Buy-to-letAug 17 2022

Buy-to-let landlords need to ‘freeze rents, not tenants’

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Buy-to-let landlords need to ‘freeze rents, not tenants’
Pexels/Lina Kivaka

Speaking to FTAdviser, the campaign group’s project-coordinator, Portia Msimang said buy-to-let landlords need to “acknowledge their good fortune” and do all they can to improve energy efficiency in the properties they rent out. 

Msimang said landlords need to “insulate the tenants by freezing rents, not renters, for the next couple of years”.

Her comments came after it was reported last week that energy bills for the typical UK household are set to reach £4,266 annually next year, a jump of more than 250 per cent since the beginning of this year. 

Msimang said: “Buy-to-let landlords don't support tenants; tenants support buy-to-let landlords. In London, people living in the private rented sector already pay a disproportionately high percentage of income for somewhere to live. 

“The same is true in more and more places around the country.  Add increased energy costs and our access to other basic needs will be seriously compromised.”

Inevitably, higher interest rates will eventually eat into margins and increase pressure on landlords to either increase rents or look elsewhere for a viable investmentChris Norris, National Residential Landlord Association

At the same time however, landlords are facing rising mortgage interest rates, which some in the industry say will put pressure on them to increase rents. 

Earlier this month (August 4), the central bank raised the base rate of interest by 0.5 percentage points to 1.75 per cent and predicted that a recession is on the horizon.

The National Residential Landlord Association said that many landlords will be immediately affected by the interest rate rise. 

NRLA policy and campaigns director, Chris Norris explained this is because most landlords fix their buy-to-let mortgages for two or five years, and only around one third of NRLA members have fixed or variable rate products.

“This is unlikely to be the last interest rate rise this year, and there is a strong possibility most landlords will eventually have to face higher credit costs. Since George Osborne’s financial attack on landlords in 2015, they no longer have the ability to off-set interest costs from their taxable income,” Norris said.

He added: “Inevitably, higher interest rates will eventually eat into margins and increase pressure on landlords to either increase rents or look elsewhere for a viable investment."

Norris said the new prime minister will need to “reboot” the government’s approach to the private rented sector and called on him or her to introduce “pro-growth policies which will encourage investment, help keep rents down and address the UK’s supply and demand crisis”.

“It is only by doing this that the incoming premier will reduce the impact of the cost-of-living crisis on the private rental market.”

Lack of housing

Others in the buy-to-let industry pointed to the low supply of housing stock and said this has a greater impact on rising rents than interest rates will.

D J Fatica Asset Management’s director, Dan Fatica said “across the board” his clients have reported achieving rents in excess of forecasted figures.

For example, the bridging finance and property investment firm’s portfolio in South West Wales has seen a 20 per cent increase in rents since the onset of the pandemic.

“This signifies that the market remains in a state of undersupply and this doesn’t look like it's slowing. Rent rises are driven by the undersupply of good quality housing and multiple bidding parties when good quality safe accommodation becomes available,” Fatica said. 

In relation to interest rate rises, Fatica pointed out that it is good practice for landlords to “stress test” their current rentals at a rate of 6 per cent - a historic norm before the global financial crash. 

“The challenge comes for landlords who are coming to the end of their fixed-term and moving on to variable rates. Which from even the most competitive lenders, are up around 5 or 6 per cent. 

“We will soon see who’s been swimming naked in the tide of near 0 per cent rates”, Fatica said.

Responding to the comments from Renters’ Rights London, Fatica said he does not see fixing rental income as feasible. This is because “buildings need routine upgrades and maintenance - the costs of which cannot be fixed”.

“The vast majority of landlords take pride in providing safe, ethical housing for their tenants. Of course, like anything, a few bad apples spoil the reputation.

“Fixing rental income is a one way path to deteriorating housing stock, and a glut of slumlord style properties.

“My practical suggestion to tenants is to offer a long term rental agreement to landlords to fix their exposure, more recently landlords have been motivated by long term commitments from tenants, stretching to two or even three years. 

“Not dissimilar to rental increases keeping pace with the market, employees salaries don’t keep pace with the market. Workers that move jobs will benefit from larger pay increases, assisting with the burden of increased living costs. This could be something to consider but obviously very specific to the individual tenant,” Fatica said.

EPC ratings

Another area of concern for landlords is the regulations around energy efficiency, with a proposal in place from the government that from 2025 all new rental properties should have an EPC rating of at least a C.

In March, Aneisha Beveridge, head of research at Hamptons, said: "The policy will mean that the average tenant will eventually pay lower energy bills than the average homeowner, although it’s likely to remove some rental homes from the market, putting further pressure on stock levels.

In Fatica’s view, the regulations are “for the benefit of everyone who shares our environment” but he queried how the plan could be delivered in practical terms. 

“How one expects to retrofit a 1903 solid brick built 3 bedroom terraced house in the backstreets of Blackpool, I have no idea. The cost of renting such accommodation will be around £500 a month. Not enough to supply and fit a single double glazed window, and certainly not enough to provide solar panels. 

“There are two issues working against individual landlords. A potential tens of thousands of pounds retrofitting bill to bring their older properties up to EPC standards that they lack scale to fund. And substantial tax inefficiencies for those who have purchased in their own name, not a limited company. 

“Does encouraging smaller ‘mom and pop shop’ landlords to sell benefit the end user? By selling up to larger institutional landlords? The lack of competition in our energy sector might have something to do with higher prices, I wonder if a similar concentration of housing stock is something we should wish for?”

jane.matthews@ft.com