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Warning over increased rent arrears in UK property market

Soaring rents in 2011 have pushed up the number of tenants in severe arrears by 18% annually to the highest level since the third quarter of 2008 and the numbers of court orders to evict tenants are up 11% in the last year as landlords take a tougher stance.

Indeed, the number of tenants in severe financial difficulty has climbed in the last quarter of 2011, with nearly 11,400 more tenants over two months in arrears than a year ago, according to the latest Tenant Arrears Tracker by Templeton LPA, the specialist practice of LPA Receivers.
Although just 9.3% of all rent was late or unpaid in November, severe arrears cases, that is tenants with arrears of more than two months, are climbing rapidly. However, despite the increase, tenancies in severe arrears represent just 2.4% of all properties in the private rental sector in England and Wales.

‘The soaring cost of renting has created a two speed market. The overall tenant population has coped relatively well with rising rents and soaring living costs with total arrears actually down year on year in November. But a growing minority of renters are falling deeper and deeper into payment difficulties, and the number of severe arrears cases is rising,’ said Paul Jardine, director and receiver at Templeton LPA.

‘While the wider tenant mix has changed since the mortgage market downturn with a greater number of financially sound yet frustrated first time buyers, a growing number of tenants are seeing their job prospects affected by the UK’s economic malaise,’ he added.

The figures also show a rise in the number of tenants being evicted through court orders. In the last quarter, 24,966 tenants faced eviction notices, an increase of 11% on the 22,558 a year ago. But the change is not just annual. In the third quarter of 2011, there were 5.4% more than in the second quarter of 2011.

Buy to let mortgage arrears have not yet felt the impact of growing severe tenant arrears and evictions. In the last quarter, the number of buy to let mortgages more than three months in arrears fell by 7% compared to the previous quarter, representing an annual decline of 17%. However, at 26,300, there are still more than five times as many buy to let mortgages in severe arrears compared with quarter three in 2006.

‘The growing level of severe tenant arrears has yet to filter through into mortgage payment problems for landlords. Mortgage rates have kept monthly payments low, but there has also been a change in landlords’ behaviour. With capital gains falling by the wayside in the past six months, rental income has become the most important component in an investor’s annual return – but it also pays a landlord’s mortgage cheque,’ said Jardine.

‘As a result, many landlords are being less lenient with tenants facing initial payment problems, and are looking to use court orders to replace tenants quickly in expectation of finding a financially sound substitute and potentially an increased rent, given the strength of competition for rental property in many areas of the UK. However, a growing number of landlords are also exploiting higher rents to set aside slush funds for future arrears and void periods, or signing up to rental indemnity schemes,’ he explained.

‘Nevertheless, we expect that mortgage arrears will climb next year. Given the economic challenges the UK faces, and the worsening labour market, we anticipate that both overall arrears and severe arrears will rise in 2012 and this will feed into increased tenant evictions and hamper a growing number of landlords’ ability to meet their monthly mortgage costs,’ he added.