James Souter and Andrew Kafkaris highlight the main issues facing the private rented sector ahead of the general election
Commitment by UK institutions to the private rented sector (“PRS”) is now well established and overseas money is also flooding into the market.
PRS was at the heart of the leaders’ debate when addressing the housing crisis. While the outcome of the general election is difficult to predict, the question remains over how the next government might take steps to encourage further investment in this area. There are numerous issues faced by the sector ahead of polling day on 7 May.
Government and industry initiatives
Over the past two years there has been growing government support for PRS, with assistance from various trade and professional bodies. Though the PRS Taskforce, which was established by the government to improve quality and offer a wider choice to tenants, has recently been disbanded, that leaves room for a co-ordinated approach from within the industry. The British Property Federation (“BPF”) and the Royal Institution of Chartered Surveyors (“RICS”) are two bodies that will have important roles to play. A prime example of this is the RICS’ Private rented sector code of practice, which has the potential to raise standards in the lower end of the existing buy-to-let market and provides a useful framework for new entrants at an institutional level.
The government has issued a model agreement for an assured shorthold tenancy (“AST”) with an accompanying guidance note aimed at striking a balance between the interests of landlords and tenants. One of the major aims is to encourage longer fixed terms of up to three years. This should provide stability for occupiers, particularly families with children, and certainty for the investor landlord.
Some argue that there has been too much focus on the lower end of the market. Going forward, more sophisticated measures to encourage investment are needed, for example stamp duty land tax relief for PRS in areas with the greatest housing need, such as the new “housing zones” announced by the government in January.
Management issues
Management remains an enigma for the institutional sector and there is already a skills shortage in residential management. There is a need for change and industry bodies are looking to raise standards through measures such as the training programmes offered by the Institute of Residential Property Management. The RICS must also look to encourage entrants into the residential sector to become fully accredited.
Rent control
This is a major policy battleground and provides unwelcome uncertainty for investors. Industry bodies should promote that stable (growing) rents and longer term tenancies are good for investment returns as well as tenants. It is clear that the introduction of rent control would be a deterrent to investment.
Planning
PRS housing falls within use class C3 (residential). While many existing permissions for residential development can be delivered as PRS, care is needed. If permission is sought expressly for PRS and reliance is placed on the delivery of that particular tenure in granting permission, national planning practice guidance suggests that authorities might consider requiring the units to be secured as PRS for a minimum period, with other controls a possibility. While that can easily be achieved via section 106 obligations, the terms will need to be acceptable to the developers, funders and operators. The community infrastructure levy and section 106 burdens placed on PRS schemes could be reviewed by the next government in terms of increasing scheme viability.
Right to rent
The Immigration Act 2014 imposes obligations on landlords to carry out immigration checks on their tenants. This could arguably serve as a deterrent to PRS operators seeking to build significant portfolios. The risk of civil penalties and the negative press this could bring will see operators taking this very seriously. In practice, the carrying out of the checks is likely to be devolved to a managing agent, which will do them as part of its initial scrutiny of the tenant’s financial standing.
The increased burden on PRS operators seems at odds with the government’s commitment to the sector. However, with immigration such an important political issue, it is unlikely that any of the mainstream parties will drop these reforms. In practice, while unwelcome, the well advised operator is unlikely to see this as a significant factor in its investment decision.
Some important practical tips to help landlords deal with these and other legislative changes were provided last month in the article Navigating the residential seas (see EG, 7 March 2015, p130).
Deregulation Act 2015
This Act received Royal Assent on 26 March 2015 and deals with a number of discrete issues relating to ASTs. These include clarification of rules surrounding tenancy deposits and simplification of the law relating to the termination of periodic tenancies. Both are welcome measures for landlords and it is hoped that they will bring an end to the ever-increasing body of case law on these points.
Landlords will be more concerned by the provisions entitled “preventing retaliatory evictions”. In short, this means that a landlord will not be able to terminate a tenancy where the tenant has complained about the state of repair of the premises. This is another example of legislation focused on the bottom end of the market, but it has the unfortunate potential for abuse by tenants.
The winning policy
With PRS growing in terms of numbers and percentage of all households, it will become a more dominant form of tenure and with it carry more votes. All the main parties say they support PRS, but whoever forms the next government should make a distinction in policy between tackling areas of ill-practice and regulating the sector as a whole. Policy should encourage investment and high standards. These need not be mutually exclusive and instead could be used to rapidly increase housing supply where the need is greatest. Institutional investment could provide a valuable resource for solving the country’s housing shortage and should be supported by policy, not hindered.
James Souter is a partner at Charles Russell Speechlys LLP and Andrew Kafkaris is founding partner of Bruton Street Advisors
