Source: https://www.gov.scot/Publications/2009/03/23153136/4
Timestamp: 2018-08-19 15:06:30
Document Index: 142795616

Matched Legal Cases: ['art 2', 'art 2', 'art 2', 'art 2', 'art 2', 'art 2', 'art 2', 'art 2', 'art 2', 'art 2', 'art 2']

2. Diversity in the Private Rented Sector: Landlords and Locations
2.1 The material gathered by the review shows that the PRS is primarily a localised shallow market of individual landlords, who play a crucial role in housing a wide range of people. Further details of the types of landlord can be found in the Landlords Survey ( LS:29-33). This Chapter highlights key findings from the research, demonstrating the diverse characteristics and motivations of private landlords and the significance of the diverse locations of their properties.
The diverse nature of landlords and implications for policy
The PRS has grown in recent years
2.2 The major tenure changes over the last 10 years in Scotland have been the large decrease in the percentage of people renting a local authority property and the large increase in the percentage of people who own their property outright. However another interesting change has been the modest growth in the proportion of households in the private rented sector. Chart 2.1 shows this trend more clearly; the proportion of households living in the private rented sector increased steadily between 1999 and 2007 from 5.1% to 8.2% (Scottish Household Survey).
Chart 2.1 Household Tenure in Scotland 1999-2007
2.3 In recent years, both demand and supply have been favourable to growth in the PRS. Expansion of the higher education sector, increased numbers of migrant workers, the difficulties young people face in affording to buy a home and pressure on social rented properties have all created a buoyant demand for private rented properties. On the supply side, low interest rates, a responsive financial market and a buoyant housing market with steady house price growth have all created a favourable economic climate for PRS supply ( TS:6-7).
2.4 This has occurred at a time when Scottish Government regulation of the sector has increased substantially. It has been argued in the past that regulation disproportionately impacts on landlords with small portfolios, but this has not been evident in the sector's growth rate.
Most landlords in the PRS are individuals, couples or families rather than companies
2.5 In June 2008, 107,516 landlords had applied for registration to the local authority(s) in which they let property and were recorded on the Private Landlord Registration database in Scotland. 6 The large majority of landlords were private individuals, couples or families, owning in total three quarters of all registered properties.
% of landlords
Source: Scottish Government analysis of Landlord Registration Database.
2.6 The sector has always included a large number of individuals operating as small-scale landlords, and the growth in the sector as a whole has been led by further growth in individual ownership. For example, in 1992-93 47% of landlords were individuals, while in 2008 between 84% (Landlords Survey) and 95% (Registration Data) were individuals. Reasons for this increase in individuals are set out in the Landlords Survey and relate in the main to the housing boom, including the attraction of buy-to-let mortgages, the ease of obtaining debt funding (certainly up to mid 2008), and the perceived investment returns to individuals from house price rises ( LS:27).
Most landlords own only one PRS property
2.7 Data showing the size of landlord portfolios suggests that three quarters of landlords own just one property . Indeed, 95% of landlords own five properties or less whilst less than 1% of landlords own more than 20 properties (Chart 2.2).
2.8 The Review found that only 36% of properties are owned by single-property landlords. In contrast, 1-2% of landlords own around 20% of all property. This is further illustrated in Chart 2.2 below, which shows the proportions of landlords (and properties they own), by portfolio size.
Chart 2.2 Private landlords and property ownership by portfolio size
Most landlords are operating on a part-time basis
2.9 The review found that a large majority of landlords consider themselves to be part time (92%), in that their main business or occupation is not letting residential accommodation. This is perhaps not surprising as regards individuals, but only 32% of dwellings owned by companies, partnerships and public trusts have landlords for whom letting is their main business ( LS: 30-32).
2.10 The 'cottage-industry' nature of much of the PRS does not necessarily mean that landlords are not professional in terms of their management of the properties they own. However, there are concerns that some landlords have less awareness of relevant housing law than they should and there is also often a reluctance to seek advice or training (see Chapter 5).
