Rent Reviews and Energy Crisis 2022
Just as we are exiting global shutdown with covid slowly fading into irrelevance within Western Europe, as population resistance to the virus has built up, we are facing a new global crisis of high inflation (RPI) and a sudden significant pressure on the wholesale prices of energy (gas and electricity are both affected). The situation in Ukraine has net yet had as chance to play out its impact on the energy market but you can definitely already see it in the stock market as dipped but then rallied. Oil prices are at a seven year high impacting what everyone pays for fuel at the pump – all the services to our homes are delivered by petrol/diesel based vehicles (at least for the last mile).
Hard times lay ahead, perhaps harder for some of us than we experienced during covid – particularly true for those who did not lose their jobs nor took a pay cut. The pandemic brought a of extra expenses but also gave us all a respite from the pressures of spending and going out. It is paramount that we remember, this will pass – tough times are unpleasant but we will go through it and we will come out victorious on the other side. The resilience of the United Kingdom has been proven beyond doubt as we keep calm and carry on; whether it be the pandemic or Brexit, or another economic pressure; we will push on and survive.
Energy Rates
The timing is however unfortunate. Our fixed price energy contract (typically fixed for 1-2 years at a time) has now come to an end and we are going to see our energy prices rise from 3.2p/kwh to 7.0p/kwh for gas and from 14.99kwh to 28.00kwh for electricity. Yes more than a 100% increase in gas unit rate and just under a 100% increase for electricity. These unit rates are capped until the 30th of September, at which time they may go up more. You can read about the price cap here:
In short our total energy expense was £9,954.60 across 47 properties, but we now expect this to land at £20,520.2 based on the same usage but with the new unit rates and standing charges.
- Note: The energy price cap is only set until September, so it may increase in September again.
Energy Usage
Since the pandemic started (including this winter, to get through it) energy usage (amount of units used per) of the houses was managed a bit more flexibly as we know people were working from home. It also helped that we, at the time, secure a really amazing rate for the gas (which is the larger cost as it is used to heat the homes). Our figures of where the energy costs are going to be are based on regulating the usage of the units for the next summer to fall in line with our average levels – so we cannot blunt the cost of the increases by reducing the energy usage as we are already using slightly (maybe 10%) more than the budget and have to reduce the usage a little bit already. The level of the heating set in the houses during winter can make a big difference on the bill, but split out per person it’s simply not worth it to aim for using so little energy that the house is uncomfortably cold.
In short, the figure of £9,954.60 and £20,520.20 is based on the budget allocated amount of units per house which we are already exceeding by around 10% per month. There is a baked in assumption here that we will be able to reduce the usage somewhat, if not by the full 10%. It also depends very much on how hard the next winter is, the coldness of the winters can fluctuate and that can impact the usage.
Other Costs
We have also seen other costs in the business, one obvious one is petrol & diesel at the pump. Another one is raw materials which is specifically used by the repairs team. Fortunately we are not impact that much by the cost of furniture, TVs, or appliances going up as the properties are already furnished.
Our external contractors have increased their rates (gas engineers, electricians, and contract cleaners) but our employed staff on PAYE (including the two cleaners) have not have a pay increase since 2019. The pandemic struck before their PAYE review and as a matter of fact all of the staff are currently still on a reduced wage. Although the reduction is marginal the reality is their bills (the cost of their rent, and the cost of their energy) will also increase, so that company will have significant pressure to give an RPI based increase there.
The cost of supplying the monthly cleaning materials has increased and one large expense of doing that service is actually the significant cost of the fuel for Robert to drive the van all over London and do all the deliveries – not to mention it takes up a full three working days of his time each month. At this stage we are not cutting that service, we will wait and see how the finances work out with the new energy bills and where the unit rates land.
Rental Market
The rental market has seen significant increases in prices and the underlying providers of the properties are demanding market based increases. So this double whammy means our two largest expenses are both going up namely the ground rent, and the energy. The ground rent makes up the majority expense, and so a 5% increase on the ground rent almost means we need to increase the room rents by 5% to stay level. Many of the suppliers have not had their rent increased since the pandemic, and that was fine as the market was showing zero or no inflation/rent growth. However now with articles all over the news saying London is up 10% year on year, and that there is a shortage of properties and rooms we are being forced to renew deals with increases. One vendor demanded an increase of 24% even, although they are an outlier, and of course we told them that is not going to happen – the average increase we are expecting there is 5%.
Inflation / RPI
Inflation (Retail Price Index) sits at 7.5% and this is a backwards looking metric, it has not factored in the coming cost of the energy increase. This is the level of increase that rooms are now changing over on in the open market.
How this has impacted me personally
It’s always interesting to compare how things impact others. My landlord, yes I too rent, has put up my rent by 8.5%. Well he didn’t do it himself, he got the estate agent to write to me and in her words “I should have no problem with the slight increase.” Had me wondering what the estate agency’s threshold is for a large increase.
