The banking crisis has delivered seismic changes in how we live our lives. Thirty years ago, prudent and aspirational Scots simply wanted to get onto the property ladder and enjoy the sensation of living in a property that was increasing in value year after year.
Not anymore. Buying and selling properties in Edinburgh, Glasgow and Aberdeen became an endless dripping roast for the conveyancing solicitors and estate agents, while the banks and building societies were delighted to lend, lend, lend with little or no deposit.
Not anymore. Today, instead, the residential rental sector is booming. The Citylets quarterly report on the Scottish Private Rented Sector has been running for five years.
It has shown that housing sales volumes have contracted by half while the volume of rentals has more than doubled. This is the new reality.
With the Council of Mortgage Lenders pointing out that a typical first-time buyer in Scotland requires to lay down a deposit of 21% on their new property, the equivalent of ￡25,037 [more than an average salary of ￡24,556], it is little wonder that the emerging generation of professionals are much keener to rent for the time being.
In 1982, with Britain fighting a war with Argentina in the Falklands, a young freshfaced Lanarkshire lad arrived in the capital hoping to make his fortune.
David Alexander was clean-cut, well-dressed and persuasive, and he charmed the Bank of Scotland manager at the Goldenacre branch.
With little more than a cheery grin and a handshake, he managed to get funding for his property company, which is now DJ Alexander.
Originally from Hamilton, Alexander left Earnock High school without any qualifications and worked as a labourer in Ireland Alloys, before landing a job as a salesman with Rank Xerox when he was 20.
“I was passionate about doing something for myself. I looked at the sales market for property and it was handled by solicitors – and I felt it was done very poorly. There wasn’t the customer service there. I thought I could bring a bit of passion and drive to it,” he recalls, sipping a black coffee in Tiger Lily’s in Edinburgh’s George Street.
“I reckon I wasn’t well liked because I was trying to ruffle it up a bit.” In 1982, the housing market was in the doldrums – although nothing like as bad as the current situation – with stagnation in property prices. It was a different era of business banking too. Alexander went to meet Ian Lewis, the bank manager at the Goldenacre branch.
“I said to him, ‘I don’t have any collateral but I have myself and I can work hard.’ And, to my surprise, he backed me.” It was the start of a long-term relationship that was beneficial for both parties.
David Johnston Alexander opened his office in Leith, but quickly learned a home truth. His first property for sale was at 9 Warrender Park Terrace, in the heart of Marchmont, then becoming Edinburgh’s noisy student quarter.
It was a four-bedroomed flat, with two public rooms and he was trying to sell it for ￡32,000 - in today’s terms around ￡450,000.
“We couldn’t sell it. It was a huge flat. The lady who owned it said, ‘If you can’t sell it would you let it out for me.’ I told her we didn’t do letting. But she said, ‘I’m down south now, just put an advert in The Scotsman and find a tenant’.”
Alexander complied with her wishes; placed an advert in the paper and the phone didn’t stop ringing, with 40 inquiries within the first 24 hours.
“I thought maybe I’ve come across something here. I thought perhaps I should move into residential letting. And that’s how it started, with one flat.” DJ Alexander, now with 57 staff and offices in Glasgow and Edinburgh, was up and running. However, there was a serious stumbling block to expanding residential renting and the first five years were a steep learning curve.
While Alexander found Edinburgh a ‘closed shop’ for city solicitors who went to the right schools, he was a trailblazer in the capital’s rented property sector, and was aided by the former Conservative Chancellor of the Exchequer Nigel Lawson, who in 1988 brought in the Short Assured Tenancy, which opened the floodgates to letting.
“The problem up until 1988 was security of tenure. Ordinary individuals were put off renting out a house because it was difficult to get rid of bad tenants who refused to pay their rent. It was time, money and effort and people simply didn’t want the hassle,” he recalls.
“You needed to know that if you wanted to liquidate your asset or there was a problem with tenants that you could get them out. So the door was opened in 1988.
“This offered the opportunity of a rental for a fixed period of time. There was basically no problem at the end of the period and you could terminate the tenancy when, historically, you couldn’t do this.”
In the 1980s, many rented properties simply didn’t have a great reputation with secondhand furniture, old-fashioned cookers and fridges, and frayed carpets.
Yet expectations were rising and landlords had to meet this with new furniture, newer kitchens, better washing machines and dish-washers, enhanced home entertainment and better beds and mattresses.
The changes brought newcomers into the market and investors began to realise that residential property was an asset class with decent returns.
Then, in the Noughties, the buy-to-let boom was fuelled by low-cost mortgages for those looking for a home for their pension pots.
This all required fresh levels of supervision and asset management.
DJ Alexander now also operates as an asset manager, more proactive in terms of repairs, and encouraging landlords to understand that maintenance and regular upgrading of the facilities are vital, and a proper programme of repairs is required, putting around 10% of the annual income back into the fabric.
He has some clients who go back 25 years and are still in the rental market. In 1982, Dove Davies, Gerling, and Rydens were the three main letting agents in Edinburgh, with others such as James Gibb.
Now there are around 175 in the central belt, with the top five having hundreds of properties on their books.
The rental management business was evolving, becoming more professional, better regulated and much more secure for both landlord and tenant.
Typically, fees are about 15% of the rental income. Recently, there has been some consolidation within the sector, with companies such as Ayrshire-based Lomond, trying to buy up letting smaller agencies.
DJ Alexander has around 5,000 properties in Edinburgh and Glasgow under management, making it one of the largest independents in Scotland, a status it intends to retain.
With the minimum property value around ￡150,000 up to the maximum of detached stone houses on the Grange worth ￡2-3m, the value of the portfolio is in several hundred million.
