Over the past few weeks, I have been asked whether ending no-fault evictions will impact on value by a number of investors. Truthfully, until the market reacts, we can’t be sure. But what are the issues surrounding no-fault evictions?
In the Queen’s Speech in December, the government made clear its intention to abolish section 21 of the Housing Act 1988, ending no-fault evictions of residential tenants in England and Wales. It’s notable also that the Government has announced a three month temporary ban on evictions during the COVID-19 crisis as part of the emergency legislation. On the surface the proposal for permanent legislation seems quite a drastic step and a return to the long-ago days of protected tenancies and lifetime security for tenants. In fact, it isn’t going to be as severe as that.
Under the current s21, a residential landlord does not have to give any reason to end a tenancy, provided the appropriate notice is served. This offers a practical way for landlords to manage a portfolio and handle things like rent arrears and anti-social behaviour, without having to prove matters in a court on the mandatory grounds permitted under section 8 of the Act. Frustrated landlords have, for many years, found the court process to evict tenants in breach of the terms of their tenancy cumbersome, particularly when it is possible for savvy tenants to employ tactics such as reducing arrears prior to a hearing to a level that would not trigger their mandatory eviction.
The government has the laudable aim of giving renters greater stability. It also recognised that something must be offered to landlords in return, so it is expected there will be provisions for landlords to gain possession in the event of wishing to sell the property or move into it themselves. Lenders are also likely to be protected if they wish to sell with vacant possession. There are also promises that revised section 8 rules will allow for speedier decisions on evictions and quicker access to courts. Quite how, we are yet to discover.
How will all of this affect valuations?
It is easy to argue that little will change, yet one can be pessimistic about the loss in landlords’ flexibility. Currently, many valuers discount from vacant possession value for the existence of a residential tenancy. The size of the discount is bigger the greater the security the tenant has. So, for example, a regulated tenancy (with lifetime security and a fair rent) may attract a discount of between 15%-20% from vacant value. An assured tenancy where a market rent is payable (but the tenant nevertheless has lifetime protection) may be at a slightly lower discount.
But with shorthold (AST) tenancies – which is what the new rules will apply to – it is increasingly the case that properties are valued by reference to yield, rather than a discount to vacant value, though much depends on the type of property. A buy-to-let landlord may still expect a discount to vacant value rather than an application of a yield. However assets owned by professional landlords for investment at scale are now primarily valued by gross yield or on net operating income, only with a final check to vacant value. Buyers who acquire for break-up value would still be able to secure vacant value under the proposed new regime. It’s a fact also that tenants who hitherto leave of their own accord will still leave of their own accord. With all of that in mind, I’m much more sanguine about the case for valuations being unaffected.
What can we learn from Scottish tenancy law?
This area of law is not new in the UK; Scotland took the lead in 2017 with the introduction of a new type of tenancy – the Private Residential Tenancy, which has similar effects as the proposals for England and Wales. Statistics suggest there has not been any noticeable reduction in the number of landlords, whilst rental growth has continued at a similar pace. The Scottish experience appears to have balanced the needs of the landlord with the rights of the tenant. Reasons for this may include a strengthened ability to recover possession in the case of rent arrears and a special Housing Court to speed the process.
Provided the government picks up on the Scottish experience, I cannot see that a ground shift is needed in the approach to valuation. Lenders are likely to have their position secured if vacant sale makes sense for them. Professional landlords, although no doubt frustrated by the removal of flexibility, will recognise that longer-term tenants prove the sustainability of income and reduce voids. Granted, some individual private landlords may exit the market, dismayed that this proposed legislation follows previous interventions that have made the life of a landlord more difficult. But, if they need a home back to live in or to sell at a higher vacant value, they can. Let’s see what the detail brings.