A landlord called me yesterday asking about rental inflation in the area. As the government has put the squeeze on landlords, many landlords are now looking to increase rents to make their investment keep its head above the water.

Looking at recent rents we have achieved and asking rents for property in Glastonbury and the surrounding areas I see rents are starting to race ahead of consumer price indices.

Recent government statistics show rents for new tenancies in the Mendip district grew 3.85% in the last 12 months (i.e. not existing tenants experiencing rental increases from their existing landlord). For the corresponding period the year before rents for new tenancies grew 4.4%

So how can we explain the slight easing on rental inflation?

The explanation for the slight drop from the previous year depends on which side of the demand/supply equation you are looking from. On the demand side (from the tenants point of view) there is the uncertainty of Brexit and the fact that salaries are not keeping up with inflation for the first time in three years. Critically this means tenants have less disposable income to pay their rent.

On the supply side (landlords point of view) Brexit also creates uncertainty. However, the biggest issue was a massive upsurge of new rental properties coming on to the market in late 2015/early 2016 caused by George Osborne’s new 3% stamp duty tax for landlords in the first part of 2016. This meant a lot of new rental properties were ‘dropped’ on to the rental market all at the same time. The greater choice of rental properties for tenants curtailed rental growth/inflation. A slight softening of  property prices has compounded this.

Figures from The Bank of England suggested that first time buyers rose over the last 12 months as some were more inclined to buy instead of rent. Together, these factors played a part in the ongoing moderation of rental growth.

The lead up to the General Election in May didn’t help: after all people don’t like doubt and uncertainty. So now that we have a new government for the next 5 years, this will hopefully remove some of the uncertainty stopping tenants making the decision to move home.

Whether it be ‘hard’ or ‘soft’ Brexit negotiations (and with the Election result the Tory’s might have to be ‘softer’ on those negotiations), the simple fact is, we aren’t building enough properties for us to live in. Both in central Somerset, the South West and the wider UK, long-term population trends imply that rents will soon be growing faster than inflation again.

Looking at the Office of National Statistics projections, the population of the Mendip district will increase by 14% from 110,800 in 2014 to 126,400 in 2039.

Tenants will still require a vibrant and growing rental sector to deliver them housing options in a timely manner. As the population grows in central Somerset and the wider UK any restriction to the supply of rental properties (brought about by poor returns for landlords) cannot be in the long-term best interest of tenants.

Simply put: rents must go up!

The fact is that I see this as a short-term blip and rents will continue to grow in the coming years. With rents only accounting for 29% of a tenants’ disposable income, the ability for most tenants to absorb a rent increase does exist.

About Tom Morgan

Founder of Jungle Property the multi award-winning letting agent based in Glastonbury, Somerset. I am passionate about property and Glastonbury and about providing the very best advice to anyone who wants the best return on a buy-to-let property investment. For an open and brutally honest opinion on anything in the Glastonbury property market please contact me via tom.morgan@jungleproperty.co.uk

• Mail
|
• Web
|
• More Posts(119)

At the recent (21st June) State Opening of Parliament the Government outlined its legislative agenda for the next year with the Queen’s Speech.

From a rental sector perspective the most notable item was the Tenants’ Fees Bill. The Government says that tackling unfair fees on tenants will make the private rental market more affordable and competitive. The draft Bill will:

• ban landlords and agents from requiring tenants to make any payments as a condition of their tenancy with the exception of the rent, a capped refundable security deposit, a capped refundable holding deposit and tenant default fees;
• cap holding deposits at no more than one week’s rent and security deposits at no more than one month’s rent;
• introduce measures to enforce the ban with provision for tenants to be able to recover unlawfully charged fees.

The Bill has yet to be drafted so the devil will be in the detail but what will this mean for landlords, tenant’s and letting agents in Glastonbury and indeed the whole of England?

Landlords

For those landlords who let their property without using an agent, the landlord will now need to cover the cost of any checks they carry out on an applicant before granting a tenancy. In my experience many of the landlords who fall into this category do little or no checking of applicants before granting a tenancy and the checks are often limited to a landlord reference and/or simple credit check the cost of which is very small. Many of these same landlords do not charge applicants a fee so the overall effect on this group of landlords is likely to be negligible. It seems likely that landlords will not be able to charge tenants a fee for extending or renewing an existing tenancy so for this group of landlords this means there will be extra work for no extra income. In isolation this change will have minimal impact on this group of landlords but does make being a landlord slightly less attractive than before especially in light of all the anti-landlord measures introduced in the last few years. A minority of landlords in this group will in time pass on any additional cost to the tenants through increased rents either when next letting their property or by increasing the rent for existing tenants. This group of landlords will not want to accept a lesser rent than that achieved in the wider market so as rents are quickly increased for agent managed properties so too will this group increase their rents.

For those landlords who use an agent to let their property they will see no change in the short term and these landlords may not even be aware of the change. However talking to many agents it seems likely that around half of agents will raise the fees they charge landlords. Fees from tenants account for around 10-25% of a typical agent’s revenue and with the sudden loss of this revenue stream it is inevitable that some agents will pass on at least some of this loss to the landlords who use their services. As with the previous group of landlords this will now make being a landlord a less attractive investment and will lead to some dis-interest in investing in buy-to-let. This group will be quick to increase rents as an easy option for agents to prevent their clients incurring a loss and the agent losing a client.

For those landlords who stay the distance they can expect increased demand and in the free market economy increased demand leads to higher prices (rents).

Agents

This is a significant loss for agents as tenant fees are a significant revenue stream for many agents. The more agile agents will adapt and make efficiency savings in the business to offset this loss. The agents operating on narrow margins or who are slow to respond to the change will not survive and some will simply throw in the towel as the business model will no longer be as attractive as before. Some commentators believe this will rid the industry of the less desirable agents (aka Cowboys). For those agents who stay the distance, the bonus will be the extra stock they may pick up from the departing agents. The surviving agents will respond quickly to recoup the loss and passing on the cost to the landlord will be a route many will choose. Rents on new lets will rise almost immediately and rent reviews for existing tenancies will be less lenient than before the change.

Tenants

Last but by no means least what does this mean for tenants? In the immediate aftermath of the change the champagne corks will be popping amongst tenants and campaigners who fought to ban fees but what of the longer term? In my opinion expect the following:

• Less landlords – the landlords operating on narrow margins will leave the sector or sell on to portfolio landlords
• Less rental properties – some of those properties sold will be out of the rental sector
• Higher rents
• Less agents
• The possibility that tenants will need tenants’ liability insurance or pay 2 months rent in advance as a requirement for a new tenancy to be granted
• The need for tenants to respond quicker to any application process as the legislation limits the amount (and therefore the time) of a holding deposit

So the long-term effect of the tenants’ fees ban is less choice and higher rents for tenants. Some commentators suggest landlords selling up and leaving the sector will be good news for tenants wanting to step onto the housing ladder – if only life were that simple. Tenants are paying so much of their income towards (now increasing) rents they will struggle to make that step. In writing this article it makes you realise what a delicate balance the housing market is in the UK and that quick fixes fail to address much wider issues.

About Tom Morgan

Founder of Jungle Property the multi award-winning letting agent based in Glastonbury, Somerset. I am passionate about property and Glastonbury and about providing the very best advice to anyone who wants the best return on a buy-to-let property investment. For an open and brutally honest opinion on anything in the Glastonbury property market please contact me via tom.morgan@jungleproperty.co.uk

• Mail
|
• Web
|
• More Posts(119)