This increase is for the rent only, my energy bill is also going to increase and between those increases my housing costs will increase by 19%. It’s a truly significant amount of money and I can definitely empathise with any of our customers who are reading this and have received an increase themselves.
Other levers Kingdom Houses could pull
Unfortunately we already pulled the other levers because the pandemic left the company with a significant financial blackhole and Kingdom Houses took on a CBILS (Coronavirus Business Interruption Loan) and those repayments have started since November 2021.
To be able to pay these large monthly payments we reduced our employee headcount by two people, which we feel significantly as it means we went from seven people to five – a massive 28% reduction in man power. The only reason we’ve been able to do this without drowning is because we are now doing virtual viewings with all applicants first (before booking in-person viewings) and we have been able to filter out all those candidates that previously wasted our time (often not showing up for the appointment, but not cancelling either). With this reduction we’ve also been able to get rid of two fo the company vehicles and their associated costs.
At this point we do not have any further cost savings levers within the organisation.
What this means for our tenants
With immediate effect we have changed all our literature to increase the portion allocated to bills from £80 per month to £100 per month. This means all our advertising that previously said £600+£80 bills is effectively £600+£100 bills.
The true per room cost (on average) of the energy crisis is £35 per month per room. This is based on those figures quoted above. So in fact on our advertising literature the bills are now underquoted by £15 a month. If you sit down and count everything that goes into the bills, you will find that the £80 per month was already an under quotation under the previous metric.
We have repriced all rooms for 2022 based on a combination: i) their rate as at February 2020 (pre-pandemic rate), ii) where we believe the room should be on the market right now, iii) and factoring in this £35 energy increase. This means that:
- If you secured a room at a covid discounted rate during late 2020 or early 2021, then your increase will be not only an RPI + energy increase but also to bring the room rate back to where it should be.
- We were not able to make any allowance for how long someone has been a customer, we just cannot afford to give a discount because someone has occupied the same house for a long time.
- We were not able to make any allowance for anyone that had some arrears account, we cannot afford to not give an increase and if we held back the increase because of arrears then we are simply rewarding people who have arrears.
- The average increase is 7.20%
– Below RPI of 7.5% (RPI hasn’t factored the energy crisis) - The minimum increase is going to be at £35 per room irrespective of the room size, for smaller rooms this may mean the increase is a higher percentage. This is fair as the £35 is only the energy costs and each person must pay their share, unfortunately.
Legality
The rent increase mechanism is in your tenancy agreement under ‘Rent Adjustment’ and says that Kingdom Houses may (has the right to) carry out a rent adjustment once every twelve months. It is very clear that increases will be market based and while they will usually fall within RPI under extenuating circumstances they can be higher – energy bills doubling overnight definitely falls under an extenuating circumstance.
Time given
As per the tenancy agreement we will give you at least one month notice of the increase, and we are staggering these increases on our tenants so that we are not overwhelmed with enquiries from hundreds of tenants at the same time.
Beware that the entire market is facing the same problem, whichever place you move to your energy bills are going to double as well. Be very careful of taking a place where the bills are not “fully inclusive” because they may verbally tell you the heating is £50 per month for the whole household, but that is just not physically possible. Read the articles below, the expectation is that the average UK energy bill is going to grow from £2,000 to £3,000 or more.
Other options
Where any tenant finds their new rate is too much for their budget please get in touch and we can investigate doing a transfer to another room. Usually this will mean a downgrade in room size, location, or facilities – or moving from a small shared house (4 bedrooms for example) to a large shared house (10 bedrooms for example).
Any such transfers is subject to our transfer fee of £50 to facilitate a smooth handover (that you are not overlapping rent on two rooms) and a new six month minimum term.
Sources & Quotes
“My fixed rate ended in January so they put me on their Flexible 6 tariff which is ~£908/yr (gas & electric – was previously ~£580/yr) but now the new Flexible 7 in April will go to £1,328/yr! Pretty crazy for a 1 bed bungalow.” – A random comments on Reddit.
“Overall they project a 73% increase of my energy bill annually.”
“Average UK energy bills could hit £3,000 a year, consumers warned” – The Guardian
“At a time when consumers are keener than ever to cut bills, the websites have found themselves without any deals to offer on energy because sky-high wholesale prices mean that suppliers are not offering cheap tariffs.” – The Guardian (On energy comparison sites)
“UK inflation forecast to hit 8% in April amid cost of living crisis”
“It’s really extraordinarily grim. A normal gas bill for our heating in January would be £150 but this year we’ve just paid £350.” – Mary Paterson quote on BBC
“As inflation hits 30-year high, UK households start to buckle” – Reuters
“Households will face a record energy bill increase of 54% from April after the regulator lifted the cap on default tariffs to £1,971.”
“Landlords are asking for almost 10 per cent more rent than a year ago, says Rightmove. And it’s set to rise further in 2022.” – The Big Issue