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Why Rents Are Going Up, Up, Up!

Why Rents Are Going Up, Up, Up!

PDPLA Chairman, Martin Silman was briefly interviewed on the BBC Radio 5 Live Breakfast programme in a discussion on inflation earlier this month. In preparation, he surveyed senior members of the PDPLA and came to some surprising conclusions.

Yes, inflationary pressures from cost increases will have a significant impact on future rent increases but there are 3 other factors which may have a more significant impact on future rent levels:

1. Letting Agent Inflation
2. Battery Farming of Students
3. Recent Tax Changes

Letting Agent Inflation

On the programme, a tenant named Lucy from Oxfordshire bemoaned the fact that she has lived in her current home for 5 years and every year her rent increases by 2-3% plus she pays £65-70 in admin fees for the new contract.

Unfortunately, this is not uncommon and it is how many letting agents make their money. Unable to compete against established names on reputation, they win business from landlords by promising to manage properties with management fees set well below what is needed to provide an adequate service, then make up the shortfall by 'churning" tenants - they get them in on 6 or 12 month contracts and then either evict at the end of the term (which leaves the landlord worse off due to the resultant void) or charge the tenant the cost of a new contract and associated (inflated) admin charges - sometimes as much as £500 in some reported cases.

The tenant is the perpetual loser here - you either pay or move on and end up with similar costs with another agent in another property and the net effect is that with a significant proportion of properties being managed in this way, rent levels in the overall market are pushed up to match the increases imposed by these agents.

There is no need to renew contracts every 6 or 12 months and many landlords allow them to become 'periodic contracts" and just run on without additional fees or increased rents. It is hoped that whatever form the proposed legislation on letting agents fees takes, it will remove the incentive for agents to 'churn" tenants in this way, but until it does, this practise is an inflationary pressure on rent levels.

Battery Farming Of Students

The letting scene in Portsmouth, and particularly in Southsea, is changing and will do so quite quickly over the next couple of years due to the number of student halls coming online.

We have had a stable student and housing situation for about 10 years - each year we have had around 20,000 students in the city (+/- 10%) and around 3,000 rooms in 'student halls". This has meant the University has been heavily reliant on private landlords and Southsea has around 4,000 HMO properties housing around 12,000 students in the community.

With the development of 'Student Square" (or 'Station Square" as some would prefer it to be named) comprising as many as 10 student halls around Portsmouth and Southsea Station, the regeneration of this part of the city is welcomed by many but most mistakenly think that it will free up property and lower prices in Southsea for 'families".

Their logic is that with 10,000 halls rooms - the University will be able to compete on an equal footing with other Universities and be able to offer halls rooms to all 1st year and international students, which is often a pre-req for worried parents sending their kids away from home and with this many students taken out of the local community, lots of houses in Southsea will become available for families and rent levels will drop due to the increased supply.

There are a couple of holes in this logic - around 50% of private landlords have mortgages on their properties and some are leveraged quite highly, so in order to cover their costs they will still need to offer HMO style accommodation as the return on 'a family let" is insufficient to cover costs. Also, much student housing in the city is too big (and thus too expensive) for family housing and with parking limitations and the like, likely to be unappealing as family homes - so far more likely to be broken into smaller units and let by the room as they are today.

But the real issue is the impact on rents that the new student halls will have. The University always 'encouraged" private landlords to offer students 10 month contracts and a typical rent, even just 12 months ago, was £300-350 per room in a shared house per month - so £3,500 a year.

The new student halls are unusable for anything other than student housing, so if there is a downturn in 10 years time, expect Student Square to turn into a ghost town (much as it often is today, to be fair). However, the reason they are unsuitable for any other use is their layout and the fact that the rooms are too small  - if they needed to meet the same licensing standards as private HMO landlords have to meet, many would not be able to operate.

The real issue though is the price and the impact of that on rent levels in the city. Remember a student typically paid £3,500 per year to live in the city while studying. A room in a hall typically costs £400-700 per month and many are offered on contracts as long as 50 weeks, even though most students are only resident for 35 or 40.  This equates to an annual bill of between £5,000 and £8,000 for housing - for many a 100% increase on what was 'normal" just 12 months ago.

Why does it matter? Most letting agents have switched from 10 month contracts to 11 or even 12 month contracts for students. This is partly because 'it is easy money" - an extra 10% for no effort but also because students are coming out of halls where it is 'the norm" and they assume that is the case everywhere.  It is no surprise that private landlords are starting to follow suit - if everyone else offers 11 month contracts and no one complains, then why not?

If it was just a 10% price hike in student rents, many would not care (except heavily indebted students of course), but it is worse than that - given the expectation that £400-700 is OK for a tiny room in a student tower, obviously being asked to pay the same for a quarter of a whole house does not seem so bad - so already we are seeing rents averaging £400 / month, up from £350 just a year ago, led by the letting agents who provide most of the rooms in this sector.

And if average rent achieved from an HMO rises by 20 or 30%, the impact on rents elsewhere in the city will be similar - with differentials that great, the trickledown effect is expected to push rents up across the city.  Our typical rents are below those in Southampton, Guildford and Brighton - expect that to change as the trickle down takes effect. (Plus in those cities 12 month student contracts are the norm, so expect even more inflation as the new halls and local agents strive to introduce that practice here).

Recent Tax Changes

And of course, last but not least, the tax changes for landlords brought in by the previous Chancellor will also drive through to increased rents. With the majority of working landlords and those with more than 2 properties now being pushed into the higher tax bands, and the increased capital requirements to get into the business or to expand, these costs will obviously be passed through to tenants. Statistics show that rents in London have increased by 7.7% since the changes were announced and many landlords have stated they will increase rents in line with their increasing taxes between now and 2020, so  above inflation rent increases seem to be here to stay.

Whether this is all attributable to tax increases or whether some of it is just catch up after several years of sub-inflation increases is debatable, but everyone seems to agree that the only likely impact of these tax changes is an increase in rent levels.

Summary

Whether letting agents are good or bad, whether you think it is a good idea to burden young adults with massive debt while packing them into 'battery farm" accommodation in high rise towers and whether you agree with the last governments assault on private landlords, you have to accept that all of these factors will put significant upward pressures on local rent levels over the next 3-4 years.

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