Blog: Will Scottish tenancy reform damage HMO?

HMO flatsBy Rob Trotter, associate director of DJ Alexander Property Managers

In January 2018 the new Residential Tenancy Agreement will come into effect. The main change leading to concern with landlords across Scotland is that lease agreements will now be on an indefinite tenancy instead of the original 6-month or 12-month minimum term.

The change will allow tenants to give notice to vacate their property at any time by providing 1-month notice, but the landlord is committed to honoring the initial fixed period of 6 or 12-month.

This legislative change will have the biggest impact on student (HMO) accommodation as it could lead to student properties coming available at times in the year when there is no market to secure replacement tenants.

As you would expect the student market has a specific calendar.

HMO properties are advertised well in advance to secure tenants for the next academic year.

By binding tenants to fixed term leases we have always ensured no loss of income for landlords and avoided properties coming available out-with the annual academic cycle.

Under the new legislation letting agents and landlords will not be able to ensure this anymore.

The Edinburgh student market has long been ideal for investors with a readily available source of tenants and demand outstripping supply. While this looks set to continue there is growing competition from purpose built student accommodation blocks that offer a higher spec interior, complete with en suite bedrooms, and tenancies that only run for the academic year.

It will become essential that landlords ensure their HMO property can compete with these alternative student offerings. New furnishings can make a big difference at a relatively low cost. Larger works like redecoration or upgrading kitchens and bathrooms will further increase desirability and rental values and help attract more conscientious, respectful and longer term tenants.

Another recent change that will affect landlord property investment is that HMRC have altered the landlord wear and tear allowance.

No longer will a landlord automatically have a 10% tax allowance for wear & tear. Now they must provide evidence of genuine expenditure in order to reduce their tax liability.

In summary, any improvements that can be made to the property will be tax efficient and help to secure future income in a less certain market, but the affect of the change is lease term will have to be seen for student year 2017/18.