UK Property - Lettings Market Advice

IN GENERAL:

Theoretically speaking, the converse effect to a weakening in the sales market should be a strengthening of the lettings market. This is basic (soap box) property market theory, and relies on the premise that ultimately people need to live somewhere, and if they can’t buy they’ll have to rent.

This make sense on paper, however in practice the reality is currently very different.

THE PROBLEMS

1. To a lesser or greater extent, all areas in the UK are currently suffering from an oversupply of lettings stock. This is as many vendors who would have sold property, are deciding to take a longer term view, hold their property, and become a landlord. This includes property developers who are currently dumping large lumps of unsold stock onto the lettings market in just about every town and city in the UK. By way of example; one of our suppliers in Kent currently has 144 vacant properties on their books when this time last year they had 68.

2. We would not go as far to say that we currently have tenants ‘dropping like flies’, however renters are definitely feeling the adverse effect of the credit crunch, and there is a clear upswing in the amount of people currently renting our (your) properties, who currently state that they cannot meet their obligation to pay the rent due to a serious problem with their finances such as a job loss, or reduction in disposable income. We also have a marked increase in the number of tenants handing in notice and citing the need to find cheaper accommodation as the reason.

3. Although there has been (mainly anecdotal) evidence over the last twelve months to suggest that rents have increased, our experience has been that (until comparatively recently) they have remained fairly static. The current trend however is that they are dropping. There are a few different reasons for this; firstly, increased stock levels mean more choice for tenants, and as a result they are putting in low offers; secondly, many of the new instructions on the market have been purchased from auctions, distressed vendors, or highly motivated developers, the net result of which being they were purchased cheaply, which gives the owner greater opportunity to undercut the market on rent; thirdly, lower costs of ownership (due to falling interest rates) have given many landlords the opportunity to be more flexible on their rental price. As increasing numbers of property owners go down the route of dropping rent in order to secure a tenant the market is gradually pulled down.

OUR ADVICE ON BEST PRACTICE

1. If you cant beat them join them

If other landlords are dropping the price of similar property to yours, you may as well bite the bullet and do the same. Painful as it may be, in the age of the internet (which gives visibility on everyone’s marketing prices), you are highly unlikely to find a tenant for your property if other similar stock is advertised for less.

Try and keep in mind, within reason it is the void periods which cause the most damage to your annual cash flow, and not the amount of monthly rent.

2. Be prepared to be flexible in order to keep your existing tenants

If you have a tenant who is currently thinking about leaving one of your properties as part of a cost saving exercise, it is well worth exploring whether a rent reduction would keep them in place for another set term. By the time you have experienced a void period through remarketing, paid fees to find a new tenant, and finally (potentially) accepted a lower price, you will almost certainly have been better off renegotiating a lower rent with your existing tenant. Also, think creatively. It may not necessarily need a rent reduction in order to keep a tenant, and some other factor may sweeten the deal enough to encourage them to stay put. We recently retained a tenant belonging to one of our clients through the provision of some additional furniture.

3. Lock your tenants in to your property for as long as possible

If an AST passes its expiry date without being renewed (if set up correctly) it automatically converts to a ‘Rolling Periodic Contract’. This will roll on each month until it is either renewed (and the term extended), or until either party serves notice on other. In normal market conditions Rolling Periodic Contracts are no bad thing, as if your tenant starts playing up you could end the tenancy simply by serving notice, and potentially avoid the need to evict via Section 8 or 21 notices. At the moment however it’s our advice to extend any periodic tenancies and lock your tenants in for as long as possible, thereby giving at least a degree of surety. Having said this, keep in mind that it’s not worth putting tenants under so much pressure to renew that they leave.

4. Deal with problem cases quickly and pragmatically

If one of your tenants has lost their job, had their hours cut, or experienced any other detrimental scenario which means they can’t substantially pay their rent on an ongoing basis – our advice is to act as quickly as possible to remove them from your property with the minimum amount of fuss. You could play hard ball – point out that they are bound by the contract – and attempt to pursue them through the courts for any loss arising from them deviating from the terms of their original agreement with you, however in our experience there is little point in trying to pursue someone with no money. As such we think you’re currently better off using the fact that they need to deviate from the contract as leverage to get them out of your property as quickly as possible, thereby allowing you to move on and put a new tenant in place who is hopefully in better financial shape.

Alternatively, if your tenant is able to pay a substantial part of the rent but is having difficulties meeting their commitment to pay the full amount, it is equally sensible to work with them and try to find a solution which means they stay, and you get most of your mortgage covered. This is to say, it is not the right climate in which to play hardball.

5. Be very careful when agreeing new tenancies

It’s always a roll of the dice when you first start dealing with a new tenant. People who look great on paper can turn out to be an absolute nightmare, and vice versa – however thorough referencing definitely mitigates the risk of ending up with a financial wreck renting one of your assets.

Look very carefully at people who are self employed, and those who work in the construction or manufacturing sectors or associated industries. You should be open minded to DSS tenants, particularly if the state proposes to pay the entirety of the monthly rent commitment (as opposed to a proportion being paid direct by the tenant by way of ‘top-up’) and will pay you or your agent direct.

If in doubt, get a guarantor. Tenants and Agents don’t like providing these, however its worth taking a hard line on. Ultimately, if your tenant proposes to pay the rent on time and in full there is no reason why they should be worried about providing a guarantor. Make sure the guarantor signs the AST, make sure you have full contact details for them. They should preferably be a home owner.

DON’T place too much faith in specialist referencing agencies and the reports they produce on tenant suitability. We have had some terrible tenants signed off as ‘fit and proper’ by the agencies providing these reports, and now treat them with a healthy dose of scepticism. Regardless of whether or not the agent responsible for securing you a tenant proposes to use one of these agencies, you should still demand to see sight of the composite elements which are supposed to make up one of these reports, namely; payslips, landlords reference, bank statements, employers reference, credit check. We have found that all these components are not necessarily in place when these reports are relied upon.

6. Use us to let your property

We’re now able to manage property all across the UK, and are doing so for some of the largest developers in the country. Here are a few ways you’ll benefit from instructing us on any other investments you may own.

•  Our business model generates higher exposure than the traditional agency approach. For example, the property under our management consistently remains around 95% occupied. Despite current difficult conditions we currently have 98% of our property tenanted. We reckon most agents run at about 80% occupancy
• We have never lost an instruction on the basis that we weren’t able to let it
• We’re not scared of giving you the truth, and can always be relied upon to give you an honest summary of what you’ll need to do with your marketing price in order to find a tenant.
• Our renewal fees are currently a flat rate of only £80. On a rent of £500pcm this means the cost of renewal is only just over 1%. Many agencies in the South East charge up to 11% for renewals.
• For existing clients, we will aim to beat any management deal you are currently offered

Courtesy: Gareth Martin from Managed Exit

13 The Timber Yard

Drysdale Street

London

N1 6ND

United Kingdom

Tel: 020 7613 3121

Fax: 020 7033 2559

[email protected]

www.managedexit.co.uk

Registered in England 6631310