Flaws resurface in residential sector

Copyright: David Lawson Published Property Week June 2008

Within living memory, residential management was the bedrock of the property industry. Landlords owned homes rather than office blocks and agents knocked on doors for weekly rents.  Housing shrivelled to near insignificance when big investors switched to commercial but history is repeating itself since a handful of funds and hoards of buy to let newcomers piled into this born-again asset class. Unfortunately, deep flaws are also resurfacing. Most traditional landlords were driven out by harsh rent controls, the burden of coping with thousands of small tenants and dreadful standards of management. Assured shortholds rectified the first problem: the others still cast a long shadow.

   Roger Southam was gobsmacked when he took his management company Chainbow into residential during the recent boom. He was no novice, with more than 15 years experience of commercial property, but that made the picture even more horrific.  In an angry contribution to Property Week’s ‘clean up agency’ campaign last year he said residential management was ‘beyond a joke’, accusing the industry of revelling in good times while ‘rogues keep lining their pockets’.

    As bad times emerge the call for wholesale reform has not abated.  Southam is quick to exclude a significant part of the industry from criticism. Landlords such as Dorrington and Grainger and agents like ARIM shine a bright light among the shadows. Yet he accuses a string of big names and a network of small operators still dragging down the industry.  Scams include developers leaving residents with expensive, and illegal, long-term contracts for equipment such as lifts. Freeholders profit from excess insurance commission and agents take inflated income from service charges.

    Ministers have reacted by commissioning a review of the rented sector, raising fears that tough laws could return, emasculating attempts by the British Property Federation to attract back institutional investors.  Southam is not against controls. In fact he believes they are the only hope for cleaning up the sector. But he is calling for compulsory regulation of managers rather than risking deflecting institutions, whose high standards would help drive out rogues.

    Other silver linings brighten among these dense clouds. Many small landlords are flexing their muscles by sacking lazy and incompetent agents.  Big names with equivalent reputations are also coming into the market. Knight Frank has ridden in on the coat tails of wealthy investors to take on management of up-market homes in central London. This trend could be diluted by a rush of inexperienced agents, however. Vebra, one of the largest suppliers of agency software, has already seen many clients trying out  lettings but reports a surge of demand over the last few weeks for full management technology to replace collapsing sales income. 

    It will not be an easy ride. Joy McSmythurs, a Knight Frank property asset management partner, says up-market occupiers demand the same kind of high quality service they get from the glossy offices in which they work.  The flash point is more likely to be lower down the scale. An influx of inexperienced managers should not be critical when Vebra has software which automates administration, releasing time to deal with the day-to-day moans of tenants and landlords.  But that relies on having people skills. A generation of skilled managers was wiped out during the years when renting was brought to its knees, says Trevor Moross, managing director of Dorrington.

  And that assumes new landlords employ managers. Problems have already emerged where investors took on homes they rarely, if ever, visit. Some blocks specifically marketed to investors are showing signs of decline similar to those which turned local authority towers into disaster zones.

  Much of the pressure on politicians to re-assert control comes from complaints by owner-occupiers swamped by neglected neighbouring investment property. The problem will get worse as interest rates rise and small landlords lay off managers to save money or abandon homes to squatters and vandals.   The BPF has urged a different approach, including tax and planning incentives to bring back institutional investors who employ efficient managers. Even if ministers are willing to act, however, it could take years to implement – and the same time for investors to change direction. Tough regulation of managers may be the only realistic solution.

First Base is breaking conventional rules for residential development. It is mixing uses and tenures, employing innovative construction techniques and putting good design at the heart of its schemes.  The firm is also taking a new look at the management of new housing.  Instead of selling the freehold and moving on like a conventional builder, First Base is retaining control of projects such as Adelaide Wharf in London’s Shoreditch by remaining as head landlord. The intention is to prevent problems arising from dominance by absentee buy-to-let investors, who can blight developments through neglect.  Day-to-day control of affordable property will be farmed out to housing associations, while other flats will be let on the open market. But all will come under overall control of First Base so it can set and maintain management standards.