Should the Private Rented Sector be Regulated?

Ian Potter

Image: Ian Potter

It is very interesting to look at the Private Rented Sector (PRS) as we continue, as a country, to be in an era of economic austerity. The PRS has continued to grow, and not just by those accidental landlords who cannot sell their property. Landlords’ surveys and the ARLA quarterly survey continue to show a willingness to expand portfolios. DCLG figures show the PRS at over 17% of the housing stock in England and Wales double what it was, as a percentage, 25 years ago.

Commentators who suggest the PRS overtaking the Social Sector by 2015 are now saying this may perhaps happen as early as 2013, and this is set against a background of some social building happening at present. However, on further analysis, there are questions over whether this can continue and of course, the million dollar question is; where is the stock coming from and can it continue in an unregulated manner?

The answers and opinions on this are almost as diverse as the number of people prepared to make comment and are set against the background of proposals to licence the Private Rented Sector in places like Newham and Wales.

Without question, in some parts of the country, PRS housing stock is coming from existing stock which could have been taken up by first time buyers, as landlords are generally cash positive with LTV figures in the region of 50-60%, and cash available without equity release or mortgage finance. Earlier this year one report suggested that there was a figure in excess of £50bn available from existing landlords. It is a staggering figure, but is it true and would they actually invest it if the stock was there? Speaking to agents all over the country rental yields vary greatly with some parts of London for example quoting 3% rent yields while other agents say they can achieve double figures for a landlord.

Will landlords invest in the correct type of property? Again anecdotally the demand is changing from flats to houses and that is understandable. Young couples can no longer afford to be second steppers, and to get the property they require for a growing family, return to the PRS, both as a tenant for the family home and as landlords with the flat they do not wish to sell. There is also demand from families who would traditionally have expected to obtain social housing either through an RSL (Registered Social Landlord) or a local authority. There are simply no properties available to them in some parts of the country within these options and the PRS is the only solution.

Are the landlords adapting? Looking to the property portals in most areas the answer would appear to be no – but should they be? There is a school of thought which would say yes, as that is the sector where demand from purchasers could mean a capital uplift in better times would be almost guaranteed. However, any landlord reading this does require to take a lot of professional local advice from an experienced agent operating in that market. The internet can assist but usually does not provide the same level of detail of the micro market or insight an investor should be considering.

With what has been said about landlords looking to invest, one has to ask what the concerns are of the impact of the schemes being proposed by Wales and Newham where landlord and agent regulation is proposed. Provided the costs are not prohibitive the good landlord will not be afraid and the quality investor landlord will be able to pick up investment properties from those who wish to “escape” the system, from fear of complying with standards. It is possible it could have the same type of impact seen in many areas when new build stock came on the market about 10 years ago as competition to old, tired, distressed stock of poor standard. The outcome being that many complacent landlords had to address the standard of their property to obtain a tenant at a decent rent and the standard was raised.
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Of course in an area where the tenant just does not have a choice, the local authority has to take action, and in its pilot area of Little Ilford Neighbourhood Improvement Zone, Newham has done that. It has also provided a large carrot for early registration. Wales has run landlord accreditation for several years and again has raised standards in parts of the Principality, and now wishes to extend that to include agents. ARLA can only welcome a meaningful, achievable regulation of agents; we have asked for it for years.

What is unfortunate however is that some see the best place to target agents is on fees, rather than on standards and quality of service. Some agents have opened the industry up to being challenged on fees. This was illustrated by a headline from the Shadow Housing Minister. Having spoken with Jack Dromey MP on several occasions the policy for the PRS is much wider and it is at least encouraging that housing in particular, including the PRS , is a prime part of policy debate. It is a difficult place for an organisation such as ARLA to argue against the case studies which are brought forward as examples of why regulation would focus on fees.

The professional agent will tell us, and we agree, that providing a good service to the landlord and an enjoyable experience to the tenant bears a cost for training, client money protection, Ombudsman Scheme etc. However we regularly find that these agents “forget” to tell the consumer what they provide. These same agents are generally not the ones that are guilty of providing the case studies either.

To quote from the Labour Party Report:

“There are three principal areas of concern when it comes to rip-off fees and charges levied by unscrupulous letting agencies:

• There is substantial disparity in the level of fees charged by different agents for similar services with no apparent difference in the quality of the service received;

• For middle income households moving into the private rented sector, fees and charges can often be a significant up front cost;

• Too often, charges are hidden in the small-print and people are exploited by unfair fees that they were unaware they would face.”

The last point, in particular, is one to which The Property Ombudsman and ARLA can both readily relate, and of course it is not only a breach of the Lettings Code, but also very possibly a breach of the Unfair Terms in Consumer Contract Regulations 1999, as well as the Consumer Protection Regulation 2008. Therein lies the problem, the regulation already exists but the enforcing body, usually Trading Standards has neither the resource, nor in some cases the inclination, to take the appropriate action.

ARLA and TPOS, do but at the end of the day the agent can continue trading and the consumer continues to be disadvantaged, regardless of our action.

The disparity in levels of fees is an open market issue. We cannot state fee levels without danger of creating a cartel. Up front cost is an issue where most of the proposed changes would in fact impact on rent levels, and as many of these people will be in receipt of some form of state support, an increase in rents can only impact on the burden placed on the state in an indirect manner.

A confused picture? Of course it is, the PRS is not one market, it is made up of many diverse micro markets and any regulation or policy is required to fit these individual circumstances and just a “one size fits all” approach is not appropriate.

Ian Potter

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