Too Much Stick, Not enough Carrot

Why the PRS needs a level playing field. 

Quite rightly, the government has its eyes fixed upon professionalising the PRS.  But has it been too keen to satisfy a rather negative and partisan narrative with its weakness for populist policies?

There’s no doubt that improvements had to be made across the rental sector; private and social rented alike, and this government, and likely the next, has and will impose a level of compliance & legislation which demands a thoroughly professional approach.

There’s no doubt that all homes, rental or otherwise, should meet the Decent Homes Standard, be economical to run, and demonstrate equitability between landlord and tenant.

The institutional residential investment sector, in the guise of Build to Rent (BTR), seems to fulfil the legislator’s appetite for a more equitable PRS. The industry takes its responsibilities seriously, has led on such things as allowing pets and not charging tenant fees and has introduced a much more responsive interface where issues are dealt with promptly and with professionalism. So far, BTR accounts for a miserly 2% of properties to let in the PRS and despite a growing pipeline, BTR is not building fast enough to fill the gap being left by private landlords.

The institutional sector has an advantage over the private PRS landlord. The scale of investment allows for cost savings and, of course, the buildings are, by and large, new with EPCs of B and above. But there’s one more thing that the institutional sector can do: offset its finance costs against gross income. Nobody seems to have a problem with this because they are ‘professional’.  Fair enough, private landlords can offset some expenditure but it’s not a level playing field.

Professionalism is key.  The National Residential Landlord Association, under the tenure of Ben Beadle, is doing a tremendous job of corralling private landlords, getting them to understand their obligations and instilling a sense of professionalism. This is what government wants.

The latest piece of legislation the Renters (Reform) Bill (RRB) imposes yet further obligations on landlords to sign up to a new landlord register.  My view, published in BTR News here: https://btrnews.co.uk/renters-reform-bill-the-missed-trick/ , is that this is a wasted opportunity and that a tenancy register, as they have in Ireland where they collect all the data generated by a tenancy, is much more effective, useful and essential.  So I don’t think the RRB goes far enough in this respect.

So far, many sticks and no carrots.

Section 24 was introduced by David Cameron in the 2015 Finance Act.  Its purpose was to slow the growth of the PRS and maintain high levels of home ownership. It was phased in from 2017 and, in a sense, the policy had some success as the PRS has hovered at around 19% of the housing market since that time.  But is it fair?

The PRS comes in for no end of stick and landlord bashing is the jeu du jour practised by most. Yet it fulfils an important need at a time when home ownership is unaffordable, and the social rented sector has seen a great sell-off under the Right to Buy.  But, however much institutional money is pumped into the sector, we simply cannot afford to lose private landlords now.

So, what can we and should we do to ensure a fairer, robust, fit-for-purpose PRS that works for all and keeps private landlords afloat?

Firstly, we need to understand exactly what’s going on, and we can only do that with a comprehensive data set.  That means adopting Ireland’s lead and broadening the scope of the Landlord Register to include all the data points from a tenancy agreement. This has to be mandatory with failure to comply being a criminal offence with appropriate sanctions. There is time to amend the current Bill and do this.

Secondly, if the government is firm in its pursuit of creating a professional PRS, it must treat all landlords as professionals. To this end, I would advocate the immediate scrapping of S24 aligning it with BTR.  This has clear advantages, especially now with interest rates as they are.  This would relieve some of the pressures that landlords find themselves under.

Thirdly, tie points one and two together.  By signing up to the portal, landlords automatically receive a specific tax code allowing the deduction of finance costs and interest payments.  The carrot.

This is what a ‘joined up’ PRS looks like. We must stop regulating in the dark to satisfy noises off. 

I fully accept that scrapping S24 will be met in many quarters with howls of protest, especially by those who are ideologically opposed to private rental. But, if we really want a well-understood, fully functioning, professionally managed PRS that works well for all, we must give landlords the tools and the incentives to do the job properly.  

Richard Berridge 

June 2023