Properties that have sitting tenants paying “fair rents”, which used to be avoided by private landlords, are being hailed as a way of riding out the property slump. Such properties, known as regulated tenancies, are throwbacks to the days when rents were determined not by the free market but by officers working for the local council. Not only do regulated tenants pay well below the market rate, they are also extremely difficult to evict.

Regulated tenancies are usually regarded with alarm by buy-to-let landlords, but since the downturn investors are discovering hidden benefits that might make them a very good way of weathering the storm.

Because they are held in such disfavour, regulated tenancies sell at a discount of up to 40 per cent of the market value of the property. And because almost all date from before January 15, 1989, when the law changed, most of the tenants are getting on in years. From a purely statistical point of view, the prob-

ability of a tenant dying and releasing the property for sale at a big profit is getting better all the time - although this does not excuse the tactic of some investors who knock on the tenant's door before buying to gain an idea of how elderly or infirm they are.

Eric Kump, an American banker who works in the City, recently bought a one-bedroom flat in Holland Park, West London, on a regulated tenancy for his four-year-old son, Jake, so that the latter will have a place of his own by the time he reaches adulthood. He paid £268,000 for the property, which had an open-market value of £400,000 to £450,000. He explains: “A lovely lady two doors down from us, who looks after our cats when we are away, said that her rented flat was being auctioned and would we be interested in buying it? The view I took was that I got it between 30 and 40per cent below market value, and I borrowed half the price, so even if we don't get possession for five, ten or twenty years we have doubled our money.”

Regulated tenancies have unexpected bonuses for the long-term investor, Kump says: “The rent is covered by housing benefits, so there is no credit risk, and there is no risk of empty rental periods either because the tenant cannot move without losing their regulated position.” He bought the property at a Savills auction; the auctioneer, Chris Coleman-Smith, is a big fan of regulated tenancies. “Regulated tenancies are the only things I have ever bought - the attraction is the capital appreciation in five, ten or 15 years' time. I have got three and I wish I could have bought more,” he says.

The Savills auction in Kensington, West London, last month featured 31 regulated tenancies. Many of the homes are occupied by former Water Board employees and were being sold off by Thames Water.

The big investors are still avoiding regulated tenancies, Coleman-Smith says, but smaller semi-professional property people were swarming into the sale. “Second-string buyers came in and bought three or four each. What I call private professionals are back in the market because they think it is time to buy,” he says.

Most lots sold at about 60 per cent of the market value. Lot 111, for example, a house in Thirsk Road, Mitcham, South London, had a valuation of £270,000 and sold for £195,000.

Average yield (the ratio between the rent and the purchase price) was between 3.25percent and 4.5per cent, which is not sparkling but is enough to pay the mortgage until the investment is finally realised.

Fair's fair

Any private tenancy that began before January 15, 1989, is a regulated tenancy, governed by the Rent Act 1977. This gives the tenant a high level of security at a “fair rent” set by a rent officer.

“Now that the law has changed for new tenancies, and landlords are able to set free-market rents, there has been a natural upward bounce to fair rents,” says David Lawrenson, of lettingfocus.com.

Landlords can apply to increase the rent every two years, or when a property is greatly improved with, say, a new kitchen. It can be difficult, however, to evict regulated tenants - even bad ones. Instead, a landlord can offer alternative accommodation. This could be a smaller property if, for example, the tenants' children have grown up and moved away, Lawrenson says.

Even the death of the tenant does not always let the landlord reclaim the property. “The Rent Act also allows for succession to pass to a spouse or same-sex partner on the death of a tenant,” Lawrenson says. Children can also succeed to the tenancy, but then it automatically becomes a shorthold tenancy subject to free-market rents.

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