Is the PRS market suffering from a knowledge deficit?

paresh raja mfs rates

Paresh Raja, (pictured) founder and chief executive of Market Financial Solutions (MFS)

With low interest-rates and the Brexit impasse making for an uncertain economic climate, buy-to-let has become an increasingly attractive form of property investment in recent years due to the fact that it offers long-term capital growth and regular rent yields.

As a result, the UK’s private rental sector (PRS) has grown considerably over the past 20 years. In the past year alone, the value of the PRS increased by £6bn and it’s now estimated to be worth £1.3 trillion in total.

The strength of this sector is largely contingent on the perceived stability of the UK housing market. As such, it’s imperative that changes in the way the market is regulated work to strengthen the landlord-tenant relationship, and in turn, encourage good practice and greater transparency.

You’d assume that the overwhelming majority of landlords are aware of the latest legislative changes governing the PRS, such as changes to minimum housing requirements. However, you may be surprised to hear that a significant majority are also in the dark. We at Market Financial Solutions (MFS) have already observed the impact of these, and other, crucial changes, and we believe it’s more important than ever before for buy-to-let landlords to have the information they need to navigate what can sometimes be a challenging and complicated sector.

Landlords are generally ignorant of the recent changes

At MFS, a key part of our business is arranging bridging loans for landlords who wish to expand their buy-to-let portfolio. As part of our many dealings with them and their brokers, it’s become clear that there’s a degree of widespread confusion about the recent legislative changes and their impact on the PRS.

We thought it might be enlightening to know the true extent to which UK landlords were ignorant and so, we commissioned an independent study to find out. Needless to say, the findings were revealing.

For a start, a third (30%) of landlords admitted to not understanding the recent round of changes to house in multiple occupation (HMO) licensing. The changes, which came into effect in October 2018 make it mandatory for landlords who manage a property with five or more inhabitants to first obtain a license.

The new regulatory regime also mandates for minimum sizes for rooms that are being let out based on the number of occupants. This represents a particular challenge for investors as their properties could drastically decrease in value if they fail to meet the new size requirements. Even fairly well-reported changes such as the tenant fees ban (introduced in June 2019) weren’t universally understood with one in five admitting that they did not know how it will affect them or their portfolio, according to the MFS research.

Moving away from reforms specifically concerned with the PRS, the property markets have been impacted greatly by recent changes where tax policy is concerned. In particular, the new inheritance tax allowance, introduced in April 2017, is a great boon to property investors. Still, 28% of UK landlords were unaware of how a change of this magnitude would affect them. Similarly, a quarter of landlords said they weren’t aware of the more recent reforms to tax relief on mortgage repayments which were implemented in April 2019.

Looking Ahead

While it’s incumbent on landlords to stay on top of the latest reforms to the housing market, the general ignorance demonstrated by our findings reflects a lack of consistency or communication on the part of the government.

However, the government should continue to play an active role in ensuring that the UK housing market is working for landlords and tenants alike. Indeed, as someone who’s all too aware of the prevailing problems in the property markets, most notably lack of supply in the PRS, I’m happy that this vital policy area seems to be commanding more government attention. However, this does not excuse the government’s inability to educate landlords about reforms that so directly impact them and their finances.

Ultimately, the study highlights just how important it is for prospective and current buy-to-let landlords to work with financial service providers who invest time and resources into keeping on top of the latest reforms. Failure to do, could come with grave legal and financial consequences.

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