Is rent hiking a good business model?

by Ben Reeve-Lewis

21:22 PM, 21st January 2013
About 7 years ago

Is rent hiking a good business model?

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Is rent hiking a good business model?

It’s been a while since I wrote anything in my ‘Don’t shoot the messenger’ series. Mainly because I kept getting shot ha-ha.

But I have a tough skin.

This article is an open letter to all you P118 landlords but probably more the London crew, because it is about rent increases and London is a different animal to the rest of the UK. I see properties for rent in different parts of Britain where the rents seem reasonable.

London is off the scale though.

What prompted me to write this was an article based on a survey by the famed LSL Property Service covered on the ARLA website that said that 24% of landlords plan to raise their rents in 2013 by 3% more than the rate of inflation. Also a tweet from Juicy Properties that urged me not to blame landlords for the lack of supply of housing. I get that argument but I come from a different angle.

Now I admit that 24% is not the remaining 76% but in term of numbers we are still talking in 6 figures, which means that hundreds of thousands of tenants are going to be affected by rent levels that will cripple them financially.

I know. I meet these people every day. Downsizing and cramming their families into 2 rooms so they can still afford the rent and stay near families and friends.

I have been a landlord, a letting agent and a tenant, and as you know, for many years I have been an enforcement officer for landlord and tenant law, so I have a broader perspective than most, so I have a keen, informed eye for the rental world.

Good Business?

As every landlord will know, it isn’t worth chasing a tenant who owes arrears of rent. Even if you win the case, the chances of getting the money back are slim to non-existent. Courts will make a money order but they don’t collect it for you. If you get possession on rent arrears then the tenant, by definition has gone. You have to employ tracing agencies to get your money back and even if you win what do you get? £3.95 a week? Pleeeeaaaase!!!! Best walk away. Why throw good money after bad?

Serious rent arrears cases are up, so are repossessions and homelessness cases. They are all intertwined for a reason.

Landlord raises rent…tenant can’t afford it…..rent arrears accrue….tenant goes homeless….if they are VERY lucky the council doesn’t find them intentionally homeless…..even if they do, the council wont share contact details with ex landlord due to Data Protection regulations….nobody wins.

So why raise rent levels to a point where tenants can’t afford it? It doesn’t make sound business sense.

Government decided some time ago that as a nation we needed to shave several billion off of the housing benefit budget. Since they introduced this idea the amount of people claiming housing benefit has risen, not through the much vaunted dole scroungers, but that new class of ‘The working poor’, old fashioned working class people, not chavs, who will no doubt form the backbone of many landlords themselves, who are struggling with a freeze on wage increases, while rent rises are subject to no such controls.

Of Landlords.

Don’t get me wrong. I have no moral problem with landlords making a profit from their endeavours. The vast majority of landlords provide a good service and are very considerate of the needs of their tenants, who, after all, are the source of their income.

My open question here is ‘Does it make sound business sense to raise rents so far that their customers can’t afford them?

Pricing is an important issue. I work as a housing law trainer and pricing courses and services is always a major headache for me. When a client asks how much the course will be,  I curse myself if they answer with a ‘Yes’ too quickly, it sends me a message that I am under-priced, but my pricing levels are based on what the market will stand. There is a formula to it.

It seems to me, being completely blunt, that in the current climate, landlords set rent levels just because they can, with no reference to the durability of the market as a whole. Which seems to be to be a dangerous position to take in the long term.

Yes landlords have an eye towards growth and the extra income can help develop properties and services that will ultimately benefit their client group, tenants but what if those strategies for growth end up killing the goose that lays the golden egg?

Landlord media.

All websites and e-zines that promote the interests of landlords talk of a ‘Buoyant market’, a time when rental income has never been better, but it is important to bear in mind that this buoyancy comes at a price….the happiness and prosperity of the tenants, human beings beyond loan to value ratios..

It’s like a see-saw, where the landlord can only feel that their needs are being met when the tenant is at an all-time low.

