I have come to realise that laws are actually key to property investing and that the strict, bureaucratic legal process of buying property in the UK can lead to increased security for investors and rising house prices over the long term (arguably the prices rising is not always a good thing). One reason I put this down to, is a classic theory we cover in A-level Business Studies called Porter’s 5 forces, along with some Economic AS- level theory on Taxes.
If we start with Porter (below), he said that an industry’s ability to be profitable depended on how competitive it was, all businesses are essentially competing for one another’s profit. This competitiveness depends on how easy it is for new businesses (investors) to join the market. In my opinion, the legal process is a deterrent for many people investing in property; it does of course make the buying process slow and the selling process slow, deterring many people from property investing due to it being so illiquid. This reduction in competition can mean that there are fewer property investors (landlords) in the market. This of course comes back to the basic idea of supply and demand; this is likely to mean that demand exceeds supply, leading to a rise in price. So in a roundabout way, such laws actually aid property investors and help it become a strong investment vehicle for the long term.
Still looking at Porter’s 5 forces, the bargaining power of suppliers (of property) will determine the level of competition in the market. The supply of property largely comes down to the ability to build new homes. This process is not only slow due to the nature of building a property, but even slower due to the planning application process that we have in the UK. I have been involved in a number of planning applications, fighting them as well as applying for them. It would be fair to say that planning laws have worked for me and against me. Going back to the Porter’s five forces – planning prevents the supply of houses coming to the market. The process is a long drawn out one involving several parties (The highways agency, Parish Councils, local councils and environmental agencies to name a few). It does, however, help protect the value of your asset, it can for instance help prevent someone building a factory outside your front window. It can also work the other way, if you get planning, then the value of your (now) building plot will be significantly higher as it can be challenging to get the planning permission in the first place, thus reducing the supply. If fewer people get the planning position then there is a restriction in supply, due to the significantly higher demand for housing this is likely to lead to a higher value for your plot of land.
Security of assets
One reason property investment is so popular in the UK, for UK residents and overseas investors, is the confidence in the UK legal system and the process you need to go through in order to legally own a property. Although the process is laborious, it covers every aspect of property investing, from land searches, leasehold checks, environmental searches, land registry checks and surveys to name a few. Of course all these processes are carried out by professionals in the property field which adds to the cost. However, using such methods can secure your investment and asset, and this is essentially what makes property such a great store of value, you can be confident it is your property and that you have officially bought it from the vendor.
Laws to protect the tenant (customer)
As landlords, there are a number of laws in place to protect us as well as the tenants. A number of them I am in favour of, not least because it improves the quality of our rental properties reducing the risks to ourselves (often financial) and to the tenants (financial and safety).
The minimum requirement of an ‘E’ EPC (Energy performance certificate) rating is one that I feel is within both the tenant and landlord’s interest. When searching for a property I have found EPC rating certificates can tell you a lot about a property, for instance areas that need to improve (boilers and cavity insulation are classics) and the total floor area. All these aspects can act as a red flag to the condition of the property and whether or not it meets your investment criteria. From a tenants perspective, a higher EPC rating will provide a more energy efficient house which is likely to reduce their bills and improve their health, from my experience these are both things that can encourage a tenant to stay for the long term.
Evictions/ notice periods
Notice periods from my experience have often been to give 1 months notice before leaving and landlords 2 months notice (3 months in the current climate- 30/3/20). Although this can be a hindrance to landlords wanting to evict tenants for various reasons, I appreciate that this law does favour the tenant as it does protect their home for at least a 2 month period, giving them time to make other arrangements. Although I have not had a charmed life when it comes to tenants, I generally find that the tenant and landlord want the same thing, long secure tenancies and this helps meet both parties objectives.
Licencing laws are something I have come across since investing in Liverpool and Nottingham. It would be hard to deny both were a long drawn out process that involved checks and paperwork to be submitted, Nottingham for instance cost me close to £800 for a five year licence. In principle, I can see the benefit of the licences, they ensure the quality of the rental stock for all tenants. This not only keeps landlords inline with current legislation but should also improve areas and make them more desirable which can only be a good thing for property prices. Inside Liverpool have been big advocates of the licencing system and their youtube video on the topic is well worth watching.
I have a couple of reservations with licencing, one of which is the cost, Nottingham for instance seemed an excessive cost, I could justify a lower cost as there is undoubtedly a cost incurred by the council but £800 seems excessive particularly when the checking of properties seems minimal/ non- existent. I would also question whether the rogue landlords that the licencing scheme is set up to catch even go through the process of applying. The system seems so stretched that there are very few enforcement officers that are able to check on the thousands of unlicenced properties. As often seems to be the case with such schemes, the compliant landlords who follow legislation get a licence, the non compliant landlords don’t conform to legislation anyway, so a licensing scheme is no different.
Article: Liverpool licencing scheme scrapped
My final thoughts:
From an investment point of view, laws can have their benefits. Looking at the wider context of property, they could actually be causing more harm than good. Less supply of housing stock leads to higher rents and higher property prices; laws mean the cost of buying in the first place increases, preventing many from becoming property owners at all. As ever, it is hard to get a balance between the two and a reason why I can understand the punitive laws against investors (increased stamp duty, capital gains tax and mortgage interest relief). This all comes down to the economics debate of who pays the tax burden (some AS Economics there) and this really comes down to your area of investment. To broadly speak, areas of high demand are less likely to be sensitive to an increase in price (inelastic) that would result from taxes and laws being implemented, this would mean that the tenant/ customer is likely to carry the burden of the tax. In areas of lower demand, the customer base is unlikely to be as responsive to a change in price, making it hard for the landlord (businesses) to be able to pass on the tax to customers by charging them higher prices. Putting my investment hat on, as investors, you should be ensuring that you are buying in areas of high demand where tenants (customers) are less responsive to changes in price and are willing to pay a higher price. As always it comes down to buying in areas with strong fundamentals such as; a high number of employers, good transport links and good schools.
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