Many landlords are new to the sector with an acquisition strategy based on credit and buying property in locations that they know well and can visit regularly
2.11 The review found that many landlords are relatively new to letting in Scotland: two thirds of dwellings were owned by landlords who had started renting in the last decade. Only one in seven properties was owned by a landlord who had first started letting before rent deregulation in 1989 ( LS:42).
2.12 The survey evidence also suggests that the PRS is now a sector where the majority of dwellings are owned by landlords who have made a positive decision to invest in housing. The majority of properties are debt-funded: just under two thirds of the sample dwellings were acquired with a loan or mortgage, one in five with cash or other equity, one in seven was inherited or received as a gift ( LS:35). This is a change from previous years where landlords were more dependent on private equity ( LS:26).
2.13 During the focus groups 7 carried out as part of the research with landlords, participants expanded further on their acquisition strategy (see LS:31-35). These showed a mix of business and personal reasons for renting. Key points included that, while many landlords had made a positive and deliberate investment decision, others had become landlords almost by accident, for example, through inheriting a home.
2.14 The management of risk was of paramount importance. Landlords (of all types and portfolio sizes) said they needed to live near their properties to manage risk. This helped them both to manage market risk by using local knowledge to spot good value acquisitions and monitor the market, and to manage business risk by personally addressing property management issues (even when they employ managing agents). Where landlords did not live near to their properties, they tended to employ agents to act on their behalf ( LS:38-41).
2.15 The importance of local knowledge was borne out by analysis in the Landlords Survey which shows that the median distance between a landlord and the property that they let is less than 4km ( LS:41). In addition, Landlord Registration data shows that fewer than 1% of landlords have properties in three or more local authority areas.
2.16 The Landlords Survey suggests that this risk management approach may limit the capacity for growing the sector from the existing 'stock' of landlords, since there is an element of risk in expanding within a limited locality. Landlords in the focus groups noted a positive feeling about future business prospects but few had plans to grow substantially. The research concluded that any substantial growth in the stock overall in Scotland would require new entrants ( LS:84).
Business and investment motivations of landlords show the sector to be diverse and complex
2.17 The Landlords Survey also examined motivations for becoming a landlord, for example, for investment reasons ( LS:30-32). Whilst 8% of landlords are full time and business oriented, part-time landlords own the great majority of dwellings in Scotland, whether they are individuals, couples, companies, partnerships or property trusts. The Landlords Survey shows that the majority (65%) of part-time landlords also have a business or investment motive for letting. However, a further 26% of part-time landlords say they are not principally motivated by investment reasons and may, for example, be housing family members or employees. Overall, the proportion of landlords letting in Scotland for investment purposes has increased since 1992-93, with three quarters of all addresses now regarded as investment properties for rental income or capital gain - or both ( LS:86).
2.18 These investment motivations are also reflected in the evidence about the relative importance of income from lettings compared to a landlord's total (personal, company or organisational) income. For example, one in three landlords who operate part time and who are not motivated by investment reasons said that they had no income from lettings. However, interestingly, this is also true for a significant minority of landlords who operate part time but are motivated by investment reasons, with almost 3 in 10 landlords saying that they received no net income from their current letting, suggesting that return from capital growth is the primary investment motivation ( LS:36-37).
2.19 The Landlords Survey estimated that the median gross income return (or gross rental yield 8) that landlords earn on the sample addresses 9 was 4.9 percent. As Table 2.2 shows only half the sample dwellings had landlords who thought that their rents were sufficient to cover their costs and give a reasonable return. Another quarter had landlords who were not looking for a return (including those who were and were not motivated by investment) and a further quarter said that the rents were not sufficient.
Table 2.2 Gross income returns in quartile ranges by whether rents are sufficient to cover all necessary costs and give a reasonable return
Gross annual income return (percent)
Not sufficient return
Don't want return
3.9 to 4.875
4.876 to 6.0
Source: Reproduced table from LS:67
Landlords use agents to assist in managing about half of dwellings
2.20 The review found that agents were involved in the management of around 40% to 50% of dwellings ( LS:38). Individual and couple landlords are more likely to use agents (see Chart 2.3), while landlords with HMOs, business landlords, longstanding landlords and landlords with dwellings in rural areas are more likely to manage properties themselves. However, the proportion of properties managed by agents varies a great deal by local authority, possibly reflecting the differing characteristics of the PRS in urban and rural areas, with urban landlords more likely to use an agent. Landlords' (and tenants') experiences of agents' services are dealt with in Chapter 4.
