John DaviesHello, this is john Davies founder of Hedge Property Investment and the LHA Network. Many of you may have heard me speak at a number of the property events around the UK and therefore know that we try to help as many would-be and experienced investors alike succeed in the current housing market by providing up to the minute strategies, based on both ours and our clients’ real life experiences.

Julie asked me to provide her readers with a background to the Local Housing Authority( formerly DSS ) tenant market place and I hope to do this through a number of articles and perhaps by answering questions you may have around this particular sector.

To start here’s how we initially became involved;

Back in February 2008 a family friend of mine who knew I had an interest in property, and is herself a senior member of a Local Housing Association, passed me a copy of the social housing magazine, Inside Housing. The magazine bore the headline “ Housing waiting list to hit over 5 million”. She went on to explain the chronic issues within social services in relation to housing.

At around the same time I was given a copy of Duncan Bannatyne’s autobiography, which described how he built his first major business of residential care homes on the back of identifying shortcomings in the government’s provision of the service. The book highlighted that the government was a great source of publicly available information and that everything he required was provided in one government department or another. It was a matter of piecing it all together.

By chance I was notified of a landlord’s association meeting in the Midlands, which I attended. This instigated introductions to several key people working in the arena of social housing. I met with representatives from eight different departments within the local housing authority, and meetings were also held with representatives from social housing landlords, in order to fully understand the issues. I also met with the heads of various departments such as that for Mental Health, in order to understand their requirements under the “Social Inclusion” agenda. It quickly became apparent that each department with an interest in social housing is working to objectives under its own wider agenda, and crucially that there may be little or no co-operation between them. Furthermore, whilst numerous reports have been written highlighting the various problems, implementing the findings appears to receive much lower emphasis.

Further research was carried out with the Department of Work and Pensions, the Rent Service and various financial institutions, supporting the “Financial Inclusion” agenda. I also instigated and chaired a meeting with all the relevant department heads, bringing to their attention the problems faced by private landlords (e.g. rental arrears caused by housing allowance being paid direct to claimants) who, it transpired, were resigned to an inability to act to improve the situation.

To exacerbate the situation, social housing landlords have new criteria for the type of property they will purchase, which is very specific, meaning that a lot of the property available to purchase is not suitable for their requirements.

A new approach was required.

These were the challenges we faced along with the traditional buy to let investor in the current market place.

Rental returns

All investors appreciate the relationship between rental surplus and the money they have tied up in a property (yield), as well as the need to ensure that there is a comfortable margin between the rent achieved and the mortgage payments and other outgoings, e.g. property insurance and boiler cover. Unexpected costs, e.g. a boiler breakdown, can however eliminate any positive cash flow leaving the landlord to subsidise the property.

VoidsMost landlords have experienced voids to some degree and are only too aware that even short void periods can turn a property with positive cash flow into one requiring costly subsidy. Many people’s property aspirations have been destroyed through lack of cash flow.

ArrearsRental arrears have always presented a great risk for the investor. The current economic climate means that increasing numbers of tenants are likely to experience job losses, with greater difficulties in finding new employment. Consequently, rent arrears are likely to pose an ever-bigger threat for the landlord in the foreseeable future. In addition many tenants know their way around the system and move from one landlord’s property to another leaving a trail of unpaid rent.

The fear of rising interest costsA further challenge is posed by the fluctuating costs of borrowing. Many landlords were unable to remortgage during 2008/9 when they came off favourable fixed rate deals, and many with large portfolios were faced with selling off all or part of their portfolio, often well below market value. Whilst rates have since come down, there is no certainty as to how long this will last.

Nick Hopkinson, director of Property Portfolio Rescue, stated: “Landlords are experiencing falling demand and an increase in void periods, but those on tracker and variable rate deals have been given a reprieve by falling interest rates, and are enjoying a period of strong positive cash flow. Interest rates will not stay at this level indefinitely, however, and when borrowing costs increase again, as they undoubtedly will, investors will find themselves trapped and with insufficient equity remaining to remortgage.

“This ticking time bomb could prove disastrous. Cash flow presents the biggest risk in property investment and landlords must act now rather than be lulled into a false sense of security, in the hope that the market will bounce back. Wise investors will act cautiously over the coming months while rates remain low, taking advantage of a temporary boost in income to bolster their cash reserves. Interest-only mortgage borrowers might consider making overpayments to reduce their debt, increasing equity and improving their chances of qualifying for a good fixed rate deal when interest rates start to rise.”

Legislation favouring tenantsWhilst legislation has been introduced over the years to protect vulnerable tenants from unscrupulous landlords, today it can be the landlord that is vulnerable to a small, but significant, minority of tenants that will exploit their legal rights. It can take landlords months to regain possession of a property from bad tenants, reliant upon a favourable outcome to a court hearing, using Sections 8 or 21 of the 1988 Housing Act.

Housing benefit paid to tenantsMany landlords used to favour housing benefit claimants, as there were guarantees that the rent would be paid regularly, as long as the claimant continued to be eligible for housing benefit. Recent changes in legislation, resulting from an emphasis on promoting “financial inclusion” or personal financial responsibility for this sector of society, mean that for all new housing benefit claims, the benefit payment is made direct to the claimant and not the landlord. With some tenants unable to manage their finances sufficiently to ensure that their rent is paid in full and on time, this causes problems for the landlord, and ultimately for the tenants themselves, who are likely to face eviction in the case of persistent arrears.

A chronic under-supply of social housing

A previous serious shortage of housing stock has been exacerbated by the current economic climate, with little property development likely in the foreseeable future. This means there is a chronic under-supply of affordable, good quality, rented accommodation for the most vulnerable members of society.

Figures released by the Communities and Local Government Department on 22 January 2009 show 1.77 million households on local authority waiting lists in 2008, an increase on the previous year of 5.6%. This latest figure represents 8.4% of all households and is the highest number recorded since 1997.

The number of individuals on the waiting list is forecast to reach five million within twelve months, one million more than this year.

Leslie Morphy, chief executive of homelessness charity Crisis, called for “bold action”, adding that “Now more than ever we need an innovative and determined approach to tackle the lack of supply”.

Local authorities are completely overwhelmed by the demand for housing, with reported waiting lists of up to six years, depending on the authority. They have no choice but to prioritise claimants using a points system, with points awarded based upon their perceived needs. The most vulnerable people, e.g. those with mental health problems, older people, or those with dependent children, receive more points and will therefore be at the top of housing waiting lists.

The resulting situation is that those with fewer points have no realistic chance of ever being granted a property. Turning to the private rented sector may not be an option, given the ceiling on housing allowance dependent on personal circumstances, meaning even modest rents can be unaffordable. In addition to this, many private landlords will no longer consider housing benefit claimants, as with benefits paid direct to the claimant, there is no guarantee rent will be paid.

But where there is high demand and short supply there is always profit to be made!

So should landlords / investors target this market?

The short answer – most definitely if they know what they are doing!

Many of our clients are successfully receiving above average rental returns with little or no arrears or voids …. In next month’s article I’ll be sharing with you how they have achieved just that on the back of what we did next!

If you would like to ask John a question click here