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The changing face of the private rented sector

August 2018

The housing market in the UK is undergoing fundamental change. For decades, home ownership was a widespread aspiration deeply ingrained in the national psyche. An Englishman’s home really was his castle and could be passed down through the generations. But a variety of factors have combined to change the housing landscape.

What is the nature of the private rental sector, and how is it evolving?

70-year trend reversed

Since the turn of the millennium, there has been huge growth in the private rented sector, reversing a 70-year trend. More people have been looking to rent rather than buy. The paucity of social housing stock has meant that many of this new generation of tenants have been accommodated via the private sector.

The new culture has been dubbed ‘generation rent’ and has been driven by a variety of factors, including a rise in the number of single person households and an increase in immigration. The growth in the rental market has supported employment mobility and has been experienced in all regions of the county. The trend has been most pronounced in London where property prices are highest, forcing a greater proportion of residents into rental accommodation.

Good news for landlords?

The early years of the 21st century represented an opportunity for private landlords, but the rental market has undergone many changes over recently. There is no doubt that these changes have discouraged investment in the private sector.

The introduction of the 3% stamp duty surcharge, the scrapping of the 10% ‘wear and tear’ tax relief, a growing number of licensing schemes, and the imposition of Right to Rent checks have made life more difficult and expensive for landlords. To make matters worse, mortgage tax relief is being phased out, and more stringent lending conditions for mortgages imposed.

Some private landlords have inevitably chosen to leave the market and there has been a significant fall in the number of buy-to-let transactions.

Greater regulation and higher rents

With fewer private landlords and those that remain facing increased costs, the result is likely to be a reduction in available housing stock at a time when rental accommodation remains in high demand. While tenants’ rights are now better protected, higher rents have been the inevitable consequence of greater regulation and a reduction in the number of available homes.

Minimum Energy Efficiency Standards (MEES)

Since April 2018, new Minimum Energy Efficiency Standards (MEES) set out by the government have impacted private rental properties in the UK. Every property must have an Energy Performance Certificate (EPC). Efficiency ranges from A (most energy efficient) to G (least energy efficient). Landlords are prohibited from letting a property with an EPC rating of F or G. This requirement currently only applies to new tenants, but landlords must ensure that their properties are at least E rated by April 2020.

Better news for landlords?

If you have retained your buy-to-lets or are considering investing in rental properties, you face additional costs and there are a few more hoops to jump through. It isn’t as easy to obtain a mortgage, and the application process is more onerous. But the demand for accommodation is high, particularly in London, and you could find that you can achieve higher rents. The new era isn’t all bad news for landlords.

The Tenant Fees Bill

It is worth bearing in mind that further new rules for landlords are on the way. The Tenant Fees Bill is currently progressing through the parliamentary process and will eventually become law, possibly next Spring. Letting agents will be banned from charging their tenants fees for services such as inventories and references. Some agents may see fit to increase their charges to landlords to cover their costs.

The draft bill, published in May 2018, also proposes to cap the deposits which landlords take from their tenants to cover any damage during the rental period. Deposits are often in excess of one month’s rent but will be capped at that level unless the bill is amended. This will mean that landlords cannot request a higher deposit from those with young children and pets, in recognition of the increased risk these tenants could represent.

The future of the private rental sector

With landlords being subject to greater regulation, increased demands on their time, higher costs and possibly lower deposits, what is the future of the rental sector in the UK?

The demand for accommodation remains high but reduced immigration in the wake of Brexit could diminish this somewhat. The impact of changes to immigration may be offset by a reduction in the number of available properties as more landlords will inevitably choose to leave the market.

All things considered, investment in buy-to-let is likely to remain a good one but landlords may have to be judicious in their choices. It will be more important than ever to choose the right type of property in the right location and then find the best tenants.

It could prove crucial to seek informed advice from professionals located in the area in which you wish to invest. The services of a letting agent will minimise the impact of the increased regulation on your time, and the cost of their services may well be offset by the higher rents and occupancy rates that you are able to achieve. The private rental sector in London continues to deliver impressive yields.

For help and advice letting property in Wandsworth, Southfields, Wimbledon, Putney, and the surrounding areas, contact our agents today.