Liz Peace: Private Renting – a Policy for our Time?
June 20, 2009
Chief Executive at British Property Federation
There are those people who claim the residential model of house building for purchase by owner occupiers is effectively broken and that even when the economy recovers we will never see the levels of private sector house building that we have enjoyed in the past. I am not sure that is true since the Englishman’s love affair with his house is not something that is ever going to disappear completely and even in what are extraordinarily troubled times for the house building industry, they have still managed to build and sell some 60,000 houses/apartments over the last 12 months.
But what the crisis of the last 18 months has shown is that there needs to be an alternative model for providing homes to the people who need them and that there should be an option that sits between house purchase, and the millstone of a huge mortgage that home ownership brings, and what we now call social housing. We in the British Property Federation believe that intermediate option is private renting.
Renting is not new. At the end of the First World War some 76% of homes were rented from private landlords but successive waves of interventionist legislation and regulation, all intended to protect the tenant from unscrupulous landlords, coupled with the rise in home ownership, drove many landlords out of business. Renting is however a popular form of tenure in other countries; in the Netherlands some 43% of total housing stock are rented homes and in the US the percentage rests around 28%.
In the UK it seems to be an obvious solution, albeit only partial, to the problems of the housing market. If we believe Government numbers, we are going to need somewhere in the order of 240,000 houses a year to keep pace with rising demand. But clearly the private sector house builders are not going to be able to come anywhere near the 167,600 that they provided in their heyday back in 2006/7. And the RSLs, who have depended heavily on the Section 106 agreements with the house builders will be lucky to reach anything near the 53,000 affordable homes delivered in 2007/8 this year. So on the basis of some pretty simple ar ithmetic, it would appear that there are going to be a lot of people who cannot find homes.
Renting does, of course, have some unfortunate reputational issues and indeed every time I get hauled up in front of some committee or other of MPs I am always lambasted about the iniquities of Rigsby type landlords who subject their tenants to bad, even unsafe, conditions and rip-off rents. But the majority are decent people who do their best for their tenants. The problem is that many of them are, in effect, amateurs whereas what the renting industry needs is large-scale professional companies coming into the market with substantial portfolios of well built, well maintained and well managed properties that they rent out to tenants in just the way the owner of a portfolio of offices rents out his premises to businesses. The US has just such a regime in the shape of their multi-family housing developments where standards, and rents, are driven by healthy competition to attract tenants.
The big problem in the UK, however, in seeking the assembly of substantial portfolios of private rented property is the unwillingness of the institutional investors to put money into this asset class in the way that they support the office, retail and industrial markets. There are a number of reasons why the investors will not invest – lack of suitable stock, potential reputational damage, the chore of managing the properties. But the principal one is that up to now the numbers have simply not stacked up and the returns have not met those that could be achieved from commercial property. Part of the problem has been that individual buy-to-let investors have been prepared to buy up property, often individual units, at a capital cost that does not reflect the rental income, on the basis that capital growth will make up the difference and more besides. And even if the property remained empty, which clearly many of these buy to let investment properties have, then the capital growth still provided the investor with a return in due course. Clearly these sort of market conditions, with massive capital growth, no longer apply – which suggests that buy to let may have had its day – so the big question for all those supporters of a professional private rented sector is whether its time has at last come and the income return that can be obtained from residential tenants will at last start to look attractive.
The new Homes and Communities Agency (HCA) certainly thinks so because they have decided, after much lobbying from the BPF and its residential members, to see whether they can kick-start some serious investment in private renting.They have already been engaging with potential investors to determine what it would take to get them to come into the market and they have now decided to put this onto a fully open basis by asking the private sector to register ‘expressions of interest’ in putting together an investment proposition that would acquire stock and manage it for rent. The initial invitation documentation is fairly sketchy, probably because the HCA does not want to deter ‘bidders’ from putting forward novel ideas – which could be based around existing unsold stock from the house builders or new developments, that may or may not have an existing planning permission. The HCA is also noncommittal on the subject of financial inducements though its document does hint at the possibility of rental guarantees being on offer and also possible gap funding for otherwise non-viable schemes.
Judging by the attendance at a recent seminar which the BPF ran for its members on this HCA initiative, there does seem to be considerable interest out in the market. Whether this translates into a real residential investment vehicle remains to be seem. There are a number of inducements that the Government might offer, in addition to rental guarantees and gap funding. Dealing with the anomaly of SDLT on bulk purchases (which would see a multi-purchase attracting only the SDLT rate that would apply to individual unit sales) would be a relatively painless concession that the Government could make and indeed we were surprised to see that it did not make it into the last Budget. There are also some simple changes that could be made through the planning system which would encourage the use of land for rented accommodation, which would in turn feed back into the price for which the land could be sold (though that may be rather less of an issue at the moment with land values at rock bottom anyway). And then there is the whole question of the affordable housing requirement which attaches to new developments and which is one of the factors that has in the past made building for rent unviable. Given that rented accommodation is cheaper overall than living in a purchased property, rental could in reality be regarded as affordable housing in its own right, or at least intermediate housing for those who perhaps do not qualify for social housing but who could not afford to buy. In which case, it would seem to make sense to remove the affordable housing requirement from development for rent.
At the end of the day, the private sector will only invest in residential property for rent if that investment is able to make the right sort of return, which according to numbers being bandied about at the moment would have to be in the order of a return on equity of 6.5%. According to modelling that we in the BPF have done this should be achievable, though how far the government will have to go in providing the necessary security blanket, either through direct guarantees or through some of the other measures outlined above, remains to be seen. With total returns on commercial property, according to IPD, now at record lows, this just might be the moment for the residential investment market to take off – which would have the double advantage of providing much needed homes and also a sound, if unspectacular, new asset class for the investment market. To claim that it’s a case of ‘now or never’ may sound overly dramatic but if we can’t convince the markets of the merits of large scale private renting now, when the traditional methods of housing provision are, if not broken, at last significantly dented, then we never will!