The British Property Federation, London First and the UK Apartment Association have written to housing secretary Robert Jenrick urging the government to support renters and landlords during the coronavirus pandemic.
In the letter, sent last week, the industry lobbyists warned of the risks to the 4.5m households in the private rented sector, including healthcare workers vulnerable to the virus and people in hospitality and retail “losing jobs by the day”. They also highlighted the implications for owners.
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“Landlords are likely to face significant challenges in continuing to operate in the immediate future should tenants not be able to pay rent,” they wrote. “Professional landlords with corporate financing arrangements will need to service their debt and interest payments, and will not be able to offset this against any deferral of rent.”
They called for extended housing benefits and interest rate payment deferrals to cover loss of income, to protect both tenants and landlords, pledging rental deferrals in return.
They got a three-month eviction ban for tenants. Though, this was quickly followed by an unlimited fund to subsidise salaries and a boost to local housing allowances, expected to cost the treasury billions of pounds a month.
Emergency policy
The £1bn funding for housing benefit and Universal Credit means the Local Housing Allowance will cover at least 30% of market rents. Salary subsidies of up to 80% of salary or £2,500 a month will provide a further safety net for both renters and landlords.
“It has been a frantic week and clearly government is having to react very quickly,” says Ian Fletcher, the BPF’s director of policy. “They have made some very large announcements and we are trying to pick through the detail. There is an undoubted need for conversations over the next week on how the three-month ban on evictions works, in terms of practical detail.”
Others have been less positive. Marc von Grundherr, director of letting agent Benham & Reeves, says of the ban: “It will simply be used as a ‘get out of jail free card’ for all of the UK’s 16m or so private and social housing tenants and this could leave a path of destruction within the rental market if not correctly implemented and monitored.”
The nascent build-to-rent industry of owner-operators, spanning an estimated 40,000 completed homes, may be relatively small. But investors with large portfolios of thousands of homes, who will not benefit from mortgage holidays, are particularly exposed.
“A blanket inability to get tenants out has in-built difficulties,” explains UKAA chief executive Dave Butler. “Are there going to be other recourses available? How do you match the loss in income with any support for outgoing payment? Yes, some BTR companies are huge and have deep pockets, but they can’t afford to lose 20% of their income. The underwriting doesn’t work like that.”
Butler says the industry is gearing up to support people in need, but investor sentiment is crucial. “It would be a very unfortunate outcome if the investment community saw that BTR was not going to deliver the things they wanted,” he adds. “There is a need to say yes, we support residents, investors and operators maintaining their cash flow – because it is cash flow, most of all, that will kill us.”
Rising costs
Rent recovery is just one element of the rising costs and increased pressure on landlords during the pandemic.
“From a practical cash flow perspective, tenants paying rent and landlords paying interest are only two components of the delivery of rental accommodation,” says Ed Crockett, head of UK residential investment at Aberdeen Standard Investments.
There are additional outgoings: service charges, ground rents, staffing, asset management, property management and more.
ASI is ramping its cleaning regimes and is preparing for challenges with staffing, managing incidents and outbreaks. The fund manager is encouraging people not to use amenity spaces, and is instead streaming exercise classes, for example.
“Anything we can think of to bring people together as a group, but not physically,” says Crockett. “We are working across our schemes to look out for the most vulnerable, something our residents are really stepping up to.”
Crockett says institutions are well placed to weather the storm, but anticipates “a lot of pain in the wider provision of rental housing”.
At the Howard de Walden Estate, residential director Tracey Hartley is grappling with the logistics of new tenant demands. “We are facing people who should be moving out but are self-isolating. What do we do about people who have signed up to move into our properties but are stuck abroad? Do we hold that property empty for them?”
Short-let operators have been immediately impacted, hotel chain Dalata being just one example. Next in the firing line will be operators leasing recently completed buildings. “The market has slowed down so much,” says Hartley. “If I had a big building rather than normal churn, that would be a worry.”
Bad debt
The BPF, London First and UKAA also raised this with the government. “There is a disincentive to complete BTR blocks in development, because not many people are going to be moving and landlords incur council tax between practical completion of a building and occupation,” says the BPF’s Fletcher.
The letter asks that council tax not be charged during this period, to enable delivery of new homes and maintain the current momentum of development. Fletcher adds that construction firms would benefit from waiving apprenticeship levies, or even redirecting them to support apprenticeships already in place.
These measures would alleviate some immediate costs, but longer term, as lack of income sees debt pile up, more drastic measures will be required. “Landlords always face some measure of bad debt, but excessive bad debt will be a consequence of this policy and situation,” says Fletcher.
He adds that a “debt guarantee” from government would support the sector, with the state stepping in to cover a proportion of the interest owed. This could support landlords in development as well as those operational assets.
Some 112,000 BTR homes are in development, with 67% of those in planning and the remaining under construction, according to the BPF’s latest count.
“The supply side is going to be in the crunch, and not a lot will be built,” says James Kingdom, head of alternatives research at JLL. “The challenge will be for anything that has a hard date wired in, where they need to have it up and running by a certain time.”
Projects relying on global supply chains, prefabricated units, construction workers and the planning process may all be hit. Kingdom anticipates an uptick in conversions amid the government’s move to expand permitted development rights. With many assets or operators at risk of going bust, this could be a route to development.
“It may see boroughs that were previously reluctant to go down that route, particularly in central London, under pressure to open up the books on that side,” says Kingdom.
Fletcher says he is encouraged by the receptiveness from government and its willingness to listen to the industry. “There is a lot of creative thinking going on. This is unprecedented and in the space of a week the government has done a lot. Over the next few weeks, they will have to continue to do so.”
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