The unintended consequences of the Renters’ Rights Act – Knight

Most of the discussion has focused on what it means for tenants, how landlords will adapt and whether the reforms strike the right balance. I think the more interesting question is whether it’s changing the way investors think about risk.

The legislation has shone a spotlight on rental voids for landlords. It’s now more challenging than ever to evict a tenant who has stopped paying rent, and that creates greater exposure for investors. Once that risk becomes greater, it’s only natural that investors begin looking at different ways of managing it.

And we’re already seeing this play out in enquiry levels for certain asset classes. Unsurprisingly, the types that offer a diversified income stream are seeing increased demand.

Why diversified income becomes more attractive

This year, we’ve seen a rise in activity across a number of asset classes, most notably multi-unit blocks (MUBs) and mixed-use properties.

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Of course, a key driver for this is yield. In a market where major geopolitical events have created swap rate volatility, buy-to-let (BTL) lenders have been forced to increase rates to protect their margins. Better-yielding asset classes are, understandably, one way of offsetting higher borrowing costs.

But, in my opinion, the reasons for this demand go beyond yield. It’s also because they offer a diversified income stream, which acts as a mitigant against rental voids. And, of course, a mixed-use property also has a commercial component. The security of a potentially longer-term fully repairing and insuring lease with a commercial tenant carries weight too.

It’s interesting because these asset classes may be considered riskier than single-tenancy residential properties. It’s certainly more challenging to manage multiple tenancies, and the more occupants there are in a building, the greater the legislative and safety obligations become. But while management becomes more complex, the reduced exposure to rental voids helps offset some of that additional risk.

What this means for brokers

If that’s the direction investors take, brokers are likely to hear it first. The discussion becomes less about funding the next purchase and more about why a client is choosing one type of asset over another.

That creates an opportunity for brokers to add value beyond arranging finance. Understanding why a client is reassessing their portfolio makes it much easier to have informed conversations about different asset classes and the role they could play within a wider investment strategy.

Looking beyond the legislation

Whether people agree with the Renters’ Rights Act or not isn’t really the point. The legislation is now part of the market, and investors will respond in the way they usually do: they’ll look at where risk has increased and adjust their investment decisions accordingly.

For me, that’s the unintended consequence of the Renters’ Rights Act. Its biggest impact may be that it encourages some investors to move away from assets that rely on a single source of income. If that happens, the act won’t just have changed the relationship between landlords and tenants; it may also influence where investment flows next.