Can landlords' business plans sustain stable, predictable tenancies?
By: Jon Neale and Mark Nevett, Jones Lang LaSalle Published: June 2012
Shelter commissioned Jones Lang LaSalle to look in-depth at individual landlord business plans, with a view to understand the impact of longer tenancies with indexed rent increases on the performance of landlords' investments.
- Full report (PDF 615.0 KB)
Jones Lang LaSalle investigated the business models of a number of landlords, through detailed interviews and case studies. The findings were incorporated into a model, which evaluates the overall returns to the investor over a 15-year period and the effects of different tenancy periods and methods for increasing rents.
The central conclusion is that landlords’ returns and business models are enhanced by longer tenancy terms and indexing, particularly if the Retail Price Index (RPI) is used.
The effects are relatively mild as the main driver of landlord business models has been, and is likely to continue to be, house price inflation, which is unaffected by tenancy lengths and rental indexing.
The benefits of stable and predictable tenancies mainly result from the fact that the landlords studied tend not to increase rents within tenancies, so any increase within a typical rental period of 18-24 months is a benefit above the existing model.
However, for some landlords studied, some forms of indexing enhanced return above the level they would be if they increased rents each year in line with the market rate.
Given that the length of stay in the sector is increasing, with many tenants likely to remain in accommodation for longer, such tenancies would offer landlords a way of enhancing returns within a framework that allows tenants to anticipate maximum increases, preventing undue stress on the relationship.