One of the few things that unites tenants and landlords is their common mistrust, even dislike of the lettings agency business, I seriously think that letting agents will get regulated this year. Not because of shouts by Shelter but because of calls from within the letting agency business by organisations like ARLA. There simply isn’t anyone to stand up for them.

I think the same position threatens landlords too.

People are heartily fed up with the ConDem’s austerity/cuts programme because it doesn’t seem to be getting us anywhere. Come 2015 I reckon Labour will be back in with a serious shout (Admittedly not, perhaps with Miliband) and they have already announced plans for a landlord register and increased security for tenants.

If London landlords continue to price people put of the market and cause so much human misery who will stand up for them when the time comes? Probably the same people who will stand up for letting agents when regulation is introduced………Ian Duncan Smith and his dog, that’s who.

With people priced out of the home-ownership market a huge number of the electorate are turning out to be tenants and, like all voters, they will put their cross in the box where their self-interest lies.

I think London’s landlords are simply making hay while the sun shines. Driving into a future on a buoyant rental market that will leave them high and dry in the near future, resulting not only in repossessions against tenants who can no longer afford the rents but a dried up landlord market who can’t afford the mortgages because their rent levels have priced their customers out of the market. And as I say….who will stand up for them then?

As a business model the market is in a precarious position and on a purely personal and moral stance, I have to say if I was a landlord, hiking up rents way beyond the rate of inflation in a culture where people are going down the pan by the day and homelessness applications are going through the roof I couldn’t be happy knowing that my standard of living was at the expense of someone else’s happiness.



Comments

Mark Alexander

14:43 PM, 22nd January 2013
About 7 years ago

Hi Ben

I'm going to play Devils Advocate with you on this one as you are one of my favourite sparring partners.

Being a unashamed capitalist and living in a capitalist economy I would absolutely take advantage of what Adam Smith describes as "scarcity" better known to most as supply and demand.

Landlords control neither of course but if I were a London based landlord with decent properties this is what I would do .......

I would advertise them to working people only at slightly below the market rent to make sure that I attracted plenty interest to arrange several viewings.

I would suss out the tenants face to face and then pick out the ones I wanted to consider letting to.

I would ask lots of questions - some might see me as being intrusive as I would want to see how they live now by visiting them at their current home and I would insist upon seeing their bank statements, passports etc. Those who refused would not get my property.

If I had more than one hot prospect I would ask them to bid on the property and explain that I will let to the highest bidder, subject of course to them passing the referencing and me being able to get an RGI policy.

I would then ask the tenants to complete an application form and I would charge them for referencing and look to make a profit on that to pay for my time. If they fail the referencing that's not my problem, it would only be as a result of them having told me lies.

Once the tenants were in the property I would do my utmost to keep them there by looking after the property. However, if demand continued to increase I would take a commercial view on whether to increase the rents in due course. Where it would make sense to increase rents I would serve notice if the tenants didn't agree, especially if I was 100% confident that I would not suffer a void period by re-letting.

Being a good landlord I would obviously ensure that I followed all the rules, e.g. gas checks, deposit protection etc. I would never rent "beds in sheds" as an extreme example of how supply and demand is being used by criminal elements and will continue to be the case whilst demand is too high.

Eventually, a ceiling would be reached on affordability and the market would be established and supply and demand would be restored. The same has happened in terms of property values, i.e. property has become too expensive for many to buy, hence they have chosen to rent. The houses are still there though and they are still lived in. When property becomes too expensive for people to rent they will again look for alternatives, for example at different locations. Eventually the market will find its level.

You see Ben, as a capitalist why would I be concerned that some people can not afford to live in London? As long as enough people can afford to live there and fill all the houses that's all that one can hope for surely? Why would a private landlord choose to let a property for less than the market rate when there are plenty of people wanting to rent it? Would that not be like owners being asked to sell their properties for less than market value because some people can not afford to buy them?

