David Alexander: Financial clout needed in rental sector

David Alexander says investment in the rental sector is being hampered by uncertainty over lease periods. Picture: Ian Georgeson

David Alexander says investment in the rental sector is being hampered by uncertainty over lease periods. Picture: Ian Georgeson

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In the Commons last week, the secretary for communities, Sajid Javid, launched a white paper on housing that will place greater emphasis on providing homes for long-term private rental.

With housing a devolved matter, whatever new rules emerge from Westminster will not automatically apply to Scotland, where the deficit in the supply of homes is less acute than south of the Border.

The sector needs large-scale involvement by financial institutions

However, the white paper makes interesting reading, even if being rather timid in proposing to guarantee three-year tenancies as part of a programme of encouraging a greater variety of property to rent.

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Tenancies lasting three years (and longer) are already a fact north and south of the Border, because most landlords are more than happy to establish a long-term relationship with a model tenant, any rent rise being limited to the rate of inflation. Rare is the landlord who will relinquish such a “good covenant” in the hope of bumping up the rent to a level that will crack the market “ceiling”.

Thus there seems to be a case for extending choice by making available leases of not just three but ten, 20 or even more years, a practice which is commonplace on the Continent. Sadly, the current Scottish administration – which, ironically, seems to want to make Scotland more “European” and less “British” in outlook – appears blind to all of this.

Some 84 per cent of privately-rented properties in Scotland are owned by individuals or family trusts. These landlords carry out an important role, but the present number of commercially-rental properties is relatively small. What the sector needs is large-scale involvement by the financial institutions to fund a “mass market” rental structure.

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But as things now stand, such a scenario will certainly not apply to Scotland because, rather than encourage longer-term tenancies, the Scottish Parliament has actually passed legislation which will reduce the minimum lease period – in other words a tenant will have the ability to up sticks just one month after taking on a lease or by giving a month’s notice any time after that.

Consequently, what institution will be prepared to fund the development of private rented housing on a large scale if financial projections are made impossible by uncertainty over guaranteed lease lengths?

Especially, as in Scotland, it’s a case of “heads you win, tails I lose”; while a tenant will be able to leave by giving one month’s notice, owners will be permitted to repossess on just two grounds: a desire to sell or move in to the property as a “main home” (and the latter will clearly not apply to an institutional landlord).

The whole thing smacks of a lost opportunity. Just as there are people renting in Scotland who would prefer to be owner-occupiers, so there are growing numbers of owner-occupiers for whom long-term renting (involving a series of properties) would be more conducive to their lifestyles – if the sums added up.

With funds bringing economies of scale and increased competition, I envisage rental levels falling somewhere between the heavily-subsidised, and unsustainable, council rents of old and a mortgage based on a more conventional basic interest rate of, say, 5 per cent, rather than today’s near-zero rate which cannot continue indefinitely.

This would make renting cheaper than buying both on a monthly basis and in terms of additional costs such as legal and surveying fees, buildings insurance, maintenance and repairs, and all those regular internal upgrades essential to stop a home becoming dated. Over 25 years a tenant might make substantial savings compared to an owner-occupier, whether the latter moves or just improves during that period.

The “one-month” lease is not likely to take effect until next year; is it too much to hope that, in the interim, the Government will look at alternatives that encourage a wider choice of housing tenure?

• David Alexander is managing director of DJ Alexander

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