Chart 2.3 Use of agents by landlord type
Source: LS:38 ( NB: Company, partnership or property trust are incorporated for-profit bodies. Institution refers to not-for-profit institutions, mainly charitable trusts, but also including churches and the private wing of housing associations).
A growing number of PRS properties come within the scope of House in Multiple Occupation ( HMO) licensing
2.21 Mandatory House in Multiple Occupation ( HMO) licensing, introduced in Scotland in 2000, requires landlords to obtain a licence for all properties containing three or more unrelated people 10. The number of licences in force has increased year on year since the introduction of the scheme, with the most recent figures showing about 10,200 HMO licences in force at 31 March 2008, 28% more than the previous year. Three quarters of the licences are in force in just four local authority areas - Aberdeen, Edinburgh, Dundee and Glasgow - reflecting the high level of shared flats in these cities, all of which have high numbers of students. There were 7,200 applications received in 2007-08, again 28% more than the year before. Nearly one in three of these was a new application, and the remainder were applications for licence renewals. It is it not known to what extent the former represent new HMOs or are the result of better enforcement by local authorities bringing more existing HMOs into the licensing system.
2.22 The rise in the number of HMO licences is encouraging and suggests that regulation of these properties has not put landlords off letting property to multiple occupants. However this is contrast to the views of landlords obtained at focus groups where "it was evident that landlords were now avoiding buying property that fell into the HMO category" ( LS:83). Issues relating to the use of HMOs by particular groups of tenants and to enforcement of licensing by local authorities are discussed later.
2.23 The nature of the majority of landlords in Scotland - individuals with small portfolios, operating part-time, and often buying with a mortgage rather than owning the properties outright - has implications for the policy approach taken to the sector. For example, it may be that many such landlords are less likely to have the time and resources to undertake training and to keep up to date on changes in housing law. Methods of consulting and engaging with landlords will need to take into account the part-time and small-scale nature of the industry. It is all the more important, therefore, that efforts are made to attract these landlords to accreditation and for local authorities to engage with them.
2.24 Similarly, the fact that there are so many properties where agents, rather than landlords, are carrying out management functions shows that it is important that agents are involved in and informed about policy developments in relation to the PRS, and that standards are adhered to. The Scottish Government already consults agents' organisations, and agents can register voluntarily with the landlord registration scheme, but it may be that more emphasis should be put on this and that ways should be found of increasing contact with agents who are not members of professional bodies. This could also include regulation. These issues are discussed further in Chapter 4.
2.25 The evidence also suggests that there may be limited capacity for growth among existing landlords, due to the small scale and localised nature of the business. Some landlords' lack of concern about the level of income return on their properties - and the fact that returns have declined in recent years - suggests that many landlords are more interested in growth in the capital value of their properties. This concentration on capital growth combined with the debt-funded nature of the sector could leave the sector exposed in the current downturn, with falling house prices and restricted access to credit. This could have implications for the size and stability of the sector. These issues are discussed further in Chapter 7.
The geographic spread of the PRS in Scotland
2.26 This Chapter has so far shown the diverse nature of landlords in Scotland. This diversity also has a geographic impact. Levels of private renting differ across Scotland, both in terms of absolute numbers and relative importance to the local housing market. Furthermore, the review has found that there is a distinct spatial element to the sector not only in terms of quantity of properties but also in the types of tenant and nature and quality of landlord practice in local markets. Rural areas are particularly distinctive.
There is an uneven distribution of PRS properties across Scotland
2.27 The size of the PRS varies markedly across local authorities in Scotland (Chart 2.4). Edinburgh has by far the highest proportion of PRS households at 17%, with the other cities and university towns also having levels at or above 10% (Dundee 13%, Aberdeen 11%, Stirling 11%, and Glasgow 10%). Some rural authorities, Moray (10%) and Dumfries and Galloway (10%), also have relatively higher proportions. However, there are a number of authorities where the PRS appears to play only a small part in the local market. The level of the PRS in fifteen authorities is 5% or less, and in eight authorities in the central belt it is 3% or less.
