Regulated tenancies: a rare and endangered species

COMMENT: Those browsing the Allsop residential catalogue will have seen the wide range of properties that we take to the auction room. In every catalogue we also offer a number of properties subject to regulated tenancies. These types of tenancies are, over time, becoming increasingly uncommon, but remain highly sought-after by a specialist pool of investors. Regulated tenancies date back to the Rent Act 1977. This act applies to all residential tenancies created before 15 January 1989. Any new lettings after this date are governed by the Housing Act 1988 (as amended) and are usually Assured or Assured Shorthold Tenancies (ASTs). Importantly, regulated tenancies give the tenant the right and security to remain in their property for life. They usually pay a “fair rent” set by a rent officer at the Valuation Office Agency. This is usually lower than a market rent for the equivalent property and can only be increased every two years through application to the rent officer by the landlord. It is the landlord’s responsibility to maintain the structure and exterior of the property, as well as to keep any gas, electricity, heating, water and sanitation equipment in good repair. The internal condition of the dwelling is largely the responsibility of the tenant. Regulated tenancies are an attractive prospect for some investors, as they are usually purchased at a discount to the underlying vacant possession value, due to the restrictions on rental increases and the lifetime security of the tenant. While this does not suit all investors, those who are not typically yield-driven but are focused on long-term capital growth, invest for the “windfall” gain when possession is relinquished. After the end of a regulated tenancy the property can be sold by the investor who recovers the discount that was applied at the time of purchase and, all being well, any capital value growth since the time of purchase. On the death of a regulated tenant, the tenancy can pass to a successor. A spouse, civil partner or cohabitee is entitled to inherit the tenancy – but only if they were living with the tenant before their death. The tenancy will remain a regulated tenancy in these circumstances (as long as there had been no earlier succession). Any other member of the original tenant’s family has a right to succession but only if it can be shown that they were living with the tenant for at least two years prior to death. In this case, the tenancy becomes an assured tenancy. Only one person is entitled to a succession and a spouse, civil partner or cohabitee will take priority over other family members. Other than in very specific circumstances, there can only ever be one succession. There is some risk for the investor that the expectation of selling the vacant property could be deferred if there is a succession. In this event the rent payable by the new tenant converts to a market rent. From a valuation perspective, there are a number of implications when considering regulated tenancies and a process to ensure that a suitable discount to vacant value is applied to attract a good level of interest from investors. At auction, lots subject to regulated tenancies are selling typically between about 75% and 85% of their vacant value. This demonstrates a healthy and attractive discount for investors, but while applying a discount to a property is a seemingly straightforward process, a one-size-fits-all approach is not always suitable. One of the main drivers to determine a suitable discount is the timescale estimated before vacant possession of the property may be achieved. The valuer may have information from the landlord about the age of the tenant(s) and whether there is a possibility of succession. If so, the valuer will adjust the discount up or down for older or younger tenants. However, new data protection rules may mean that age information isn’t available (or alternatively cannot legally be sought) in which case an “average” discount is more appropriate. It is also interesting to note that we are seeing a growing trend of much narrower discounts to vacant value where quite low value dwellings in the North of England have a fair rent that still delivers a highly attractive yield. We have seen regulated tenancies trade at more than 90% of vacant value – even at 100% of vacant value – where the resultant rental yield can be 7% gross or upwards. In total, 61 regulated investments have been sold at auction by Allsop over the past 12 months at an average yield of 3.63%. There are fewer than 75,000 regulated tenancies left in the UK and all have an ageing tenant pool. Their rarity value, together with improving rental levels, is likely to see discounts to vacant possession narrow further in the coming years. They remain highly sought-after, not just in the auction room, but also in small portfolios by private treaty. Becky Swinburn is a surveyor at Allsop.