What impact will the new rules on private tenancies in Scotland have on lender appetite for the PRS sector?
1 December 2017 finally saw the introduction in Scotland of the new private residential tenancy (PRT) following the long-awaited coming into force of the Private Housing (Tenancies) (Scotland) Act 2016. There has been lots of debate over the merits of the new legislation from the perspective of landlords and tenants, but what will be the impact on lenders. Will they still have appetite for the buy to rent and PRS sector as it relates to assets in Scotland?
The new form of tenancy has been hailed as creating a fundamental overhaul of the previous regime but in practice how acceptable are the changes likely to prove from the perspective of lenders?
Among the changes introduced, PRTs will no longer be subject to termination solely on account of the contractual period of the let coming to an end. Instead they will roll on unless and until either the tenant decides to leave or one of the 18 grounds for eviction are met. I would suggest that from a lender’s perspective the conversion to what is effectively a periodic form of tenancy should not be unduly problematic subject to the rent stream from the property being maintained.
On rent there are two significant changes. The first is a restriction against rent increases more than once in a 12 month period. The second is the ability of local authorities to apply to the Scottish Ministers for orders for the creation of rent pressure zones in which increases are capped for a maximum of 5 years at CPI + 1%. For the avoidance of doubt, there is no ability to reduce rents from what has been contractually agreed. Again, I would suggest that lenders should be capable of modelling in appropriate assumptions in terms of rental growth and impact on yield.
The rules on early termination and eviction have also been updated. There are split grounds, some mandatory and some discretionary. The mandatory grounds critically include where the landlord intends to sell the relevant property and where the tenant is in rent arrears, with a requirement for arrears of three or more months, and total arrears greater than one month’s rent. The discretionary grounds (in relation to which the First –tier Tribunal is only to grant an eviction order if it considers it reasonable in the circumstances) include breach of the tenancy agreement and anti-social behaviour. It is correct that the pendulum has swung in favour of the tenant but I would suggest not unnecessarily strongly from a lender’s perspective.
Potentially of greater concern to lenders might be concerns over the practical application of the new rules and impact on the ability of their borrower’s to manage their portfolios. For example, the timescale to secure an eviction if opposed could potentially be quite substantial dependent on the efficiency of operation of the new regime by the First-tier Tribunal. This is something which will need to be monitored but should be manageable.
Overall, whilst there are substantial changes with a re-balancing in favour of tenants, I would propose that, particularly given protection of rental income, the new regime does not introduce any fundamental reasons to dissuade lenders from financing BtR and PRS portfolios in Scotland.
On December 5, 2017