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UK private rented sector sees tenant arrears fall significantly

In the fourth quarter of the year there were 16,000 fewer tenants in severe arrears of more than two months compared with the previous quarter, meaning that the number in this situation has fallen for the first time in over a year.

However, the improvement has yet to filter through to evictions, with court orders up 5.5% in the third quarter of the year, the latest tracker report by Templeton LPA, part of LSL Property Services.

The arrears improvement contrasts with the trend in the preceding four quarters, where severe arrears rose by an average 10.8% per quarter. They are now at their lowest level since the end of 2011. The fall leaves the level of severe arrears cases 9.2% lower than the average for the previous four quarters.

The quarterly drop slowed annual growth in the number of tenants in severe arrears to just 0.3%.  Such tenants now represent 2.2% of tenancies in England and Wales, down from 2.5% in the previous quarter.

There was also a wider improvement in tenant finance. According to LSL’s latest buy to let index, overall tenant arrears fell in November, with 7.4% of all rent late or unpaid. This compares with 8.1% in the previous month.

‘Tenants’ finances have suffered a gruelling combination of rising living costs and rental inflation throughout much of 2012. With many budgets balanced on a knife edge, a slight reprieve from rapid rent rises towards the end of the year has been very significant. But the recent strength of the labour market has played the biggest role in halting the upwards climb in the number of tenants in severe financial difficulty,’ said Paul Jardine, director and receiver at Templeton LPA.

‘Unemployment has fallen dramatically to 7.8%, and with 44,000 more full time jobs in the three months to November, fewer households have faced seeing their monthly income halted and their ability to meet the monthly rent cheque hampered. If the UK’s economy can avoid falling into a triple dip recession in 2013, a further improvement in employment levels will go some way towards preventing arrears cases from rocketing up,’ he explained.

However, those facing eviction through court order are yet to feel the impact of a better financial situation for tenants. In the third quarter, 25,756 tenants faced eviction notices, a quarterly rise of 5.5%. On an annual basis this puts evictions marginally up, increasing 0.25% from a year ago.

Improvements in tenant arrears also haven’t yet filtered through into landlord’s mortgage arrears. The number of buy to let mortgages over three months in arrears rose by 0.9% to 21,900 by the end of the third quarter of 2012, compared with a fall in the previous quarter of 9%. Despite this small step backwards in the third quarter of 2012, on an annual basis, buy to let mortgages more than three months in arrears fell by 15.8%.

‘Improvements in tenants’ finances come on the back of surprisingly strong unemployment figures. But after a year of increasing severe arrears, landlords are more aware of their legal protection than ever, and a more proactive approach to tackling arrears has helped rein in severe tenant arrears,’ Jardine pointed out.

‘However, the Funding for Lending scheme is bringing historically low mortgage rates down further, and this should continue into 2013, which will leave landlords increasing room for manoeuvre when cash flow problems do emerge. In turn, this is likely to place downwards pressure on buy to let arrears over the medium-term, in the absence of a major downturn in the labour market,’ he added.
 
David Brown, commercial director of LSL Property Services, said that more investment in the private rented sector is needed. ‘Thankfully strong tenant demand and yields are tempting more people to invest in the sector and existing landlords to expand their portfolios,’ he said.

‘But investors should place financial suitability of any prospective tenant high up their agenda when letting a property. Cutting corners at the point of vetting a tenant is a false economy, and can prove costly. It is far easier to take action to prevent arrears in the first place, than to resolve them after they have occurred,’ he added.

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