Mortgage woes fuel move towards more long-term letting

DEMAND is growing for longer-term rental tenancies as would-be buyers are forced by the continued shortage of mortgages to put their home ownership dreams on hold.

Letting agents and landlords across Scotland are reporting a marked trend of tenants extending leases for longer than is traditional. And as the letting sector shows signs of moving towards the European model of long-term tenancies, experts have called for more incentives for landlords to offer longer-term leases.

First-time buyers without access to substantial deposits are frozen out of the market and are likely to be for some time, with lenders warning that mortgage funding will remain subdued for the foreseeable future. The average Scottish first-time buyer had to find 15,016 more for a deposit last year than in 2007, according to research for The Scotsman by property data group Hometrack.

David Alexander, owner of the DJ Alexander residential letting agency, said the result was more tenants renting for longer.

"A number of people have extended their leases for considerably longer and their attitudes to renting are changing.

"There is no real benefit to owner-occupation when the market is in this state," Alexander said. "Renting is less advantageous when values are rocketing, but when that is taken out of the equation there are no real benefits to buying."

Under the short assured tenancy system in Scotland, tenants agree an initial six-month lease that can be extended on a rolling basis, provided both parties are happy with the arrangement. Whereas many tenants in Edinburgh and Glasgow traditionally rent for six months while looking to move, extending their terms by two or three months at most, the majority are now looking for a further six or 12 months, according to Alexander.

"They are increasingly looking to longer-term leases, with some people who initially rented for six months in the hope of buying having now been in their rented property for three or four years."

The Council of Mortgage Lenders (CML) admitted earlier this month that mortgage rationing and a shortage of new homes would continue to undermine private ownership levels. And with little prospect of housing market activity returning to its mid-noughties level, the UK lettings sector could move towards the Continental model, where long-term renting is common – in Germany, almost two-thirds of private homes are rented.

The CML said: "For the foreseeable future, the picture of continuing constraint in the flow of housing supply, and housing finance supply, looks difficult to avoid.

"The effect of this is likely to be that first-time buyers will continue to face significant deposit challenges to enter the market, and that the trend of falling home-ownership that had already begun before the credit crunch will continue."

The problem for tenants is that the prevailing short-term letting model undermines their security of tenure.

Alexander said: "We would need a move away from short assured tenancies, where people are given assurances that they can be there for a period of time. Landlords need to be prepared to grant longer-term leases."

While short assured tenancies stipulate a minimum stay of six months, there is no legislation to prevent landlords from offering long-term leases. The tendency towards short-term deals is dictated by the prevailing preference of the two parties, according to John Blackwood, director of the Scottish Association of Landlords.

He said: "The current tenancy regime allows landlords to offer longer tenancies, but it is up to them to do it and for tenants to be comfortable with it.

"Most tenants go on a six-month contract and then a rolling lease, but there remains a reticence among both tenants and landlords to tie in for long periods."

This reticence is most marked among the "reluctant landlords" – those hoping to sell their property sooner rather than later.

The government is working with lenders to give incentives to landlords to offer longer leases. Blackwood called for tax breaks for landlords letting properties over the long term, while Alexander said both institutional and private property investors should be given tax incentives to invest in the market over the longer term.

Alexander believes that more financial institutions could enter the lettings market as demand for longer-term lets grows.

He said: "Some banks now own units through circumstance and as demand becomes bigger we could see opportunities for big institutions to put residential property into real estate investment trusts and offering them on a long-term basis."