Chart 2.4 Household Tenure in Scotland, by local authority
2.28 As the map below shows 11, the private rented sector is highly significant in rural areas, with many census output areas 12 in rural Scotland having over one third of households living in the PRS.
2.29 The nature of the market is also different across Scotland. Chart 2.5 shows that the size of the typical portfolio is widely different in different local authorities. In Eilean Siar, at one extreme, almost 60% of properties belong to landlords owning only one property and less than 5% to landlords with more than 10. By contrast, Dundee has less than 25% belonging to single property landlords and about 40% belonging to larger landlords.
Chart 2.5 Landlord portfolio size, by local authority
Source: Landlord Registration Database
The rural PRS is different in some key characteristics from the urban PRS and may require a distinct policy response
2.30 The review sets out a number of important distinctions between the rural PRS and its urban counterpart. The rural sector can cater better to larger households, as properties are likely to have more rooms, and they are more likely to be unfurnished, which makes them suitable for established families ( TS:29). Properties may be associated with the tenants' employment (including tied housing), although some evidence suggests that this is declining ( LS:82). The sector is also less short term, with tenants remaining in their homes for many years (for example, half of tenants in rural areas said they did not expect to move again ( TS:40); rural tenants were more likely to want a longer tenancy than the six months offered by a SAT ( TS:72).
2.31 A key issue for rural PRS households is the affordability of owner-occupied housing. The review found that the main reason tenants in rural areas are renting is because they cannot afford to buy an appropriately-sized home in a suitable local area. While this is also a problem for some tenants in the urban PRS, the scale of the problem in rural areas could be seen to be greater, as households appear to be renting for longer periods. Of course, this could also reflect household choice. The Scottish Government is taking a range of actions to improve affordability, although it has recognised that, particularly in more remote communities, providing sufficient levels of such housing is a challenge. Because of this, and the relative lack of supply of social housing in some rural areas, it could be that there is limited choice to buy and the PRS becomes a key housing provider. Further, there may be a very limited choice of properties for rent, because of the remoteness of some communities and/or a local lack of supply. The review found that rural households were more likely to identify a lack of properties for rent in areas where they wanted to live and a lack of appropriately-sized properties ( TS:30).
2.32 There also appears to be an 'informality' in the rural PRS between tenant and landlord, with a higher proportion of tenants reporting that they did not have a written and signed tenancy agreement and being less likely to have paid a deposit or fee ( TS:59) for their current property when compared to those in urban areas. This 'informality' may also translate into lack of awareness of legal rights, with a slightly higher proportion of tenants in rural areas feeling they did not understand their rights and a higher proportion not understanding the legal process that landlords would have to go through to end their tenancy and/or evict them ( TS:73). Rural tenants had lower awareness of landlord accreditation and registration and were also less likely to check that their landlord was registered and less likely to feel that landlord accreditation was important ( TS:45).
2.33 As the Good Practice Resource Pack makes clear, local authorities will have to undertake an assessment of their local housing market, including the role that the PRS plays within it, in order to understand the specific nature of the sector in their area. This information is essential in order to produce the Local Housing Strategy, engage effectively with landlords and provide services for tenants. The Resource Pack suggests a range of information sources that may help councils gather data on their local private rented market.
2.34 The Scottish Government recognises the particularly important role that the PRS plays in rural areas. There are specific provisions to increase the supply of affordable housing in rural areas, including Rural Empty Property Grant, the operation of which is currently being reviewed by the Scottish Government (see Chapter 7 for a general discussion of bringing empty houses back into use).
2.35 The Scottish Government has also launched Rural Homes for Rent, a pilot scheme supported by £5 million over three years from 2008. Rural landowners and community buy-outs can apply for housing grants to help them build new affordable homes for rent on their land. The aim is to help to maintain the long-term viability of rural areas. The scheme is expected to provide 100 new affordable homes for private rent by 2011, after which its results will be assessed.
2.36 We will bear in mind the particular needs of rural tenants and landlords when considering how to improve the provision of information to the sector (see Chapter 5).