There is a long-held misconception that renting out property is a passive investment. But, like everything else, property management became more complicated quite quickly. Like any other investment, property has to be carefully managed if you want to get the most out of it.
Property investors who use market trends and movements to inform their investment decisions are likely to get much better returns. So, in this post we’re looking at some of the most important trends and indicators that landlords can use to make smart decisions from 2022 onwards.
Eviction Reform and Tenancy Length
The last few years have seen significant changes to eviction legislation. The Section 21 notice is all but phased out and increased tenant rights and protections all lend themselves to longer tenancy terms. Back in 2018, there was a consultation on increasing the standard tenancy length from 6-12 months to 3 years and the government issued a press release stating that this was the standard they wanted to work towards. While there are no plans to introduce a standardised tenancy length in the near future, this is the direction legislation is heading in.
Smart investors can read the writing on the wall and use this to determine the best letting model to meet their longer-term aspirations. If you’re in property for the long haul and you see yourself letting out your properties for a long time, this is likely good news. Longer tenancy terms lead to lower churn rates and therefore lower costs. Provided you have a sound vetting process and are diligent with inspections and maintenance, long-term tenants can be a boon to your business. However, if you’ve got plans to exit the PRS at a specific point, longer-term tenants might not be on your wish list. If you want a shorter-term business model you might want to consider diversifying into short-term lets, HMOs, student tenancies, or other tenancy types with naturally shorter lease periods.
Mortgage Interest and Lending Criteria
Most landlords are familiar with Section 24 which was introduced in April 2017. Since its introduction, tax relief for mortgage interest was phased out for non-incorporated landlords.
This had a big financial impact on landlords, particularly those who had made use of extensive lending to build property portfolios. As the relief has been phased out totally by this point, it means that for many landlords gearing is out and cash buying is in.
Incorporation as a Counter to Section 24
The move has led to a rise in landlords incorporating their property businesses as the interest relief is still available where properties are run as a limited company. However, with corporation tax rates set to increase in the coming years, it could be more of a delaying tactic than a sound long-term strategy for landlords with heavily leveraged portfolios.
Lending is Getting Harder for Property Investors
Aside from tax relief adjustments, lending is becoming more difficult to acquire. Lenders are tightening their criteria and requiring larger deposits for investment mortgages. With inflation running high, increases in the Bank of England base rate, and cost of living increases there are indications that there is more financial disruption to come.
This may put some property investors in an awkward position especially if your investment plan involves expanding your portfolio.
REITs Represent Lower Capital Property Investments
For property investors who don’t have the cash to invest in new properties or who need to raise capital for expansion, or even investors who want to be more hands-off, it might be time to look into the growing popularity of REITs. This is a way of investing in property without a huge capital outlay and if you invest in them wisely, they can also represent a quick return on investment. Check out this article for a detailed look at REITs from an expert and an idea of where to start.
Energy Efficiency Standards and Property Maintenance
The government has not been shy about its plans to hit energy efficiency targets in recent years and legislation aimed at helping them to do this has touched nearly every part of society. Landlords have already been the subject of a drive to improve energy efficiency in the private rental sector. Minimum Energy Efficiency Standards (MEES) were introduced in 2020 and it meant that rental properties could only be let out if they had an EPC rating of E or higher. Landlords who struggle to achieve this rating are only exempt from meeting the standard if they can prove that they have spent £3500 or more trying to achieve it. This has already increased spending for a lot of landlords with older properties.
MEES Set to Increase
While the initial introduction of MEES wasn’t a huge surprise, there were many landlords who were caught off guard by the changes. However, since then the government has been very vocal about its plans to raise the standard even further. Plans are in place to raise the energy efficiency standard to EPC C by 2025. There is also a possibility that the spending cap, used to determine whether landlords are exempt from the standard, may also increase.
Smart investors looking to expand their portfolios should make themselves familiar with the legislation to ensure that they purchase properties that are either exempt or that already have an EPC of C or at least have plenty of potential for improvement. There is also some speculation that lenders will begin to offer more favourable buy to let mortgages for landlords who buy energy-efficient properties.
Property Investors Need to Account for Energy Efficiency
Landlords with existing properties that don’t meet a standard of C can start to look at their options. Either it’s time to sell the property and use the capital to re-invest in a more energy-efficient property or you can begin looking into initiatives and incentives to improve the rating. There is some evidence that lenders are offering favourable loan rates to cover energy efficiency work.
