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Rising rents a sign of restructuring market, not letting agent fees

23 July 2019

Alan Cleary - Managing Director of Precise Mortgages

Last month the Tenant Fees Act came into force, preventing letting agents from charging tenants disproportionately high referencing and contract fees. At the same time, rental deposits were capped to five weeks.

As a move to protect tenants from being charged unfair and sometimes astronomical fees, it’s one that we at Precise Mortgages welcome.

We strongly support a private rented sector that treats tenants fairly, just as we want to see one that enables an environment allowing professional landlords to offer quality accommodation to those tenants and still turn a profit.

There have been plenty of warnings that the loss of this fee income would prompt letting agents to raise landlords’ costs to compensate, piling yet more pressure on them at a time when their finances are already undergoing massive change.

It’s something that has seemed the inevitable, if unintended, consequence of legislation designed to protect tenants.

Rents increasing

So it would seem to have turned out.

The private rented sector report from ARLA Propertymark showed the number of tenants experiencing rent rises increased to the highest figure they’ve ever recorded, at 45 per cent in May 2019. Year-on-year, this figure is up from 27 per cent in May 2017, and 28 per cent in May 2018.

It seems reasonable to draw the conclusion that landlords, faced with rising costs on yet another front, have done the only thing they can to manage – raised their own prices in response.

There are other factors at play here, though.

The same report from ARLA also showed the number of properties available to rent dropped marginally to 201 per member branch in May, from 202 in April.

Meanwhile, demand from prospective tenants increased in May, with the number of house hunters registered per branch rising to 69 on average, compared to 64 in April.

Year-on-year, demand is up 15 per cent, from 60 house hunters registered per branch in May 2018.

Restricted supply combined with growing demand for rented accommodation is supporting these rent rises; they are not simply a function of passing on letting agent fees back to renters on a monthly basis, easy as that explanation will no doubt seem to many.

Fundamental restructuring

There is a much more fundamental restructuring going on in the private rented sector – one that began with the stamp duty surcharge and continues today as landlords’ profits feel the pinch of reducing tax relief on mortgage interest.

There has also been the simultaneous tightening of prudential rules by the Bank of England, with tougher affordability stress tests and the portfolio rules taking years to bed in as landlords come to remortgage.

It’s not been an easy ride for landlords over the past few years, and it’s taken considerable time to adjust. Yet we are seeing that they are adjusting.

Our own buy to let lending remains strong – something that we attribute to the fact landlords committed to remaining in the market are working out smarter and more efficient ways to finance their investments.

We’ve tried to support that too, by identifying where in the market we saw ‘problem’ gaps appearing.

London’s fundamentals are not bad

London’s market was the obvious one: high house prices and proportionately lower rental incomes made yields too skinny to stand up to the tougher affordability scrutiny lenders were having to apply to new purchases and those made by portfolio landlords.

But the fundamentals of the London rental market are not bad – quite the contrary. It’s often the way with rules designed to create systemic stability; it makes sense overall, but there are going to be examples of good deals that don’t fit the new box.

Ironically, putting this kind of pressure on London’s rental market probably wasn’t the intended outcome.

Demand for flexible and high-quality accommodation in the capital is consistent and strong; capital values are typically resilient, particularly over the long-term, which is usually how landlords invest.

We recently launched portfolio top slicing, which allows landlords to use their surplus portfolio or earned disposable income to prove they can meet any financial stresses on a new loan application.

So long as the landlord’s overall interest cover ratio meets the minimum requirements there is scope to include very low yielding properties in a portfolio so long as they are balanced by higher yielding properties elsewhere.

This move puts London and other high value markets back in the game; something that tenants will no doubt appreciate at a time when supply is under pressure and rents are rising.

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Precise Mortgages is a trading name of Charter Court Financial Services Limited which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register Firm Reference Number 494549). Registered in England and Wales with company number 06749498. Registered office: 2 Charter Court, Broadlands, Wolverhampton WV10 6TD. Copyright © Precise Mortgages 2018.