Is rent capping a viable option?
Published June 9th, 2014
Recent newspaper reports suggest that Labour, if elected, would impose caps on residential rents and insist that landlords offer a minimum term of three years. Opposition parties are renowned for flirting ideas, many of which will never make serious progress. However, property investors need to consider the implications of such statements.
Graham Bowcock, chartered surveyor and partner with Berrys says “The residential lettings market in the UK is characterised by the variety of ownership. There are accidental landlords (those who have perhaps inherited a house and let it pending dealing with an estate, those who have to move at short notice for employment), serious buy-to-let investors building portfolios, and Local Authority/Housing Association owners”.
The rental market was revitalised in 1989 when The Housing Act 1988 came into operation. This enabled property owners, for the first time in many years, to let a property at a market rent and to have the ability to obtain vacant possession for any reason. This meant that the number of privately rented houses brought forward was quickly and significantly increased.
Graham notes that prior to The Housing Act 1988 landlords were subject to regulated tenancies with rents fixed by the Rent Officer and limited ability to obtain vacant possession, tenancies often even had succession rights attached.
Revitalisation of the market was greatly assisted by bank funding and provision of buy-to-let mortgages. Again this was something that was largely unheard of before the late 1980’s, partly because the economics did not stack up.
Although buy-to-let mortgages have had an interesting history they remain available for those who meet the criteria and form part of the support for the lettings industry.
One of the key criteria for buy-to-let mortgages is rental cover. Most lenders insist that the rent is greater than 125% of the interest charged. Some overly cautious lenders insist that the multiplier is based on both capital and interest repayments not just the interest.
There is clear issue that by capping rents the availability of funding will become limited.
It is also a feature of buy-to-let mortgages that if a property is repossessed then recovery of vacant possession could be dealt with within a few months. Lenders may even derive a rental income whilst vacant possession is being obtained. If the minimum term for a tenancy is three years then lenders may have to reconsider their terms as their ability to sell a property with vacant possession may make the lending less attractive.
Graham Bowcock adds “I have seen it reported that Labour have said that their proposals effect a small number of landlords but millions of tenants. This hides the issues which will come to light if such proposals were ever implemented. The market has an equilibrium and rising rents in recent years is a symptom of a lack of housing supply. However, as rents have risen tenants have rightfully demanded much improved conditions and properties. Landlords have a raft of legislation to comply with, beginning with gas safety certificates, electricity safety, soft furnishing regulations and not to mention the general requirement for a property to be safe. Commercially properties also need to be well maintained, clean and properly decorated. Whilst rents are operated on a market system landlords are able to properly invest and ensure their properties meet market (and safety) requirements. There is a clear correlation between rents and quality of properties.
I think most people acknowledge that there is a sector of the rental market which is never going to fall into line insofar as regulation goes, probably centred round the more urban areas of the country. No doubt those who choose to avoid regulation now will choose to avoid regulation in the future”.
It is unlikely that these proposals will have any effect on social housing and local authority providers. Serious portfolio investors may not be unduly concerned about the term issue. Here at Berrys we have many long term AST tenants on our books, but may be concerned about rent capping. No doubt the ability to obtain funding may also prove to be a problem and it remains to be seen what action lenders would take in the event that rent caps were introduced.
The accidental landlord is perhaps most likely to be effected by the proposal for a minimum fixed term of three years. If a householder has to relocate temporarily, perhaps for employment, they would not necessarily wish to let their property for three years. They would then need to consider whether to sell it or leave it vacant and, of course, at risk of trespass and vandalism.
The answer is for supply to be increased by more house building, probably with more social housing provision. If there is a requirement for lower rental levels this is not something which private landlords should be expected to subsidise. I have no doubt that rent capping will lead to a reduction in the quality of properties available and the ability of a landlord to reinvest in their portfolios.
For more information on Berrys residential lettings and management services contact Graham Bowcock on 01606 49200.