Now is the time for lettings reform: Guest Blog by Strawberry Star

November 6, 2019
Rachel Colgan

The tenant fee ban is having an impact up and down the country. Yorkshire letting agency Linley & Simpson said that the first three months of the legislation triggered an average rent rise of between 4-5% on new lets, as landlords try to soak up the cost of increased fees. In London, the lack of housing stock has been further exacerbated by the shortage of new buy-to-let activity. In many cases it is no longer profitable for small scale PRS landlords to chase tiny yields in an uncertain market, having already been hit by an extra 3% surcharge on second homes in 2016 and then phased reductions in tax relief on buy-to-let mortgages. Some landlords are leaving the rental space altogether and choosing to sell. 

So, the news that the London Mayor wants to impose rent controls has unsurprisingly been met with harsh criticism, where many believe increasing supply should be the priority to ease market pressures. Further legislation that chases new landlords out of the sector with smaller margins would also impact on investment into the Build to Rent sector – key if we are to increase supply.

Private rents in London on average rose by 0.5% in nominal terms in the year to March 2019 (ONS). This compares to an increase of 1.5% in the rest of England. We expect the latest figures after the tenant fee ban came into action in June to be much higher. Even so, London rental price growth has been below the England average since late 2016. Perhaps the solution is for rent rises to be capped to inflation and limited to two-year increments, to ensure fairness for both the landlord and tenant.

We also hope the Government’s anti-landlord tax regime is eased by the new Housing Minister. Currently, tax is suppressing supply to the detriment of many young renters who lack choice. Furthermore, lifting stamp duty for those who use rental income as their primary source of day-to-day living expenses is something which could help both market supply, as well as struggling retirees who don’t have a pension.

The importance of reforming the sector is greater than it ever has been. A fifth of the UK population now live in privately rented accommodation and this number is growing each year. The number of households in the private rented sector in the UK increased from 2.8 million in 2007 to 4.5 million in 2017, an increase of 1.7 million (63%) households. With it, we’ve seen a marked shift in attitudes towards renting. Many are actively choosing to rent over buying because of lifestyle, greater work flexibility, and less responsibility. The quality of PRS housing stock has vastly improved over the past 10 years as a result. In fact, according to research from PwC, like many big cities in Europe, London will become a city of renters with just 40pc owning their own home in 2025. Although many of these will be ‘generation rent’ locked out the housing market whilst saving for a deposit, it is worth noting that rents are rising at a much lower rate than house prices, and largely mirror wage growth. Many renters in Europe enjoy greater stability, and there’s no reason London’s tenants can’t as well. The Mayor must prioritise longer, more stable tenancies in the capital, and commit to fulfilling the genuinely affordable homes quota that’s has been promised for many years. We are seeing new tenants ask for two years+ contracts for personal stability – there is a desire for much longer-term fixed contracts. Supply remains the key issue in making the sector balanced and fair for all.

Landlord outlooks are changing too. Although 60% of Strawberry Star’s developments are priced affordably within the Help to Buy Scheme, buy-to-Lets take up 20% of our market share. As landlords are being squeezed with high admin fees and tighter yields, investors are now looking at long term capital growth with the vision to sell further down the line. This may be especially unnerving for tenants whose properties might be purchased by live-in homeowners. Indeed, we are now seeing many investors downscale their large-scale portfolios, having already seen an impact on landlord profits from the tenant fee ban. Landlords are saying: ‘I will sell, but at the right price’, as they look to recoup their investment. The fear is that the hassle of having a buy-to-let property just won’t be worth it anymore. We are hopeful that because of this, Boris will cut the additional 3% Stamp Duty charge on second homes to re-boost the housing market.

Some landlords are renegotiating their fees with property managers and letting agents, but the amount of administration for lettings agents can be phenomenal. We are hopeful for more to be done in the prop-tech sector to make admin processes more efficient, allowing agents more time to build on client bases and matchmake homes to tenants.

Strawberry Star is now pitching directly to exposed developers who are struggling to move their stock to guarantee a rental income – an emerging Build to Rent sector within our business model. This guarantees a lump sum as the market recovers.

As we see some investors cash out and decrease rental supply, rents will creep up. But it’s worth noting that as Brexit resolves itself either way, confidence should grow. Sale prices are already stable and should remain favourable, so it’s a good time for owner-occupiers to buy and long-term strategy landlords who can now achieve an increased return as all forms of property lending is at an all-time low with amazing fixed rates available.

Alex Lazarov

Lettings Director, Strawberry Star Homes