‘Landlord exit’ part 3: it’s time to do something about landlord churn
27 Jul 2017
This is the third of three posts looking at the reasons for, incidence and implications of private landlords leaving the market. Part one used new research to quantify landlord churn; part two what causes it. This part looks at the options for reducing the impact that landlord churn has on tenants.
Every year, hundreds of thousands of private landlords – at least one in ten – leave the market by selling up or moving back into their properties. This forces up evictions and ultimately leads to some people becoming homeless.
Yesterday we revealed that the biggest drivers of our high levels of existing landlord exit are changes in personal circumstances, like people getting older.
So in turning to the question of how to tackle the problem, we understand it is not something that will resolve itself naturally. Additional intervention is needed. Ultimately this must begin with addressing the fundamental power imbalance between landlords and tenants.
A market for tenanted properties?
In commercial property, selling with a long-term tenant already in situ can make your property a more attractive investment and add to its value.
So why doesn’t this happen in the English residential property market when a landlord decides to quit the market and sell?
Recent research for us by Cambridge Centre for Housing and Planning Research begins to answer this question. As part of the research, landlords were asked why they would not think of selling with sitting tenants in place.
There was a sharp split in their responses. The larger, institutional investors who were investing in large blocks of buildings said they actually would consider selling with tenants intact. They saw the homes more like commercial property and said, for example, ‘We believe once the building starts trading, it will be worth more tenanted.’
In general, however, these big landlords are also less likely to quit the market entirely. They are much less vulnerable to the changes in personal circumstances considered in yesterday’s post.
If the private rented sector is going to continue to house households who need long-term stability, we must consider how we can get more into homes that are owned by landlords with these sort of long-term business plans that mirror their needs. There has been a lot of talk of the growth of institutional investment in private renting in recent years, but much of the focus has been on shorter term tenants like affluent young professionals and the student market.
But we must get back to the small landlords, who make up the overwhelming majority of the people letting property in England today and are responsible for most landlord churn.
As you might expect, small landlords said they would sell their property vacant because they feared selling with tenants in place reduced the price they would get for the property. This was because they would be excluding owner occupiers from the pool of potential buyers or as one landlord in the study put it: ‘it would drastically reduce the audience I was dealing with’.
When asked what would persuade them to sell with a tenant in place – to create a market for tenanted properties – in the main they said it would be something that made up the difference with selling a property vacant, i.e. a financial incentive.
But there are significant challenges with creating such an incentive, even ignoring the cost to the exchequer.
Some form of capital gains reduction is an option, but what happens if the landlord has made no real capital gains? A fixed sum is another option, but how would it be calculated and avoid perverse incentives.
More importantly, financial incentives do not get around the more fundamental problem – selling with the tenant in place is no good if the tenants have no protection from eviction as soon as there is a new owner.
The case for more fundamental reform
After I posted the first blogpost in this series someone got in touch to ask how things work in Germany, the posterchild of private renting. Isn’t it the case, they asked, that in Germany landlords are normally required to sell with their existing tenants intact?
Of course the answer is yes. As with commercial property – and our own institutional residential landlords – buying a tenanted property isn’t necessarily seen as a bad thing.
So should we require it of landlords here? Or are there other options we could consider, like requiring landlords to try to sell to another landlord first, just as shared ownership properties must be marketed to other potential shared owners first?
Just as with incentives for sale, none of these options will have any effect if selling rented property is viewed in isolation.
The fundamental power imbalance between landlords and tenants that is created by the landlord’s power to evict at any time, for any reason, outside a fixed term tenancy, must be addressed first. Otherwise the landlord will always be able to evict immediately before or following the sale.
We have advocated the introduction of five year tenancies to help rebalance the power disparity. Within those five years, the landlord’s power to use a no-fault eviction would be suspended and they would be required to give a good reason if they wanted to evict.
If we are to put any additional measures in place to reduce the negative consequence of landlord exit, a change like this – to limit landlord’s complete freedom to evict irrespective of the circumstances – is an essential first step.
Ironically, some have said that such a step would cause landlord exit. But as we established in the last post, moderate policy change has a loose relationship with landlord exit. The largest risk to renters lies in doing nothing.
We will return to this topic again. But as the private rented sector continues to grow exposing more to the risk of losing their home through natural churn and exit, it is vital that we take this first step.