Feb

Comment: the self-defeating march of ever increasing landlord regulation

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Announcing his Levelling-up White Paper, Michael Gove unveiled the government’s plans “to transform the UK by spreading opportunity and prosperity to all parts of it.” The rhetoric sounds fine and dandy, but the reality for landlords is likely to be something quite different.

In addition to having to deal with a slew of additional regulations and restrictions, many private buy-to-let landlords are likely to have to put their hands deep into their pockets to substantially improve their rental properties. Older properties will need the most money

Older rental properties

Gove’s plans will force rental property owners with older properties – and the majority of rental properties tend to be older – to carry out improvements costing up to £15,000 each. There are estimated to be around 800,000 rental properties in England that fall into the category of needing up-grading.

The 400-page white paper proposes new minimum standards for private rentals, and new regulations which come on top top of existing rules, forcing landlords to make properties more energy efficient.

This, combined with the other landlord measures included in the White Paper, the tenant friendly letting restrictions, will undoubtedly drive some existing landlords out of the market. It will exacerbate an already severe shortage of suitable homes in the very regions the policy is focused on rejuvenating.

The National Residential Landlords Association (NRLA) certainly thinks so, it warns that the additional cost of these upgrades will force more private landlords to sell up, unless the Government comes up with some sort of support package.

Minimum health and safety standards

Mr Gove’s proposed changes will mean that all rental homes have to meet minimum health and safety and energy standards. But because areas in the North and Midlands, where levelling up is targetted, tend to have higher rates of poor quality homes, the measures will have a disproportionate effect on landlords in these regions.

Parts of Yorkshire and the Humber, the West Midlands and the North West are specifically mentioned in the white paper, but here property values are lower that other parts of the country, which means that landlords are unable to use mortgage debt to cover the high cost, as is the case in say, the South East.

Arguably, some of these proposed measures are sorely needed where a minority of neglectful landlords are concerned, and particularly those issues affecting health and safety, but others are taking the industry back to the dark old days of long-term security of tenure. The Rent Acts, which gave tenants lifetime security – and some of those legacy tenancies are still around today – are at the extreme end of this scale, but the trend now goes in that direction.

Section 21 to go…

The long anticipated abolition of Section 21, the ‘no fault’ eviction process which has provided a “safety net” for private landlords since the 1980s, is coming to an end, according to the paper. It will end the “unfair situation where renters can be kicked out of their homes for no reason,” the Paper says.

There will also be a consultation on introducing a landlords’ register, yet another measure that is supposed to crackdown on rogue landlords, the idea being that it makes sure that fines and landlord bans stop repeat offenders. However, it introduces further costs and a similar system operating in Scotland for some years now has met with questionable results.

Tightening regulations will make life tough for landlords

The current trend across the whole of the UK regions is to tighten landlord regulations, giving tenants ever more protection, but is this really helping?

Across the regions, starting with Scotland but spreading to Wales, Northern Ireland and now England there are seriously more stringent measures being introduced, all of which make the work of landlords more onerous and risky. They give tenants increased security of tenure, along with other protections.

When faced with delinquent tenants landlords want to be able to evict, and quickly. On the other hand, when landlords have good tenants who look after the property and pay their rent on time, most landlords would want them to stay as long as possible.

Compared for example to some American states – Virginia for example, with police sheriffs evicting tenants if they miss just a few weeks’ rent – evictions in the UK can never be described as quick or easy, averaging around 6 months, and this time period is now set to get extended even further.

A major deterrent for landlords

The assured shorthold tenancy – which remains in tact in England for now – was a major factor in the growth of the buy-to-let market, with around 4.4 million households now rented under the regime. It guarantees that landlords can regain possession, albeit with a few months’ wait, but it provided the necessary assurance that investors and mortgage lenders could at least get their property back, even if it meant a financial loss, usually before too much damage had occurred.

With these new proposals, the shorthold concept is under threat in England and is already gone in Scotland and Wales. It’s passing will be a major deterrent for landlords.

Most tenants are responsible

In my experience of dealing with working and professional tenancies, the majority of tenants, around 90% of them (19 out of 20), are excellent tenants. They respect the property and pay their rent on time. But if you get saddled with the 5% tenant, the one out of 20 who fails to pay, causes damage or generates constant complaints from neighbours, then it looks like you are in for a very rough ride in the future – there will be no quick, easy or inexpensive solution.

So, increasing security of tenure increases risk for those landlords. For those who operate a portfolio of properties, say 5 and upwards – and many now operate through limited companies – they can generally cope quite well with the odd rogue tenant. But what about the 45% or so of landlords with just one property, many relying on their rental income to pay a mortgage or fund retirement. For them a bad tenant becomes a financial nightmare, and it’s likely to get worse as these new laws come in.

House price growth is peaking

So far through the pandemic landlords have been bolstered by the growth in house prices. House prices growth has confounded all expectations though the Covid pandemic, and this has been a boost for buy-to-let investors with rents rising by 5% and house prices by 10%, keeping many landlords in the market. But as the virus recedes, we hope, and we face the massive debt that’s been accumulating, house price growth is likely to stall.

So, take more expensive mortgages, tighter regulations, draconian eviction restrictions throughout Covid causing serious rent arrears, a hostile tax regime and these new proposed measures and combined they could easily trigger a mass exodus of buy-to-let landlords in 2022. That’s what’s likely in store for the UK buy-to-let rental market in 2022.

There is only one result, in my view, of cracking down so heavily on the responsible majority of buy-to-let landlords who operate within the law and provide an excellent service – they will leave. If they leave, a rental shortage will keep rents high or push them even up higher – total rental stock levels are already some 43 per cent below their five-year average, that’s according to property portal Zoopla.

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