Private Sector Leasing: A Beginner's Guide

What is Private Sector Leasing?

Private Sector Leasing (PSL) is a way for councils and housing associations to increase their pool of housing stock by taking on private rental properties.

Why? Quite simply there is a massive need for social housing, and, with the credit crunch resulting in fewer new homes being built, the housing waiting lists are set to lengthen.

PSL housing fulfils a slightly different role to the council-owned stock, as it is used for people in critical need who have presented themselves to the council as homeless.

So far there are about 40,000 homes in London alone under PSL schemes, and the number is growing fast.

Scottish Scheme Success

But London is not the only Capital in need of emergency housing. Edinburgh council receives some 5,000 homeless presentations a year.

So, a few years ago, the decision was made to launch a large-scale drive to encourage private landlords to offer their properties to a new PSL scheme.

The scheme, which is now approaching its third anniversary, is run by managing agents Orchard & Shipman, and it has been a great success.

Andrew Morrison, Director of Policy & Business Development at Orchard & Shipman, says, "It works particularly well in Edinburgh because there is a large private rented sector here anyway. Within the first year we had 602 properties, now we have 1,386."
 
While the landlords involved are a mixed bunch, from large investors to people who have been left a single property in a will, about half the homes offered have been bought specifically for the scheme.

As well as receiving a reasonable rent, a lot of landlords like the scheme because of the ethical aspect of offering a home to people in need.

Morrison is keen to dispel any worries potential landlords may have about the type of tenants who will be living in their properties. "The tenants we get are people who the council feels will be able to maintain the tenancy," says Morrison. "They don’t deliberately set up people to fail, and most people don’t cause any problems."

Currently landlords in Edinburgh are signing up for a minimum three-year contract at a rate typically 10-15 per cent below market value, while landlords who commit to a five-year term receive guaranteed retail-price-index linked rises.

"It’s a great deal," says Morrison, who is now involved in a second wave taking on hundreds of new properties in East and Midlothian. "It’s hassle-free letting."

PSL: the advantages for the landlord

1. A guaranteed rental income:

With a PSL voids are much lkess likely. Rent, sometimes paid three months in advance, is guaranteed to be paid monthly, whether or not there’s anyone in the property.

2. No agency fees:

However, this saving is negated by the fact that the rent you receive will be lower than the open market value.

3. (Almost) no maintenance:

You hand the property over empty (which also saves money in furnishings), and any routine maintenance or damage will be taken care of by the council, housing association, or management company. However, the fabric of the building remains your responsibility (see below).

4. Vacant possession at the end of the tenancy:

If the tenants refuse to leave, the council, or whoever is managing the property, will take legal action to remove them, but meanwhile you will continue to receive your rent.

5. Ethical benefits:

Many people view property rented out through a PSL as an ethical investment because they are providing housing to people in dire need.

6. Help with renovations:

Some councils will offer finance (loans and grants) to help owners of empty properties to bring them back into habitable use, so that they can be rented out under the scheme.

PSL: the drawbacks

1. The commitment:

The length of contracts will vary, with three to five years being an average, but generally the commitment will be a minimum of a year and a maximum of 25 years. Extricating yourself before the end of the contract can be tricky.

2. Lower rents:

The rental income you can expect is likely to be 10-15 per cent lower than the value on the open market. However, once you have taken your other expenses into account, as well as the lack of hassle and worry about voids, you may decide it’s still a reasonable deal.

3. Your tenants:

You have no control over who lives in your property. If you’re used to carefully choosing your own tenants you may find this difficult - there is a perception that people in housing need may be more likely to indulge in anti-social behaviour that will upset the neighbours.

However, according to figures from Orchard & Shipman, who manage PSLs throughout London and Scotland, 87 per cent of tenancies pass without complaints and less than two per cent of tenancies fail.

4. Maintenance:

Although all contracts will vary slightly, you will probably still be responsible for maintaining the fabric and structure of the property, including the heating system.

5. Finance:

Buy-to-let mortgages are harder to come by at the moment, and companies may be wary of the long contractual terms involved in PSLs compared with a private tenancy.

But, according to London and Country Independent Mortgage Brokers , deals are still out there, from lenders including Mortgage Express and UCB.

6. Insurance:

Premiums are likely to be higher, partly because your property may be more likely to have longer voids. As usual, policies will be out there, but you may need to search.

How can I do it?

First of all, contact your local authority or housing association. They, or the managing company, will be able to tell you what type of properties in which locations they are looking for.

Most commonly this will be homes with one- or two-bedrooms, (not studio flats) but larger properties for families are also sought-after.

In terms of location, they are likely to need properties in urban situations, rather than rural retreats, as people in need will often want to be close to friends, family and schools.

Secondly, make sure your property is up to scratch.  As a minimum, it will need to be clean and safe, with an up-to-date gas safety certificate and electrical checks.

You may also need to fit new door and window locks, smoke alarms and fire doors. Always check exactly what is required before undertaking the works.

Lewisham Landlord

Experienced landlord David Lawrenson, who runs the property training and education company Letting Focus has just completed a successful four-year contract as a landlord through a PSL in Lewisham.

David says, "In a nutshell, it gave me a guaranteed rent with no voids sent straight to my bank account every month."

Although during the four years he was aware that there had been an issue with one of the tenants, the problem was resolved by the housing association and David received no complaints from the neighbours.

On the downside, David was surprised by the level of the redecoration required at the end of the tenancy because the occupant had smoked so heavily.

"I’m very careful with my selection of tenants and I’ve never seen a requirement for redecoration that intense after four years. But maybe I’ve been lucky. It’s that element of control that you don’t have with PSL."

However, it was the finance that stopped him from renewing the contract with the housing association; when David handed over his property he was given a rent about 10 per cent below the market rate, which he was happy with. 

However, when he was offered the same rent four years later, making it by now about 20 per cent below what he knew he could get on an open market, David decided to let the property himself.

But, if you can secure a good rent, David believes that the scheme is worth considering. "You’ve got to be comfortable having no control," he says. "But as long as you’ve got a one- or two-bed flat that’s self-contained in the right area it can be a good idea."

Nikki Sheehan