Image source & credit: Knight Frank
With an election in May, what should we as property investors do now to prepare for political change?
This was a question from a poster to a property forum that I saw yesterday. Then, this morning Knight Frank released this neat summary of the pre-manifesto declared policies:
The forum poster raised very good set of questions including what about rent controls and how many 'silly schemes' will be introduced and what can we do to prepare for it. There is no doubt that we will get to hear lots around the topic of political change over the next few months as I outlined in my property predictions for 2015 blog post.
Specifically, the topic of rent controls has been hyped up by Generation Rent, as I also discuss under another blog post on this topic of political change. However, Generation Rent are a lobby group and not a political party and as with Shelter are making a lot of noise calling for changes to housing policy by the main political parties; ultimately it is what the main political parties decide as their manifesto pledges that counts therefore.
The bottom line is that there is much uncertainty around what any new Government will look to introduce and even the summary by Knight Frank makes it clear that the policies presented are 'pre-manifesto'. This means that things could yet change. The Labour party and LibDems seem most likely to take a more sympathetic line towards tenants in the main but even they (I assume) realise that they need the private rented sector investment due to the UK housing shortage. Like the forum poster, I think we may see another coalition but of what colour mix? We now have another party chomping at the right (UKIP) and that could stir things up a little too now that they have there first elected MP. So, in truth we don't know who will get in and what types of political change they will ACTUALLY deploy once they do (especially if it's a coalition - remember students and LibDem policy last time?). As I say, there could be a difference between the rhetoric and final policies, so watch for what goes into the Manifestos.
Whatever does happen it is unlikely to be super fast, as passing legislation does take time..political change is not a fast process. However, budgets can bring about changes in the tax system more quickly. However, if policies like drastically reducing tax relief for buy-to-let investors are brought about, there is likely to be a raft of 'unintended consequences' such as divestment, transferring investment, financial hardship for some landlords and even a general house price crash that would affect millions of homeowners too most likely (hence unlikely as a sudden change I imagine).
The main political changes being debated that centre on the private rented sector specifically seem to be:
- Rent controls / caps - we can manage around these by applying up to the maximum increases allowed, which stupid as it sounds would probably lead to higher rents overall and may be a little needless and harsh on some sadly. In times of low inflation, a 'rent cap' of say 2% per year (outline Labour proposal) is not going to hurt us UNLESS we also have high interest rates (pushing up finance costs), which is not likely. I would point out that CPI and RPI inflation are different measures of inflation and crucially CPI excludes housing-related costs like mortgage interest (source: Economics Help Blog), so linking rents to CPI rather than RPI could be a concern for us.
- A ban on letting agent fees - this is another policy declared by the Labour party. We can work around these by increasing rents to compensate for absorbing any fees passed through to us by letting agents. Which is exactly what happened in Scotland...where it also lead to higher rents overall. This may drive more competition in low cost referencing services and among letting agents but they don't seem to me to be operating with 'super-profits' and so I doubt they can absorb the costs. In areas of weak tenant demand it could squeeze landlord profits if we are unable to pass on the costs, so it could vary by area. A review of local demand for our properties would therefore be advisable here.
- Changes to security of tenure, such as 3+ year tenancies (Labour & UKIP) and removal of some aspects of s21 notices (as a proposed change to the Deregulation Bill in this Parliament) - most of the suggestions would allow us to continue to operate effectively, as we could evict for non-payment, anti-social behaviour, seeking to sell or move back into the property, etc. so no major concerns here. However, the mortgage lenders would need to allow the longer-term tenancies and most currently do not, so that is one to watch out for - a possible limit on lenders available. My gut feeling is that the lending market would largely comply, as most of the changes are workable even for them I believe (e.g. regaining possession to sell).
- Standards and energy efficiency - I would expect greater pressure to lift standards in the PRS over time and this is something that I agree with anyway - we should be offering decent homes for people to live in is my view. We can start by checking our EPC rating and look at ways of lifting it as a good start. Also, if we look at the property condition in general and consider what types of improvements / maintenance are likely to be needed in the next 2-5 years, we can start to plan and budget for that. Look at the big expenses like boilers, damp, draught-proofing, roofs, etc. This is a good discipline anyway
- Licensing and accreditation - there are noises of getting tough on landlords and to be fair a small minority make life hell for their tenants - the Labour party have said they will introduce a national register of landlords. A national register is only really going to help if it captures ALL landlords, especially the rogue landlords that 'fly below the radar'. I do not have the detail here but if this came with a change to how council tax was reported it could achieve that. If it means a more harmonised approach to licensing generally, then that may not be a bad thing at all in heloing to rid the sector of bad landlords, which we good landlords dislike as much as good tenants do. In terms of what we can do, getting accredited via the NLA or RLA is one positive step we can all take, especially if self-managing, as is using professional, approved letting agents if not self-managing. As for licensing - who know really here but if we make sure our properties are in good order and follow the correct best practice and legal procedures as per the Private Rented Sector Code of Practice, then we should have nothing to fear really
- Removal of tax incentives - this one is one that could 'hurt' us the most I believe but I have yet to hear this as a declared policy by one of the main parties. For example, a withdrawal or reduction in mortgage interest relief would impact our profitability, as would the removal of capital gains tax relief on property investments. The best approach here is to ensure that we have positive cashflow, have a contingency fund and are not over-extended with our borrowing and so this is probably the area to focus on most in terms of preparation
- Housing supply - pretty much everyone is talking about measures to increase the housing supply in way way, shape or form. This means building more houses and with an increase in supply, it could lead to a drop in house prices. However, we are so far behind with our housing supply deficit that it will literally take a generation (two or three parliaments) for this to be anyway near corrected, even if we start today. We should not be complacent but I do not see a reason to panic either. One thing that we perhaps should consider is thinking about alternative styles of living and assessing these as investment opportunities for our portfolio. Consider shared accommodation and assisted living as two such examples.
- Finally, there could be some 'curve balls' or policies with 'unintended consequences'. So, a defensive strategy is to look at our portfolio and for example: see how we could either switch strategy e.g. from a single let to multi / short-term let & vice-versa, or sell on, or exit weak tenant demand areas. This gives us options if we need them and if we think we don't have options then now is the time to take steps to address that. If we decide to stick with long-term buy-to-let, then taking on longer term fixed rate mortgages (so 5+ years not 2 years) could be prudent to hedge against interest rate rises later. However, personally I would prefer some flexibility in this regard until after I see who is going to be calling the shots in the next Government at least.
There we have it...a summary of what the main political parties might be considering in terms of housing policy. I have attempted to show how some of these policies could affect us as landlords / investors and where applicable, how we could take positive steps to protect our position, or plan for the potential political changes.
The truth is: we really do not know and at least a part of me is curious to see how all of this will play out. We will have TV debates extended to include some of the 'fringe' parties and so this election does promise to be one of the most interesting ones for quite some time I would say. Yes, it is true that a new Government could bring in political change that could affect our property investing goals and ambitions, yet if we ensure we put in place good foundations and have alternative courses of action available, then we should be able to withstand much of the proposed changes I would imagine.
What do you think though?