Since private equity firms around the world began to take a greater interest in property investment, after the 2008 US mortgage crisis, concerns have been raised. Many people flagged the potential for significant rental increases when under the control of landlords who were more money driven and focused on growing profits. It would appear that chickens are now coming home to roost with private equity firms looking to replace low rental tenants with those willing to pay a higher rent for a redeveloped property.
Plugging the gap
Investment in the UK property market has remained fairly constant even through the difficult Brexit times. Yes, we have seen some regional markets rise and fall but on the whole the UK property market has performed much better than many had expected. However, there is one issue which has been exacerbated since the 2008 US mortgage crisis brought about a worldwide economic downturn. This is the difference between low income properties which have been starved of investment and potential rental increases after redevelopment.
It would appear from recent events that private equity firms believe the gap between low rents and higher rents compared to the cost of redevelopment is now feasible. As a consequence, we are starting to see many businesses and private tenants coming under the control of private equity companies and facing higher rental charges once their tenancies come to an end.
Lawful, immoral or just business?
It is safe to say that these huge private equity companies, investing billions of dollars into property, are well aware of their legal obligations and their legal rights. Waiting until the tenant comes towards the end of their current agreement and then suggesting a redevelopment and offering them another lease, is perfectly legal. The fact that they may well encounter a significant increase in their rental payments is neither here nor there for the private equity companies.
Whether or not this is morally correct is a matter of opinion because unfortunately at the end of the day tenants and landlords both have rights. If we were to see a left-wing government voted in in the UK then this issue would probably be addressed in a different manner. However, even in the best case scenario polls suggest that Jeremy Corbyn is a million miles away from Downing Street!
In effect what we are seeing is an arbitrage situation where the difference between current rental income and potential rental income on a property is out of sync. While the redevelopment of a property would obviously require additional investment funds, the higher rental income as well as the potential for capital growth should more than offset this cost in the longer term. Unfortunately, a side-effect of this strategy would be to see more and more homes pushed out of the reach of first-time buyers.
At the end of the day private equity investors have as much right to operate in the UK property market (and worldwide) as any other type of investor. The fact that they have the funds available to take advantage of the gap between current rental rates and potential rental rates is neither here nor there. They are well aware of their legal position, their obligations and liabilities, and unfortunately due to a lack of government backed social housing we are likely to see more huge investment companies enter the UK private rental market. While the buy to let scheme introduced by the Tory government in the 19080’s was extremely successful, maybe individuals need to be a little more careful about what they wish for in the future?