Every investor wants yield today, and it’s getting harder and harder to find.
As prices have risen, residential yields are coming under pressure. And not just for property but for many other assets as well.
So is it no wonder that property investors have flooded into moving their assets to the ultra high[er]-yielding areas such as the private market and moving away from the lower Local Housing Allowance [LHA] market?
I mean why wouldn’t they? You simply note which of your properties are not getting clobbered in the current market correction.
Identify which areas outperform the general market that means the area is showing positive relative strength. This reveals the areas of the market that aren’t only “rising with the tide,” but have strength of their own, without the help of broader market trends.
Let’s look at the local housing market for example. It was one of the best-performing areas to park your asset.
Today? This has completely reversed. In other words, we are moving away from the riskiest payers in the market, especially as LHA payments have gone south, and private tenants catapulted upwards.
When readers email me asking my thoughts on renting to the LHA market I always emphasise we have taken virtually all the same steps and measures as across the best part of our 300 portfolio currently let or coming up for letting…
Not so aggressively in evictions, but more in the natural expiry of tenancies, targeting private tenants and tightening the vetting process.
What is clear is, that many landlords are taking this necessary measure; and we saw this as a snowballing issue a few years ago.
There are many extreme views in the press today about benefit tenants, and while it is not accurate to box every single benefit tenant the same (not every single mother is the same, for example), it is also totally unrealistic and shows commercial naivety from anti-commercial media and ‘enterprises’ (anti-enterprises are virtually all enterprises themselves) to suggest that Landlords are making tenants victims by ‘profiteering.’
In fact the opposite is often happening where landlords are being ‘targeted’ (taken advantage of) by certain tenants who know how to ‘work the system,’ (intentionally or through mis-management) and by governments letting go of their part of the responsibility in housing the waiting list.
If a landlord is not able to cover their costs and make a fair margin then they will never house the tenants who are the biggest risk to this. And why should they?
I predict that this will be cyclical. As the housing benefit rates reduce and protection against huge voids, huge refurb costs and legal battles diminishes, landlords with hundreds of properties will vote
with their feet (as is being proven).
They will only want to continually let to private tenants and the problem will exacerbate for benefit tenants who have no chance of finding shelter through private landlords.
Yet there is no ‘sweetener’ to the landlord with legal battles over arrears, damage, voids and refurbs.
So what’s the solution?
The solution has to be to incentivise and collaborate with private landlords (not alienate them) to help challenge the problem.
When benefits payments were proportionately higher than private market rents to compensate for the extra refurbishment costs, voids etc, landlords showed and proved that they would back the system by renting to benefit tenants.
It is drastically reversing and the problem will get bigger for government bodies if they don’t collaborate with Landlords, alternatively they have to find their own solution (build millions of houses, get them jobs, educate them on enterprise) and that will cost them billions; perhaps much more than the previous benefits system?
An investor targeting the wrong market could therefore see his yields wiped out.
So what’s an investor who needs yield today to do? I see three choices
1) Take on more risk than is reasonable to house LHA tenants
2) Buy safe stocks and let the ‘safer way’ to higher yielding private tenants
3) Find an alternative.
Currently, I’m excited about No. 2. It involves safe returns and is one of the most conservative strategies there is.
Regardless of what strategy you use, be sure you’re not taking on too much risk in order to get the yield you want.
It’s better to have a little more income today than a lot less capital tomorrow. There will always be opportunities in the market, so be sure you don’t miss out on them because you’ve lost money taking on too much risk.
