The Private Residential Tenancy And The Private Rented Sector Post COVID-19

Pre-COVID I commuted daily on the Glasgow to Edinburgh train line.  I was intimately acquainted with spending an hour squished between a train door and strangers, sharing air of all things with hundreds of other humans.  I didn’t see a day coming where I’d do a mental risk assessment before leaving the house.

While some changes in life take you completely by surprise, others, for better or worse, don’t.  Changes in the shape of the property market since the introduction of the Private Residential Tenancy (PRT) in December 2017 are one such event and COVID has occasioned it to grow further.

Initial Thoughts on a New Tenancy Regime

I was never an opponent to tenancy reform.  Short Assured Tenancies (SAT) were unnecessarily complicated and both seasoned agents and landlords got the paperwork wrong with frightening frequency.  Responsible landlords working with accredited agents rarely decide to arbitrarily evict good tenants, so I didn’t see cause to mourn the loss of the Section 33, that so-coined ‘no fault ground’. Especially when the First Tier Tribunal removed the costs involved in representation to defend discretionary grounds.

Some things are certainly better under the new tenancy regime; digital signing of leases, grounds for dealing with abandonment, to name a few.

Unfortunately, as an agent, it was easy to see the cracks in the legislation.  The savings provisions were messy and there was conflicting legal advice around the extension of the ongoing SATs. Tenants also lost the security offered by the initial six-month minimum term, and HMO landlords were no longer assured of being able to keep a property let within an academic cycle.

The concept of a Rent Pressure Zone was introduced too but not the mechanism by which councils could collate the data necessary to enact one.

The Evolution of the PRT Through COVID-19

COVID-19 created a desperate need for the Scottish Government to keep people housed and so some of these flaws have been not so much patched up, but cemented over by the Coronavirus Act.  The SNP-Green cooperative agreement will likely result in some of the more heavy-handed changes (such as rent arrears pre-action requirements and removal of mandatory grounds for possession) being pushed forward into permanence.

However, instead of taking a step back and making an assessment of the pros and cons of the new tenancy regime and smoothing over the cracks, it appears a sledge-hammer may be implemented in order to better fit the adapting political landscape. We can only watch this space.

Rant over.  Back to the PRT. As an agent I feel there are two key challenges with the current PRT.

Firstly, it doesn’t allow an adequate vehicle for dissolution of the tenancy in the event of conflict between the ‘joint and severally liable’ parties and secondly, it is far from ideal for student HMO tenancies.  I would need more time than our marketing manager will allow me here to discuss the first issue, but the second will be of interest to a large number of landlords.

From its inception in 2017, the PRT has interrupted the standard process of leasing of HMO properties desirable to students.  Where leases would previously come to an end in either mid to late summer, and two months’ notice was required to be provided by tenants, agents would market properties in March, prior to exam periods.  Now that tenants only need to give 28 days’ notice, the listing of properties is much more sporadic.  Students are finding they have to actively pursue properties (in a very competitive arena) throughout the exam block and then onward into the summer in some cases.

While tenants have the flexibility to leave properties earlier than they may have previously, our recent research tells us that a high percentage are also feeling they have to take a property much earlier than they might like or need, to be assured of securing their next home.  What benefits they see in their final year are mitigated by this increased financial commitment in their second

This year a high volume of applicants told us they were ‘holding off’ securing a property until later in the summer due to the limitation on social and work opportunities in the city.  Unfortunately, by early August, nearly all available HMO properties were re-let and there was no sudden ‘late supply’ to fulfil this demand, leaving tenant groups to split up and compete with professionals for 1 and 2 bedroom properties.

The resultant shortage of all stock in the city has caused a sharp rent hike likely to last till the inevitable seasonal dip at Christmas.   Students who have been renting since pre-COVID know that the supply in Edinburgh does not meet demand, but the more recent first and second years are only just finding this out, supply having been temporarily superfluous in 2020 due to the year of lockdown learning.

For an HMO landlord prior to COVID, the biggest concern was tenants experiencing a change of circumstance and leaving mid-term at a point where there would be a limited number of applicants for this style of property.  When the pandemic hit in March 2020, this fear was realised by circa 80% of clients with student occupied property.  Some properties saw their first extended void in 20 years or more, but not all.

Recently renovated properties, with modern fixtures, appliances and furnishings, in city centre locations have not seen anywhere near the same void cost through the last eighteen months.  These properties were also able to be marketed to professionals too and indeed initially, many were occupied by groups of medical professionals opting to live separately from vulnerable family members during the height of the pandemic.  Many of those same properties were re-tenanted this summer within two weeks of previous tenants exiting.

Quality has been king throughout COVID.  When I first encountered HMOs in the early 2000’s many had battered varnish-bare floorboards, blue tac stains on every wall, a mish-mash of antique furniture and questionable fire safety.  Oh, and the rent was £200 per room (this monthly payment was equivalent to 5.3% of the annual student loan).

Jump forward twenty years and rents are over £600 per room in some parts of the city (10.4% of annual student loan).  Understandably then, neither the students, nor their contributing guarantors are prepared to pay for sub-standard finishes, furnishings and fittings.  Cullen Property has just invested in market research to identify what exactly students want from their rental accommodation and what features they are willing to pay for to keep properties on through the summer. Unsurprisingly, the better-quality properties are expected to be the ones being held by tenants over summer and into the next academic year, unless they’re graduating or changing group.

So, while the combination of COVID and the PRT possibly has some HMO landlords feeling that their yield has dropped at a time of increasing compliance spend and rising cash investment requirements to enter the market, now may be the most important time to be looking to re-invest in properties to ward off future void periods and protect or grow yields.

COVID restrictions have been lifted for non-essential property management activity and so here at Cullen, we are embarking on undertaking asset management style reports for all our landlords over the upcoming months.

It is hard to imagine a bigger upheaval to the rental market than COVID. However, even if there is, or at a lesser level a potential wholesale restructure the PRT, quality will always win and certainly help any property to better survive the foibles of any such future events.

Dawn Pianosi

Head of Property Management

Cullen Property Ltd