Whatever your situation, it’s clear that energy efficiency is becoming a permanent fixture of property letting so smart investors will account for this in their existing portfolios and future purchases.
HMO and Residential Licencing
Licensing schemes have continued to proliferate. There is plenty of evidence showing that the schemes are not reducing the problems they have been introduced to combat. However, this seems to be leading to the introduction of more schemes, rather than the re-evaluation of existing ones.
Licencing in England
In England the licencing rules are regional, so in some areas you may be required to be licenced. In other areas licencing will only apply to certain property types and in some areas no licences are required at all. While many property investors and interest groups think that licensing schemes are the sole realm of HMO landlords, there are more and more licensing schemes making their way to consultation stage that apply to residential landlords. However, smart landlords will note that at this stage, England’s licencing rules are the exception rather than the rule.
In Other UK Countries all Landlords Must be Licenced or Registered
In Wales, all landlords have to be licenced or they have to use a licenced letting agent. While Scotland and Northern Ireland don’t require licencing as such, you have to pay a fee and register to rent out property in Scotland or pay a fee and register to let property in Northern Ireland. These schemes are not selective, they are blanket schemes that apply to the whole country.
While there are no obvious plans to introduce blanket licencing in England, there’s no guarantee it won’t be introduced in future, especially with renting standards being very much on the government’s agenda and precedence being set in other UK countries.
Licencing is here to stay, and it is likely to keep evolving. Property investors should be keeping their ears to the ground for new licencing schemes and consultations so that they can at least have their say. The more landlords that get involved in consultations that will directly affect their businesses, the more effective and reasonable measures proposed following consultations are likely to be.
Pet Friendly Rental Properties
Pet ownership surged during the early years of the pandemic. More people picked up pets than ever before as a way to combat the isolation that many felt during this time. Couple this with the housing bubble and the shrinking pool of people able to buy their own properties and you suddenly have a lot more renters looking for pet-friendly rental properties. It is now the case that landlords operating a blanket ban on pets in their properties are consequently limiting their rental model. A blanket ban on pets is more likely than ever to exclude a significant number of people from your rental property.
The Government are Invested in Pet Friendly Rentals
The government have also recognised that pet ownership and renting have not traditionally gone hand in hand. Early in 2021, it caused significant chatter when the government introduced a new model tenancy agreement that made it harder for landlords to say no to pets. This wasn’t something that was enshrined in legislation, though the move caused a lot of speculation and misunderstanding around this point. Rather, the model tenancy agreement doesn’t impose a blanket ban on pets in the hopes that it helps more landlords move to a pet friendly model.
Pet Friendly Rentals are an Investment Opportunity
According to the press release issued by the government around the model rental agreement, only 7% of landlords advertise their properties as pet friendly. Savvy investors understand an opportunity when they see it.
If you can find a way to put yourself in that 7% then you have an edge that many of your fellow investors don’t have. A good strategy is not to operate a blanket ban on pets in your rental listing, but to state that pets may be allowed and are assessed on a case by case basis. A more personalised approach allows you to widen your pool of prospective tenants while also protecting your investment. You can then assess pets based on the type of property and owner and determine what you think is suitable.
Build to Rent Growth
Build to rent is a rapidly expanding property sector. If you’ve been discounting build to rent as something that doesn’t apply to you, think again. Build to rent has largely been proliferated by large companies sinking profits into purpose built rental properties. While last year only 5% of properties were build-to-rent, Savills forecasts that there could be 1.7 million build to rent homes by 2031.
Even if build to rent isn’t something you want to get into, you should be looking over your shoulder at where build to rents are going up in your area because they will represent fierce competition within the private rental sector.
Build to Rent is Proliferated by Larger Corporations
While there may be some smaller landlords venturing into the sector, the growth has largely been bought about by huge corporations. John Lewis for instance is planning to build 10,000 rental properties, and it already owns most of Leckford in Hampshire. Using this as an example, it’s easy to see why big companies will give traditional landlords a run for their money. John Lewis have said that those renting one of their properties will have the option to rent a property fully furnished with John Lewis furniture, staff will be given discounted rents, and apartments will have a concierge service and an on-site Waitrose. Couple that with a landlord who’ll give you as long a lease as you like and you’re starting to see why landlords with properties in the surrounding areas might feel the competition.
Investors who are interested in the build to rent sector will find that there’s never been a better time to look into it. There are plenty of opportunities out there for savvy investors. But investors looking to expand or change their portfolios would be well advised to consider buying in areas away from large build to let projects.
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