What is now emerging is a new asset class of longer-term residential letting. Alexander is in discussions with Scottish-based pension fund managers and institutional investors to set up rental portfolios in central Edinburgh, which it will manage, modelled on the continental system in France and Germany, where people have enjoyed much longer term leasing and security of tenure.
“I think you will look at a number of developers who, if they can’t sell the units, will look at the much longer term rental market. This is a sea-change,” he says.
The focus is now on rental yield, rather than capital growth. Renting property brings a yield of 3.5-4 %, without any capital appreciation, when a savings account is at 2%. David Alexander is clear about one thing: “We wanted to stick at the quality end. A crap flat will mean a crap tenant. We try to be very focused and I think if I wouldn’t stay in the flat myself, then we don’t want to manage it. If it’s a landlord that doesn’t want to do what needs to be done, then we’re not interested in them. We don’t want to cut corners.
“In some cases it might be better to advise a landlord to take less rent to get a better quality of tenant.” For example, a single woman working as a manager with a retail chain might be better than a young family with two children because there might potentially be less wear and tear on the property.
“In my 30 years I’ve never known the demand for letting property to be so high. At the beginning of the year we let 80 properties in nine working days. This gives you the level of demand. We are finding now that the length of tenancy is increasing substantially: where people would come for six months to Edinburgh renting initially and looking to get onto the housing ladder, they either can’t get the finance or don’t want to get.”
Alexander says the analysis of whether to buy or rent a house means that if you take away capital appreciation – and the market is presently flat – there is no real benefit of buying.
“You don’t have a deposit to find, legal fees and if the roof leaks someone else fixed it.
You’re not left with a house that you cannot sell.” He says everyone wants to get into the housing market when there is capital appreciation, but if you take that away people say I’m better just renting.
People who bought at the peak of the market in 2007-2008, will be looking at a 20-25% drop in the value of their homes.
“You will be very lucky if you come out with anything less than that. Everyone thought Edinburgh was this special little place that was immune to the rest of the world. And on the way up it certainly looked that way, but Edinburgh has been affected – especially with the demise of the big banks. There were so many big stone houses being sold to the high earners, which has disappeared now. A house that drops by 50% has to increase by 100% to get back to where it was. If you’ve a house worth £100,000, and it loses value to £50,000, it has to go up 100% to get back to where it was.” It hasn’t been without its turbulence.
Alexander was bitten badly too. In 2007, he ventured into the London market with an office in Knightsbridge, and a central London flat, but his timing wasn’t right, and he lost £2m.
“I learned that you should stick to your knitting.
I lost a huge amount of money but I’m glad that I did it.
There’s no point in looking back, all your eggs can’t be double yolked.
It was 20 minutes before everything went wrong.” He was managing a number of property funds and the bank said they wanted to invest more in London and wanted Alexander to manage this.
“I stupidly said I would have an office in London. This was going to be the feeder for all the managed properties. But when the banking collapse happened the bank was no longer interested in London property.” He returned to Edinburgh, determined to focus on what he knew best.
“Residential letting has always done well in Scotland. It had got me into the position and it managed to get me out of it. He says a lot of his recent business has come from property portfolios in administration, from KPMG, Deloitte and PwC, where the administrators require a managing agent.
So when does he think prices will return to the glorious days of 2007? He laughs and shakes his head.
“Well, that could be 2020.” “People say to me; when are we going to be back to normal and I say, ‘This is normal’. What was happening up until 2007 was abnormal. It was not sustainable. We were all caught up in it and thought this is fantastic.”
Pre-collapse, if anyone went to the bank with a project and business plan that predicted that you would get double-digit growth in the housing market in the next ten years, the bank would agree with that and given them a loan.
“But that was fundamentally flawed. How was it possible that you’ll get 10% plus every year in house prices? It was just not possible because wages could not keep pace with this. But we were all caught up in that. I sat there for 26 years and thought it could only go one way. It was very difficult to say it was all going to fall.
"We could see it coming but when it happened it was too late.” Thirty years ago, a landlord simply rented the home. Now there are a raft of regulations which Alexander accepts but says some are verging on political correctness gone mad, rather than benefiting the public.
“There’s landlord registration, which is the most hideous thing in the world. If you don’t register with the council you can be fined £50,000 for renting your house. I don’t quite see the logic in that. You need to pass a test that you are a fit and proper person to rent your house, so you have to declare any criminal convictions, and if you have they may not allow you to do it.”
Along with compulsory energy efficiency certificates, he feels it is simply another taxation stream that has to be recouped by landlords in the form of higher rents.
He also says the anti-social behaviour act is potentially draconian on landlords.
“If a landlord has a tenant who is behaving anti-socially and disturbing the neighbours, and is not seen to be doing enough to stop it, the judge can tell the tenant, not to pay the rent.
Don’t you think the tenant will continue with the anti-social behaviour, if he doesn’t have to pay rent.
It’s just madness!” Thankfully, there hasn’t been a case through the court, but that remains the letter of the law.
Over the years, he has looked to Sir David Murray, the former Rangers owner, as a mentor for his firm.
Even before the recent shock news of the Ibrox side’s battle with administration, Alexander paid tribute to Murray.
“He’s been a fantastic friend – and also a client. We used to help the Rangers players settle in Edinburgh, where they weren’t so caught up with the Old Firm rivalry. I have tremendous admiration for the man, who has so many setbacks in his life and you speak to him today at 60 and he’s as enthusiastic and passionate as he was when I spoke to him first 30 years ago. What he’s had to come through, he is inspirational. I’ve always found him very helpful.”
Alexander remains the sole proprietor with his senior management team in accounts, maintenance, new business, with people working for him for over 20 years.
“They have been crucial for the business, having continuity of people that you are speaking to is very important. We all work together.”