Why do landlords either avoid or target the lower end of the lettings market?

A report by Julie Rugg & Alison Wallace was recently published regarding the property supply to the lower end of the English Private Rented Sector.

This considers tenants who are in receipt of some form of benefit, from either: Universal Credits (UC), Local Housing Allowance (LHA) and Discretionary Housing Payments (DHP). The report outlines the various difficulties that landlords have in dealing with this area of the market and reflects on why this area’s supply of properties has decreased in recent years.  

In this post, we summarise the findings of the report as well as the reasons why some small independent landlords are finding the lower end of the PRS market less appealing.

Why landlords may not want tenants in receipt of housing benefits

In the Private Landlord Survey (2018), the report found that 52% of respondents were unwilling to let to people who are in receipt of housing benefits. Some of the reasons for this are as follows:

• Landlords will often need to pay a premium for insurance due to the fact that the property is being let out to DSS tenants
• Landlord’s mortgage may prohibit them letting out to tenants in receipt of housing benefits
• Landlords may have to charge lower rates for the property in line with what the tenants claim through Local Housing Allowance in the area. This loss of income may not be something landlords are financially able to do
• Tenants who receive housing benefits can be extremely financially vulnerable. These tenants may use LHA payments in order to pay for food and other basic necessities rather than rent. This is a risk that landlords who have LHA tenants have to take.

In addition to this, rather than the tenants being the problem, it can often be the local authority and the benefits management system  which ultimately is what landlords are most worried about:

• Local Housing Allowance rates are determined on 1 April each year for all claimants. This can be a good or bad thing for landlords. The LHA is based on the area where you live as well as the number of bedrooms in a property. The LHA figure determines the maximum amount of rent that can be used to calculate the amount of money the local authorities can give. The fact that this figure can charge yearly means that it can be potentially difficult for landlords & tenants to agree a long term tenancy for a property due to the changing incomes that tenants can receive.
• Landlords often claim the administration and the process needed to go through is reason enough for not allowing tenants into the property. Currently, if you make a new claim for universal credit it takes five weeks for the application to be processed – and that’s the case without any hiccups along the way. Benefits can also be suspended if there is an investigation or being re-assessed. This affects the landlord as well as the tenant.

Why do some landlords target the Housing Benefit and lower-end market then?

With all this being said, it does raise the question of why anyone would want to enter the lower end of the market and how it can be economically viable.

The fact is there are some landlords who focus on this market and do make money. Landlords who are in this market generally set the rent at around the Local Housing Allowance, taking into account the local market.

Landlords at the bottom end of the private rented sector generally maximise profits by minimising expenditure. This allows them to set their rent quite low or at the rate of Local Housing Allowance rates.

While landlords would not maximise their money through rent, often landlords would see tenancy turnover and voids as the major expense.

Landlords would rather charge a lower rent and have constant income flow rather than having losing two or three months with additional costs of re-advertising and reletting. Re-advertising the property can also lead to expenditure for refurbishments as they would want to attract a good tenant who is willing to live in the property for an extended period of time.

Setting out the rent at either a lower price or the LHA rates reduces tenancy turnover in two ways:

• Firstly, by setting the property at below-market-rate or in line with local housing allowance, they are ensuring that there is a wide pool of tenants that are likely to be able to pay the rent. Setting the rent high cuts off some of the tenant market, and increases the risk of having a poor-quality tenant as there will be less of a pool to choose from.
• Secondly, having a below-market rent, also means that tenancy turnover is unlikely. Tenants who are in a property that they can barely just afford that is job dependent are more likely to just stay for the fixed term before moving on. However, if the property is something that tenants can afford easily, either through LHA rates or just below the market rent in the area, tenants are more likely to stay at the property for a longer period.

Why are landlords who did focus on the housing benefit market now leaving?

There are six reasons which the report has found which has caused landlords to either leave the HB market or are causing too much of a risk for landlords to currently enter:

1. Demography: There is a large contingent of landlords who brought properties during the prime ‘buy to let years’ where properties were cheaper to buy. This generation are now older and are willing to sell off their properties as they enter retirement.
2. Financial Reasons: Tax changes recently have made it less viable for landlords to continue to rent out their property. This tax increase has meant that some landlords have stagnated and have stopped investing into properties as they are not seen as the investment that they used to be.
3. Universal Credit: there is a growing consensus amongst landlords that the credit system does not work for anyone, either landlords or tenants. Recently, there has been a growing trend of local authorities paying the tenant the LHA rather than the landlord. The report states that DWP data indicate that the proportion of payments made directly to landlords has reduced substantially. This has led to tenants spending the money on necessities such as food, rather than on their rent. This then leads to landlords being out of pocket.  In addition, the mechanisms within the credit system are far too slow-acting, meaning that tenants rack up significant rent arrears before the local authority decides to directly pay the landlord. In addition, universal credit is run by the DWP, so there is a perceived lack of links with the centralised system compared to the local authority.
4. Regulatory Burden: While this applies to all landlords, the new additional regulations that have been passed in the past 10 years (electricity compliance, HMO licensing, tenants fees ban etc..) have increased expenditure and the time needed to make sure that properties comply. This affects smaller landlords the most, who find it difficult to spend capital in order to comply with the latest regulations. In addition, the fines that come with not complying with regulations can be severe, such as rent repayment orders.
5. Hassle: Some landlords found the above problems too much work, especially for landlords who have multiple properties. Couple that with the prospect of having to deal with the universal credit system, then it is understandable why some landlords just do not want the hassle and risk of a tenant from this area of the PRS market.
6. Risk: Overall, respondents to the report argued that there is an increased risk within the PRS for landlords. The combination of the above has created a harsher environment for landlords and there is a perceived view that the situation will only get worse. The scrapping of section 21 that will occur in the next couple of years is another check to a landlord’s power of their own property. Landlords argue that it increases the risk significantly when you let out your property with an uncertain income with no guarantee that you will be able to evict the tenant until they reach a certain threshold of rent arrears.

Overall, the report highlights the negative points which landlords have to deal with in the lower end of the private rented sector.

While it is often referred to as ‘discrimination’ when landlords do not want tenants who are in receipt of benefits, it is a multi-issue problem that is largely caused by the system that landlords must operate in.

While there are still positive reasons to rent to this area of the private rented sector, it is understandable that there are diminishing numbers of small landlords. While the government struggles with social housing, it seems all the more important for regulations to encourage landlords to feel at ease when letting out to tenants on benefits.