A perspective of a former London real estate agent.
The consensus that real estate is an investment option with income certainty might stand to be questioned or seem old-fashioned thinking. Even this industry sector, which is as old as humanity, also witnessed a level of volatility and rising chaos in the United Kingdom’s market in recent times.
Nevertheless, there is no doubt that it still powers most economies of the world and is still the safest go-to investment option for many people.
Like most other developed countries, the level of activities in the real estate sector at different levels in the United Kingdom is immense. These activities spread across the manufacturing and services sectors, which contribute 17.7 per cent and 71.63 per cent, respectively, to the UK’s GDP as of 2021.
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The six top contributing assets divisions are Office, Multifamily housing, Retail, Industrial, Healthcare, and Student, which run in billions of GBP overall, making the property market a significant industry in the United Kingdom’s economy.
Despite the impact of Covid-19, as of June 2020, “listed office real estate companies had a market capitalization of 66.6 billion euros, while multifamily housing companies’ market cap stood at 53.9 billion euros. The third leading sector was retail, with a market cap of approximately 20.5 billion euros” (Statistica).
With all these positive drivers, one is right to ask, ‘what could be negative about this lucrative industry?’ To begin with, the intensity and complexity of activities happening in any country’s economic power sector indicate numerous underlying and overlying issues.
When I was in the industry, I identified multiple issues which directly affect what I do as an estate agent and might pose a few challenges for another professional engaged differently in the industry.
But what if a slight government intervention in a few policies could help calm the chaos?
For this article, I will only outline five issues and two possible government policies that may offer solutions to the property market chaos:
1. Excessive Policies
It seems the government introduces new regulations mandated to operators or property managers in the industry almost daily. This year alone, the government introduced 15+ regulatory updates every agent and landlord should know.
These changes affect letting agents and landlords because their liability is increasing quickly for investors operating rental portfolios.
2. Market Volatility
Real estate is one recommendation I see people give whenever they want to suggest an investment with less volatility. However, being in the industry for over 36 months, I noticed that despite the tremendous opportunities it offers as an investment, the uncertainty of the global pandemic and geopolitics makes this a difficult period for real estate investors.
3. Revenue Uncertainty
In addition to the volatility of overall income generated by assets portfolio over time, investors face one challenge: income surety. The economic position of many investors will be different from before. Everything should be considered new, from the amount of time and resources spent to investigate a tenant to those spent to make sure all regulations are ticked throughout that tenancy.
4. Evictions Of Delinquent Tenants
This year saw over five rental reform regulatory headlines regarding evictions in the country’s real estate market. Again, because of the time and capital needed, landlords with limited capital either face the expensive challenge of evicting delinquent tenants or accept government stipends with many strings attached
The last eviction I oversaw as an estate agent cost the landlord over £6000.00 within nine months. If he had decided to accept the government’s stipends and keep the tenant, that would mean he would still keep receiving rents lower than the local housing rates while also adhering to regulations to ensure the safety of the tenants, causing damage to the property.
This factor, in my perspective, is the most significant plight of residential property real estate investors. Furthermore, investors looking to acquire those same properties from tired landlords are faced with navigating legal and affordable solutions regarding evictions and refurbishing the property to market standards.
5. Tenants’ concerns
Tenants’ concerns go two ways: that of the landlords, which I covered in points three and four, and that of the tenants, which are mainly the suitable living conditions of their homes and the skyrocketing monthly rental increase.
Investors want to ensure income surety and beat hyperinflation on assets, resulting in a hyper increase in monthly rental prices. Percentage change in rental prices of prime property in England forecast from 2022 to 2026 growth is forecast to reach 30.4 per cent.
Two Ways Government Could Intervene With Property Market Chaos
From my perspective as a former London real estate agent, there is no one-switch button to fix the complexities and challenges of the property market in the UK. However, addressing the fifth factor (tenants’ concerns) could help the industry experience significant benefits for the major stakeholders (investors and tenants) involved. I will lay out two potential ways tenants’ concerns can be addressed.
Reimagining the Local Housing Allowance (LHA) Rates
In the UK, the Department for Work and Pensions (DWP) uses Local Housing Allowance (LHA) rates to calculate housing benefits for tenants renting from private landlords.
The Valuation Office Agency (VOA) rent officers collect rental information from letting agents, landlords, tenants and other sources to update their site. Most landlords and agents use these LHA rental prices as a baseline to determine monthly rents for tenants.
The problem with this is that many landlords and agents always stay above the LHA rates, no matter the living condition of the property. Some landlords and lettings agents even double the LHA prices.
A solution to this challenge could be for the government to set LHA as a price ceiling on private market rents being paid in the Broad Rental Market Areas (BRMA) instead of the current LHA rating system, in which it is the price floor.
Additionally, this should be complemented by a precise specification for a property standard to be worth this new system of LHA rate in rental income.
This will force landlords and letting agents to ask for monthly rents according to property standards and equally increase rents with respect to the amount of investment made to keep the property to specific living standards over the tenancy.
Appreciation of Deposit protected for Tenants in Financial Value
Another policy that, if evaluated and changed, could help with the property market chaos is the security deposit that tenants or leaseholders pay to landlords.
Since 1 June 2019, the UK government introduced a cap on the deposit that the tenant is required to pay at the start of the tenancy. If the annual rent is less than £50,000, the maximum deposit is five weeks. If the annual rent is £50,000 or above, the maximum deposit is six weeks’ rent.
The deposit must be refundable at the end of the tenancy, usually subject to the rent being paid and the property being returned in good condition. Therefore, it must be ‘protected’ during the tenancy. Judging from the amount tenants pay in deposits for tenancy durations and the inflation rates, this brings no financial value to tenants.
For instance, an annual rent of £50,000 is a monthly rent of £4,166.67. Under the current deposit law, the tenant is expected to pay a deposit of £5,769.23 at the beginning of a tenancy. Let’s assume the tenant stayed for 20 months, as the average rental duration in the UK is currently at 19+ months.
If everything is correct, at the end of the residence, the tenant will still receive a refund of £5,769.23. In most cases of tenants leaving a property, some private landlords are not even happy to release the deposit protected willingly to the tenant.
What if a policy rewards tenants financially for these protected deposits and for being good tenants over the years? For example, the illustrated tenant might receive a refund of about £5,800 to £5,850.
It is important to note that this idea is not necessarily to give tenants a large financial incentive but to incentivise their stay while looking after the property they rented.
This policy may mitigate unnecessary movements of tenants by making them stay longer in a property while reasonably maintaining the property. This would also be a welcoming initiative for buy-to-let investors.