Articles and Resources for Private Landlords

London Property: the Outlook for Rents in the Buy-to-Let Sector

With London property prices crashing and house and flat repossessions increasing, this article examines the outlook for London rental values. Will London property fare better than the rest of the UK? Will rents rise as house prices fall?

The UK economy is in for a rough ride. House prices have dropped off a cliff and many buy-to-let investors have already seen the capital value of their property investments fall dramatically. The big question is: should they sell quickly before prices drop further, or should they hang on and wait for an upturn?

Of course, with mortgage rates remaining stubbornly high, many landlords may not be in a position to afford to ride through the storm. However, assuming imminent repossession is not a danger, a rational look at the indicators suggest that it is worth holding out for the next 3 or 4 years - as that is how long most analysts expect it to take for house prices to start to recover.

"History shows that as house prices fall, rents usually rise..."

Firstly, tenant demand for both flats and houses across the capital is likely to remain strong. London is in many ways a separate economy to the rest of the UK. It is not so much a UK city as an international city and this does not look set to change. London has always attracted workers from other Commonwealth countries, notably Australia, New Zealand and South Africa but many reports now classify London as the fifth largest French city in terms of population. Although some East Europeans workers may return home as jobs become harder to find, anecdotal evidence suggest that many have settled here and intend to stay. And whatever the state of the economy, people still need somewhere to live.

With house prices falling and mortgages in short supply, many people are choosing to rent rather than buy. Letting agents report a surge of demand which has already been pushing up rents in some areas.

Secondly, the supply of rental property is likely to slow. The major house-builders have mothballed developments and cut back sharply on new projects. Don’t expect to see any new luxury apartment developments for the foreseeable future. To this must be added those buy-to-let landlords who decide to bale out and sell up as the going gets tough and the fact that first time buy-to-let investors are an almost extinct species. The net effect: fewer properties available to rent.

And don’t forget the Olympic effect. The surge of new transport projects and construction associated with the Olympics is likely to give London’s flagging economy a boost in the run-up to 2012. As the value of the pound falls, London becomes more attractive to international visitors. And the international publicity surrounding the London Olympics can only keep London in the forefront of people’s minds as an international destination.

Finally, history shows that house prices and rents are usually inversely proportional. As one goes down, the other comes up.

Tenancy Deposits Schemes

From 6 April 2007 all deposits taken by landlords for assured shorthold tenancies in England and Wales must be protected by a tenancy deposit scheme. Any deposit paid before this date will not need to be protected by a tenancy deposit scheme. Landlords will have to safeguard the deposit within 14 days of receiving it.

Landlords can choose to protect the deposit either through a “custodial scheme” or through an insurance-based scheme. The custodial scheme is free but involves the landlord paying the deposit into the scheme for the duration of the tenancy. Under the insurance scheme, landlords retain the deposit but have to pay a premium to the insurer. The premium can not be passed on directly to the tenant.

Visit www.depositprotection.com for details of the custodial scheme and www.mydeposits.co.uk for details of the insurance scheme run by the National Landlords Association.

Renting Flats and Houses in London: Beware of High Rents!

Many landlords, tenants and property professionals are unaware that letting flats and houses at the high rents common to central London can sometimes leave tenants with little legal protection. This article explains how a loophole in the law affects thousands of people renting accommodation in London.

Arguably the buy-to-let boom, of which London property has been at the forefront, started with the coming into force of the Housing Act 1988. Hotly debated by parliament at the time, the Act introduced a revolutionary new form of tenancy agreement, giving private landlords the certainty that they could regain possession of their house or flat at the end of the tenancy without the legal restrictions that had strangled the private rented sector for so many years. The Assured Shorthold Tenancy (AST) opened up the rental market to the mass private investor.

The AST attempted to balance the need to give some protection to the tenant with the government’s aim of making it easier for landlords to let out property, thereby increasing the supply of affordable rented accommodation. Under an AST, a court is not permitted to make an order for repossession within the first 6 months of the tenancy. After 6 months, repossession can only be ordered on certain specified statutory grounds.

"Letting Agents do not appear to be aware of the Restriction..."

What are the legal requirements of an AST? As with all tenancies, the property should be self-contained (renting a room out cannot create an AST). The other main conditions are that (1) the property should be let to individuals (ie no companies), (2) that the property should be the tenant(s) main home (no holiday lettings) and (3) the annual rent should not exceed £25,000.

It is this latter restriction that is often overlooked by landlords, letting agents and lenders alike, particularly in London where rents over £480 per week (£25,000 per annum) are relatively common. For instance, 5 people sharing a house and paying a rent of £100 per week each could not rent under an Assured Shorthold Tenancy, because the total rent would exceed the statutory maximum. Letting agents do not appear to be aware of the restriction, simply using their standard form of Assured Shorthold Tenancy, inserting whatever rent has been agreed.

Likewise, many buy-to-let lenders will cheerfully assess loans on declared rents of well over £480 per week, whilst including the restriction in their Terms and Conditions that the property must be let on under an AST.

Residential tenancies that are not Assured Shorthold are likely to be classified as “ordinary” or “common law” tenancies. Tenants actually have less protection under a common law tenancy than under an AST although a court order is still required for eviction. Perhaps most importantly, the deposit protection legislation introduced in 2007 does not apply to common law tenancies. It is possible, therefore, for a landlord to avoid the requirement to pay the deposit into a statutory scheme by setting a rent higher than £480 per week and classifying the tenancy as a common law tenancy.

Of course, none of the above is likely to matter unless and until a dispute arises between landlord and tenants. The solution is simple: the government should raise the £25,000 limit, which has not changed since the Housing Act 1988 came into force. Average London rents have more than doubled over this period.