I live in Norfolk and might well like to have a weekend getaway apartment close to Tower Bridge. The reality of why I don't have one is that I can't afford one, so I don't have one

If people can't afford to live in London they will have to move on, it's as simple as that. People who can afford to rent property in London set the prices. Landlords can not charge more than the market rent as people will simply rent a different property if they can get the same thing cheaper. That's how the market always has and always should work. Tinkering with those basic economic principles, as some politicians have considered in terms of rent capping, would be a disaster for our capitalist economy. Communism as an ideal is a proven failure and rent capping is exactly that, as is over regulation. Whilst supply outstrips demand by massive margins neither regulation nor rent capping will work. The best tenants will always get the best properties and the criminal elements will continue to operate.

One might argue that London will return to being a place where society's elite and high earners live. If the government don't like that idea they need to work on increasing supply, it's as simple as that.

Mark Alexander

16:50 PM, 22nd January 2013
About 7 years ago

PS - I don't like the price of diesal but my choice is to moan and get nowhere, accept it is what it is, get a more economical car, ride a bike or walk.

18:54 PM, 22nd January 2013
About 7 years ago

Mmmm!............................ affordability; can see where you are coming from.
To me the rent is too high the day the tenant cannot afford,
C Tax ,
Gas/Elec
Tv licence
BBand
Basic food

If they can afford a car fags, booze, the latest iphone and holidays they can afford rent increase.
I can't have any of the aforementioned luxuries; I can't afford it.
Therefore my rents will be set so that the tenant cannot afford luxuries; just the basics.
If that makes them unhappy...........tough; they will have to move to a cheaper place.
And well done you; these forums are a poorer place for you not posting!
It is far better to have commentary from well informed and knowledgeable insiders such as yourself than not to have it makes a forum a little boring.
We know that no matter what ammo we use; you will remain resolutely bullet-proof and long may that situation remain.......................now where is my 50 Cal with APC!!??

Ben Reeve-Lewis

20:00 PM, 22nd January 2013
About 7 years ago

Well let me reiterate again….or as politicians say “Let
there be no mistake”, I am not a socialist. Just taking a counter view to the
logic of free market forces does not automatically mean I am a card carrying ‘Morning
Star’ vendor.

I think market forces are fine as a driver of growth in most
areas….but not all, and housing is one of those things that I don’t think
should be subject to market forces.

Mark you say “Being a unashamed capitalist and living in
a capitalist economy I would absolutely take advantage of what Adam Smith
describes as "scarcity" better known to most as supply and demand.-Landlords
control neither.

I think it’s a disingenuous stance to say “It’s not my fault, it’s
just the market”. Landlords are not victims, they have choices.

The point of my article is to question the business sense of
raising rents to a level that causes arrears that can’t be recovered.

I’m not even going to harp on about the morality side of things.

You use the analogy of a car with housing, as many landlords do
but the business/sales model doesn’t stand up.

I hear so often the argument on rent arrears comparing it to
walking out of Sainsbury’s without paying for some cornflakes but there is no
comparison because the legalities involved in the rental market are subject to
a completely different set of parameters.

I can choose my mobile phone tariff, based on affordability. I
can choose the car I drive. I would love a Merc but I have to stick with my old
second hand Vitara. Of course I could max out a loan and get an SLK and if I can’t
pay it I have nobody to blame but myself.

But homes are different. It isn’t just a case of saying “Oh I can’t
afford to live in London, I’ll move to Norwich”. Property isn’t just bricks and
mortar. Property is part of community and THAT is made up of family, friends, support
networks and….god damn it……the fact that an area is somebody’s home.

I would love to live in Birmingham. I like the city, I like the
people, the culture, and with Frazzy it is also important that she live
somewhere she feels comfortable as a West Indian, Brum ticks all the boxes. She
is self-employed and does all her work online, so it makes no difference where
she lives from that perspective. Financially it would make perfect sense to
relocate and I would be happy to. But her mum is elderly and disabled, where we
go; she has to go, so it isn’t just like buying a car or swapping from 02 to T
Mobile.

The fact is that as rent levels are rising, so are serious rent
arrears. Also, as is obvious, so are the number of repossessions where arrears
are involved and as I point out in my article, landlords rarely recoup on those
arrears. This all has a knock on effect in the rise in homelessness
applications.

