Covid-19: how a second wave could sink many domestic landlords

Covid-19: how a second wave could sink many domestic landlords

This time last year landlords across the land were nervous. The 3% surcharge on buy-to-let properties and the phased reduction of mortgage interest tax relief had made the landlord’s life rather tricky. It used to be money for jam. But now their bread and butter faced an uncertain future.

With the good times coming to an end, investors began to sell up whilst others simply couldn’t afford the mortgage anymore. 2019 witnessed a 40% rise in repossessions from the previous year and confidence was waning. Little did they know that worse – a whole lot worse – was coming in 2020.

If there was no joy for landlords in 2019, the global pandemic ensured there would only be furrowed brows for the foreseeable future. Worrying about yields suddenly seemed passé; the new concern was collecting any rent at all.

According to the homelessness charity Shelter, over 227,000 private renters had fallen into arrears by July 2020 as Covid-19 infected the UK economy. With predictions of mass job losses and the worst recession since John Maynard Keynes was a whippersnapper, landlords began slashing rents faster than you can say “U-shaped recovery”.

Rishi to the rescue

The man in the middle of the crisis was chancellor Rishi Sunak. He protected ailing tenants by banning evictions for non-payment of rent until 23 August. Meanwhile, adjustments were made to notice periods under the Coronavirus Act 2020. But what about the landlords? Tenant eviction was never a panacea anyway. Landlords fear empty properties more than anything else.

Fortunately, Rishi had a brilliant plan up his sleeve: the national job retention scheme. It was a big hug for the whole UK economy and gave tenants, landlords, and agents the kiss of life. With the government promising to pay furloughed workers 80% of their regular monthly income (up to £2,500), the majority could pay their rent without worrying … at least for now.

Furlough: temporary relief

Furlough was wonderful. But was it just a stay of execution? Firms have already started to repay national insurance and pension contributions, and next month they’ll have to contribute 10% of furloughed staff’s wages. This will rise to 20% in September and then, at the end of October, the furlough life-support machine will be switched off. Gulp.

A rise in unemployment is therefore highly likely this autumn. Workers in hospitality and tourism are especially at risk. The consequences for the rental market could be significant, with the National Residential Landlords Association (NRLA) warning that younger tenants are particularly at risk with almost 30% under 34 years of age reliant on furlough.

Fears of a second spike

A second wave of coronavirus cases also remains a possibility in the coming months and nobody knows if this will be a mere ripple or a tsunami. Sajjad Ahmad, CEO of the British Landlords Association, has warned that a significant second spike would be “disastrous” as buyers run for cover and banks curtail lending. 

Even the fear of a Covid-19 resurgence has affected the market. Renters have been seeking larger properties with more space – especially outside space – to survive any second lockdown. Meanwhile, landlords have cut asking prices because they prefer a steady but lower monthly income than no tenant at all.

As a result, the rental market has been busy this summer. But appearances mask a broader nervousness – for example, rents are down 10% this year in central London. Even Airbnb landlords are finding less lucrative long-term lets more appealing.

Hope for the best, prepare for the worst

The next six months will require resilience from everyone in the rental sector. Struggling tenants will need to negotiate either a rent reduction or a manageable repayment plan to avoid the dreaded notice of eviction. Landlords, for their part, will need to be flexible and understanding.

Agents will play a key role too as they chase arrears and try to reduce debts from getting out of hand. Long-term tenancy models that encourage landlords to stay in the market will also be required. After all, indebted tenants and disillusioned landlords could quickly add up to zero management fees.

However, for all the dark clouds circling above residential landlords, there is one silver lining: at least they’re not commercial landlords. Those renting commercial properties must pay full business rates on vacant properties. What’s more, with more people working from home in response to Covid-19, demand for offices may never be the same again.

There’s no doubt that the next few months could be tough. But the industry will inevitably pull through with its resourcefulness and adaptability. Just don’t expect Rishi to come galloping to the rescue again. The chancellor didn’t spare the horses with his first furlough scheme but the public finances surely can’t afford a repeat.

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