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A SWOT analysis of the Private Rented Sector

publication date: Oct 20, 2009
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SWOTManagement jargon comes and goes; it’s as subject to fashion as the height of hemlines and heels on Laboutins and Jimmy Choos. But skirts are skirts whatever the length, and shoes are shoes with high heels and no heels. Similarly, tried and tested management tools stay in use from one generation to the next. No problem can be solved without analysis or a stroke of genius, but strokes of genius are rare indeed; so SWOT – analysis under the headings of Strength, Weakness, Opportunities and Threats – remains one of the most popular disciplined approaches to the development of strategies that will ensure survival, build defences, identify weaknesses and reveal opportunities.

The Private Rented Sector (PRS) could be subject to a SWOT analysis. Social housing is obviously excluded as are properties let under service tenancies and those provided to students by universities and specialist providers. Statutory tenancies do not form part of the PRS but those properties owned by local authorities and housing associations and let on the open market – market rented properties, as those bodies describe them – are obviously part of the PRS even if their owners do not like to think so. HMOs fall into the net as do those with rents for in excess of the present limit (£25,000 per annum) imposed on Assured Shorthold Tenancies (ASTs), which form the bulk of the sector.


Strengths
Flexible
- An asset to the national economy, privately financed, attractive to Government since housing is provided without cost to the Treasury.
- Investors may choose value, location and type of investment. While there are constraints on cashing in investments through sale of properties, PRS is a medium to long term investment.
- Tenants may choose from a wide range of property. Competition between landlords controls quality and rents for the benefi t of tenants.
- Assisting mobility. Tenants can commit for period of six months, those looking for stability can fi nd longer term/ renewable tenancies.

Safe
- The sector is subject to comprehensive safety legislation and regulation unlike owner-occupied properties.
- With the exception of tenants sharing a landlord’s home, the right of a tenant to occupy a property for the duration of the tenancy agreement may not be terminated except by Court Order.
- Tenants’ deposits are protected by law, while rents due to landlords are at risk if tenants cannot or do not pay, rent protection insurance is affordable. Default by letting agents will be made good if the agent is a member of a recognised trade body such as RICS.
- The Office of Fair Trading (OFT) polices the terms and conditions of tenancy agreements to protect tenants from unfair conduct by landlords and agents. Landlords are protected from unfair clauses in agency agreements. The OFT can and does prohibit guilty agents from trading and sometimes from returning to the industry. Industry bodies have complaints and penalty procedures which are now more active in protecting landlords, tenants and the reputation of the industry than in the past.


Problems Persist

There will always be rogue landlords, rogue agencies and rogue suppliers. The best protection for members of the PRS, their tenants and landlords, is to work only with responsible landlords – accreditation schemes are increasingly common. When agencies are employed they should use only those which are members of recognised industry bodies.


Weaknesses

Self inflicted disasters
Weakness is almost always self inflicted, following too easily the fashion for residential investment, paying deposits, or casually accepting longterm mortgage obligations. If the investment clubs were so certain of future profit, why offer the expertise for a fee? Foolish investors signed on the dotted line often without viewing properties or checking on demand and rent levels in distant towns.

Unprofessional advice
Some estate agents, surveyors and valuers saw the sector as an opportunity to make money at the cost of the standing of individual firms and the professional bodies to which they belong. These bodies may have a case to answer and explanations to give about the lack of disciplinary action taken even on instances of gross breach of trust.

Lenders co-operated to their cost while the Financial Services Authority, FSA, and the Bank of England became concerned but took no action.

Regulation
The PRS should have welcomed regulation and legislation that might have raised standards of property, safety, commercial probity and tenant care for their own benefit and that of the public at large. When regulation is finally in place it may be more onerous than that which should have been supported by all members of the PRS many years ago – as soon as the Thatcher legislation was in place.

Politics
Left wing aversion to private provision of housing is too established to accept a vibrant private housing sector as a public benefit. Even the words are weasel words – social housing means subsidised housing – for anyone lucky enough to reach the top of a housing list ahead of a long line of single mothers, asylum seekers...

The cost of subsidised housing falls not on the state but on the taxpayer while competing with would-be house owners, landlords and private developers. Housing Associations (HAs) and Local Authorities should restrict their activities to providing for those in genuine need.

If a developer is forced to provide 30-50 per cent of new homes on each new site to a HA at below market price, this is not a Section 164 Agreement but a tax on each family that hopes to buy one of the other new homes for occupation or investment.

Tory policies
The Tory party has always been good at building houses. Harold Macmillan, tasked by Churchill to build 300,000 homes or leave politics, succeeded. Margaret Thatcher opened the PRS floodgates with Assured Shorthold Tenancies and the Right to Buy policy moved many subsidised tenants into home ownership.

Surprisingly the Cameron team and shadow housing minister, Grant Shapps, have not yet defined housing policy since the publication of a Green Paper – “Strong Foundations – Building Houses and Communities” in March 2009. The paper is focused on planning issues and has local decision making at the heart of policies.

The party has pledged to undertake a further review of the PRS but not until they come into power. Proposals announced during the party conference in Manchester include a drive to put the unemployed back to work or lose benefits. Housing benefit is one target, as is the bloated ‘social’ sector. Dismantling these costly quangos could be high on the agenda.

The PRS should expect no favours in the early days of a Tory rule, but the party has always used tax breaks and incentives in preference to subsidies so a few modest changes to place investment in housing on an equal footing to other investment could come. The best hope is their preference for private rather than state provision.

Institutional Investment
A few files have been dusted off and the lure of longterm assets to match longterm liabilities of pension funds, insurance companies and providers of annuities could energise the PRS – while posing a threat to smaller landlords.

The ‘social’ sector hopes to capture this investment, offering experience in large scale residential property management. They may not win, because of bloated overhead costs and their focus on housing benefit tenants and lifetime tenancies.

Organisations like the Grosvenor Estate are already offering their skills to lenders with incomplete developments on their books. Institutional investment could be a real boost to the rented sector; it will force the smaller landlord to seek the profitable niche markets that larger players will never reach.



Opportunities

Demand
All the rational estimates of housing need point to an increasing demand for new homes as family formation, including that of single families, continues to grow. ‘There is much to do other than cover the country with concrete in a continuing urban sprawl. Private investment can deal with small scale urban renewal, converting empty homes and redundant commercial space into new homes to rent more efficiently than large scale organisations. The flexibility of the PRS and strength of the sector should encourage new investment from existing landlords and small companies seeking a longterm future.

There are opportunities to work with local authorities and the subsidised sector who will soon have to outsource the rental and management of new build property that remains unsold and cutting back as subsidies are no longer provided.

The conventional small landlord with a tiny portfolio should expect to grow. Trading out of homes more suited to sale while reinvesting in replacement stock that need refurbishment makes for a fascinating personal business opportunity.



Threats

Recession
Unemployment may well reach 3-4 million before turning down in 2011. The burden of debt and increased taxes will hurt everyone – landlords, tenants, letting agents and service companies.

Unpaid rents, landlords who borrowed too much and tenants who vacate without notice will all damage the sector, bringing personal problems to landlords and tenants. There are not many landlords left alive who somehow survived the early 1930s but those landlords then provided 85 per cent of all residential homes and carried on until rent regulation drove them away in the post war years. Providing there is no rent control that forces landlords’ income below the cost of property maintenance, the PRS will survive and recover as it did in 1930, 1988 and 1991.