Despite the fact that many London councils are relocating
homeless applicants miles from the capital I suspect that for middle income
earners, London’s rent levels will still have some way to go but there are 2
limits:-

1. What the market will bear

2. The human cost of rent increases.

As you have stated, number one is your sole concern and as a
businessman I understand that but there will come a time when there is a
backlash. I think it is already there, in the rise in serious rent arrears.

Free market forces rely on choice but tenants have little choice
at the moment. In London it is estimated that between 8 and 10 people chase
every property. Void periods are not a serious concern. It is a seller’s market
not a buyer’s. The only choice is knacker yourself financially in order to stay
in your home area or move and as I say, moving isn’t always a viable option.

Of course tenants will always whinge about rents. I’m sure they
even did it under the old Rent Act 1977 and landlord’s whinge too. Its human
nature, but I still seriously question the business sense of pricing so many
out of the market, not to mention the human cost, which is the subject of another article.

Mark Alexander

23:11 PM, 22nd January 2013
About 7 years ago

OK, let's for the sake of this debate assume that by magic rents in London were to halve over night. How would that affect 8 to 10 people chasing the same property? Surely the number of properties would not change? However, the demand for them might.

Now let's look at rent arrears. Are these really necessary? I think not. Once landlords are better educated on how to avoid them they will not exist. It's not a case of if this happens, it's a case of when it happens. We've all read the reports from housing charity Crisis who are saying that 98.5% of landlords will not accept benefits tenants. The reason for that is that landlords recognise this sector as being risky so the majority have pulled out of it.

Landlords are also beginning to recognise the benefits of lifestyle referencing, robust financial referencing and rent guarantee insurance "RGI". It is only a matter of time before landlords realise that if a tenant and/or a guarantor do not qualify for RGI they are not a good risk. The rents arrears you speak of will ensure this happens and the time will come when landlords will only let to tenants who qualify for an RGI policy. I said the same about landlords letting to the housing benefits sector and I've been proven right on that too. There will still be 8 to 10 people chasing the same property but it's pretty obvious to me who will get it.

When the number of tenants who qualify for RGI is equal to the number of properties available to let that's when the market will stabilise. If the number of properties available is greater than the number of tenants who qualify for RGI then rents will start falling again.

Ben Reeve-Lewis

0:14 AM, 23rd January 2013
About 7 years ago

Nice argument Mark but a tautologous one, still predicated on the notion of supply and demand, which I argue is not a sane way to run the housing market.

Sure half the rent would not change the 8-10 people chasing properties, in fact it would probably increase numbers so people would find it harder to find somewhere to live but the tenants who do live here would be able to have a life.

There is this persistent myth doing the rounds that tenants are in arrears because they live champagne lifestyles at landlord's expense. Boss of Assetz PLC, a major portfoilo landlord Stuart Laws said recently in an interview in Moneyweek Magazine "I will keep putting rents up, and will find tenants who will pay the rent, and they will stop buying handbags, and stop going out for expensive meals. I will have that money. I will decimate the high street. So sell the retails shares."

Similarly the landlord who owns half the Caledonia Road in Kings Cross, featured in last year's BBC documentary who happily described his tenants as "Cash cows to be milked"

Nice huh? Can you blame tenants for being not very landlord sympathetic when they read quotes like that? The truth is that tenants arent spending vast amounts of disposable income on swanky meals and handbags. They have to make tough choices about which bills to pay and what to buy for dinner because London rent levels are out of all proportion to their income, even those in reasonably well paid jobs..I see them everyday and end up in court trying to save their homes for them. To do this I have to dig deep into their financial lives and believe me, they aint got jack to spend elsewhere once the rent and council tax are done with

Even the CBI have been saying lately that London rent levels are holding back economic growth as working people cant afford to live here to work. Vodaphone particularly say they cant get the executives they need because of housing costs in the capital.

