) has warned that: “even if institutional investors enthusiastically enter the market, individual landlords will remain dominant – as they are across Europe.” So far there is little evidence that the government’s drive for institutional build-to-rent has been a roaring success, as a recent House of Lords committee report (https://goo.gl/0qp3PP) says, previous attempts to encourage such efforts have “achieved little”.

Instead the Residential Landlords Association (RLA) has called on the government to ensure that incentives are provided to all of the private rental sector, including encouraging smaller private landlords and supporting them to expand their investment to provide the extra housing urgently required.

Ministers have been saying for some time that they want to encourage longer tenancies in the rental market, presumably to encourage more family tenancies, yet official government data shows that the average length of time a tenant spends in the private rented sector (PRS) in the same home is now four years.

Responsible landlords will always encourage longer tenancies, regardless of the wording of the agreement, providing (1) rent is paid on time and (2) the property is being treated with respect. The only motivation I see for the desire for a longer term commitment is to get landlords to be tied in regardless of the performance of the tenancy. I find it hard to believe that small landlords or institutional landlords would see that as desirable.

RLA Chairman, Alan Ward commenting on the White Paper, said:

“Whilst we welcome efforts to boost the supply of homes to rent, this will not be achieved through a single minded focus on corporate investment.

“The very fact that a renewed push is being made for such investment is a sign that previous efforts have failed.

“Any plan for the rental sector that does not provide equal support and encouragement for the vast majority of individuals making up the country’s landlord population is doomed to failure.

“Instead the Government should look again at the tax rises imposed by the previous Chancellor on landlords which will only act as a disincentive for the hundreds of thousands of smaller landlords to get more properties on the rental market.”

Small-scale private landlords face tough challenges ahead, especially relating to the tax changes, and also the other coming legislation mentioned above. Because of this rents are likely to rise and landlords leaving the sector will increase rented housing shortages. Surprisingly, the White Paper has little to say in their support and almost denies the reality when it “aims to deliver more affordable homes to rent.”

Tom Entwistle, Editor of LandlordZONE®

Housing White Paper 2017: https://goo.gl/5lirqd

… LandlordZONE.

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The UK’s leading property investment event reveals a new-look to its Landlord Investor Magazine and launches a mobile website.

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Landlord Investor Magazine, published since 2014 will also contain more in-depth stories and additional interviews with leading industry figures.

The redesigned magazine will reach 44,000 opted-in subscribers monthly and will cover news from UK and overseas, with a focus on how current and potential landlords and investors can keep up-to-date with legislation and leverage investment most effectively.

With Landlord Investor Magazine, investors and property professionals can keep their finger on the pulse of the buy-to-let and investment property markets.

Each edition is now available online via a new mobile website, as well as in its current digital and print formats. These enable readers to access information on the go via their preferred platforms.

The investment in the new digital platform and redesign is a result of consistent feedback from advertisers and readers who want their content optimised and available on any device while they’re on the go. Additional sponsorship and advertising formats have been made available across all platforms to meet the demands of advertisers in the industry.

The LI Media portfolio includes:

Landlord Investor Magazine is a subscription-based product available in both print and digital formats with 11 issues each year. It offers advice, features, and news, and helps property professionals keep up to date with essential industry developments.

Subscribe at www.landlordinvestmentshow.co.uk

National Landlord Investment Show:

National Landlord Investment Show is the UK’s leading property investment exhibition, providing solutions, networking and advice for seasoned and new investors in the buy-to-let market. Established in 2013 and operating in property hotspots throughout the country, it has now run 44 shows successfully and has provided property investment solutions for over 50,000 landlords since its launch in 2013.

The show will be in 11 locations in 2017 including 5 National events and will attract over 25,000 visitors and more then 550 exhibitors annually.

www.landlordinvestmentshow.co.uk

… LandlordZONE.

View Full Article: The UK’s leading property investment event reveals a new-look to its Landlord Investor Magazine and launches a mobile website.

One in Four low income tenants in arrears!

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I read the following article last week and wanted to share it and hear your views. The former Welfare Minister Lord Freud has identified that one in four low income tenants are in rent arrears under the Universal Credit Scheme as a result of DWP administrative problems: http://www.insidehousing.co.uk/policy/welfare-reform/universal-credit/freud-one-in-four-universal-credit-tenants-in-arrears/7018719.article Increasingly, over the last few months we… Read more

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Comment please on my rent increase letter

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Hi, I have adapted another rent increase letter I have seen on this forum. I would rather not make it to lengthy so I have tried to make it short whilst still making relevant points. Advice/Comments please before I send them out. Dear ………………(Tenant) We are having to review your current rent. It’s a decision… Read more

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CCTV installed by landlord and access to the materials?

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Hello, the landlord installed the cctv cameras around whole house and gave the access to the material to one of the neighbors who can see us 24 hours a day on the TVs. We have been informed only about one camera on the front side of the house. Is something like that legal and what… Read more

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Wirral Selective Licensing refund requested and refused!

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I managed a block of 15 apartments in Wirral which fell into one of the designated selective licensing areas. Although we had this block up for sale at the time we were advised by the selective licensing department that we would still need to pay in full for the five year license at around £450.00… Read more

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Jacob Rees-Mogg recognises damage done by the Treasury

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It is now clear that the Treasury, under George Osborne’s stewardship, made some catastrophically bad decisions with the twin aims of courting popular opinion by appearing to go for the ‘nobs’ and also of raising money towards his manic deficit reduction quest. As part of this he imposed a large extra burden of stamp duty… Read more

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Tenancy Deposit Protection

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Deposit Rules: Landlords are still being caught out with the tenant deposit protection rules, despite the fact that the rules on protecting tenancy deposits have been in place since 2007. Here is a useful re-cap. Put simply, if you do not protect a tenant’s deposit within 30 days of the deposit being paid, and serve […]

… LandlordZONE.

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