Government strategy for the Private Rental Sector

THE war on the private rental sector and landlords by former Chancellors of the Exchequers is starting to shape into an impossible situation for the very people it set out to help – hopeful first-time buyers and generation renters.

According to the latest Hamptons International Lettings Index, rents in the UK are rising twice as fast as they did in 2018. It showed that average rents rose by 2.1% in November 2019 – nearly double the rate recorded in 2018 which equates to the average UK rent now being £989 per calendar month, £20 more than compared to this time last year.

Rent increases only serve to reduce the amount that would-be first-time buyers can save towards their deposit – pushing their dream of homeownership further into the future.

Why are rents rising? Simple – there’s a marked shortage of rental properties available in the marketplace and as the rule of supply and demand dictates, the result is higher rental costs. The number of homes available for rent fell by 7.8% in the first 11 months of 2019.

The fall is mainly down to the measures put in place over the last few years, designed to stem the (previously) growing number of landlords in the UK. Whilst these measures have gone some way in removing the appetite of private landlords to continue acquiring buy-to-let investments many landlords are now turning to the more lucrative market of short-term lets which will further strip the supply of rental accommodation and worsen the problem for tenants seeking long term rental accommodation. A recent report produced by ARLA Propertymark found that 2.7% of landlords have changed their strategy from long-term lets to short-term lets which equates to 46,000 now no longer available to long term tenants.

The number of landlords that are still in the market are largely professional landlords who can achieve economies of scale with their property portfolio. Smaller landlords are being forced to sell up and cut their losses which is resulting in new rental stock falling (apart from in London) causing a limited supply in rental properties and so driving up rents. Research conducted by Paragon found that landlords with just one property has fallen drastically since 2010, from 78% to 45%. Currently, 52% of the private rented sector is occupied by non-professional landlords who own between 1-4 rental properties. Given that there are approximately 4.5 million households in the private residential sector, which is expected to grow to 6 million households by 2025 (source: ARLA) the amount of slack which will need to be picked up by corporate and professional landlords just to keep to current stock levels is vast.

It is estimated that there are only approximately 150,000 units in the pipeline to be delivered by build to rent providers. These numbers are insufficient to bridge the gap in the short to medium term particularly as the availability of private rental sector properties appear to be contracting. This can only lead to further rent increases and the problem with the rental sector being exacerbated.

Analysts are therefore expecting that rents will continue to rise this year as the shortage of properties pushes prices up even more. In its most recent survey, the Royal Institution of Chartered Surveyors said that rents would increase by 2.5% in 2020.

RICS highlighted that the number of new landlord instructions has been stuck in negative territory for 14 successive quarters as the clampdown on landlords takes its toll.

A series of tax reforms, including the withdrawal of reliefs, higher stamp duty on rental homes and tighter regulation of the buy-to-let sector have all contributed to landlords heading for the door. If the Government really want to help the generation of renters get on the property ladder, they need to make some urgent changes to reinstate a fluid rental market. There are approximately 183 pieces of legislation which landlords and the rental sector in general need to contend with.

The quick solution is to explore areas which have a direct impact on landlord desire to want to hold onto their properties which will help to hold up the supply and keep rents at sustainable levels.

Options include:

1. Consider providing tax incentives for landlords who rent their properties out to tenants on a long-term basis
2. Simplify the property portfolio incorporation process allowing landlords operate under a limited company structure and obtain full mortgage interest rate tax relief.
3. Explore ways where limited company lending rates are broadly on par with personal BTL mortgages.

This needs to be done to help suppress the desire of landlords wanting to increase rents to cover additional costs. In addition to this the government needs to continue with the national house building programme, promoting the build to rent sector and streamlining the planning process so homes can be delivered without lengthy local authority bureaucracy

It is perfectly acceptable for the government to continue with their 3% SDLT levy for landlords thereby prioritising owner occupiers. However penalising landlords annually (through their tax return) for maintaining a portfolio will quickly strip away supply, which is what the market can ill afford to do.

If changes aren’t made we will be in a position where buy-to-let will once again become attractive for landlords to re-enter the market because the rent increases will mean the yields that landlords can earn will be more lucrative.

Tenants will ultimately feel the brunt of this as landlords will look to pass on the additional costs onto them particularly due to a contraction in the availability of good rental properties.

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