I also dont wholeheartedly accept your argument about benefit tenants being a risk. True housing benefit caps are wreaking havoc and that isnt landlord's fault but I think most of it is a perception. Aki Elahi is a sensible portfolio landlord who promotes benefit tenants as a sound business model. He wouldnt agree with you on that point in fact figures show that benefit tenants tend to stay longer.

Mark Alexander

1:18 AM, 23rd January 2013
About 7 years ago

I think some of those quotes are a OTT Ben but it doesn't change the realities of life based on supply and demand.

I may have told you this story before and if so please forgive me for repeating myself.

Here in Norfolk we have a beautiful little village called Burnham Market. In recent years the most popular credit card to be used in the pubs and restaurants is the Coutts & Co World Card. Now you might expect that to be the case in Chelsea but Norfolk?

The reason for this is that wealthy Londoners decided to buy a nice little country cottage. Burnham Market became a very trendy address for a second home. London's elite brought wealth and prosperity to the area and the pubs, restaurants and shops all became very upmarket whilst employment in the area improved too. What do you think happened to property prices though when more and more wealthy people wanted to live there? You guessed it.

The locals had the same problems that you are now describing. The ability for them to live in the next street to their elderly parents, friends and families was no longer viable. In many cases whole families chose to relocate, others moved to areas which were more affordable and came back to visit when they could.

OK, so Burnham Market isn't London but I think you get the point.

PS - try renting in Burnham Market if you are on benefits!

3:27 AM, 23rd January 2013
About 7 years ago

I let a house in Cambridge and get high rent for it; however I would make more money if I sold the house and brought 2.5 houses in Stockport. The rent I get in Cambridge would only just cover a 75% LTV BTL mortgage. So if I can’t put the rent up this year when the current tenants move on, I will consider selling that will make it even harder from people to find somewhere to rent.

Landlords in London face the same problem.

While people are still willing to put up with a very low quality of life to live in London, rents/prices in London will remain high. There are a lot of adorable houses in the Manchester area, slowly companies are relocating to cut their costs, and staff turner seems to be a lot lower than in London.

Basically I think London is full to overflowing and there is nothing that can be done on the supply side that has a hope of keeping up with the increasing demand.

Mark Alexander

4:50 AM, 23rd January 2013
About 7 years ago

That's a very good point Ian about London being full to over-flowing and businesses relocating to Manchester, the BBC being a prime example. I hope the trend continues as it doesn't really make a lot of sense for 25% of the population of the UK to live within a 25 mile radius. Spread the wealth and spread the jobs.

14:33 PM, 23rd January 2013
About 7 years ago

The only reason that there are rent arrears is the pathetic eviction laws.

Prevent the ability for a tenant to live rent free in a property until evicted and then rent arrears would magically disappear.

However rent increases etc are a fine balancing act to how much a tenant can pay.

The LL determines this.

Get the pricing wrong and the LL has no tenants!!

The other issue with homes etc; is that LL deploy their capital to make as much money as possible.

The PRS has NO obligation to provide affordable rental property and to offer any form of forbearance.

Just because someone use the LL investment as a home is irrelevant.

LL are not obliged to be moralistic about their rental property.

If things were made sufficiently awkward for them they would just leave the market; which would do no favours for the tenants in the PRS.

Of course what is needed is a massive council house building programme to bring about 2 million affordable rental only homes to the population; with NO ability EVER for tenants to purchase the property.
These properties should only go to British citizens;lanyone else will have to use the PRS
The PRS cannot guarantee people homes and neither should they be forced to do so unless they wish to comply.
Housing is such a fundamental requirement for labour flexibilty; only govt money can project the economic force required.
The PRS can never cope with housing demand.
The banks won't lend.
Govt is the catalyst that is needed to have a mass increase in housing infrastructure.
Will this ever happen.......................................not a cat in hell's chance!!!!
I have over the past week rejected 2 tenants who did not pass the RGI check.
I would rather my property empty than risk taking a tenant on whom I had no RGI policy on.
I would rather have voids than a non-RGI tenant.

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