Build-to-Rent and the Private Rented Sector in London
April 30, 2013
Despite a recession, Euro zone crisis and global economic uncertainty London’s population is increasing. Respective statistical authorities agree on this point although, as always seems to be the case with population statistics, there is no consensus about the exact level of growth. Take 2011 as an example, which is the most up to date year of evidence available.
The London Plan placed London’s population at 7.8 million; the Office of National Statistics midyear estimate stated it was 7.825 million; the Greater London Authority’s (GLA) 2011 projection was 7.99 million and the Census said 8.17 million.
The growth in London’s population can be seen as a sign of resilience, reflecting London’s status as a world class city – one of the few truly cosmopolitan cities in the world in which to live and work. However, an expanding population is placing increasing pressure on the ability of the city to adequately house its residents.
As London’s population has increased, so has its number of households, which currently stands at 3.27 million. There has also been an increase in the average household size from 2.35 persons in 2001 to 2.47 persons in 2011. This, as the 2011 Census notes, is a result of the population growing at a greater rate than the available housing stock.
A lack of new homes in London is a problem that has confronted the city for some time. The Mayor has a minimum target of 32,210 new homes a year. Research undertaken by Savills showed that even when London’s economy was growing, the minimum target for housing delivery was not being met. This historic and continuing under supply of new homes, combined with a growing population, suggests that London faces a significant challenge to solve its housing shortfall.
This is where the Private Rented Sector (PRS) could make a difference to housing supply. Securing greater levels of institutional investment into housing, leading to the creation of a flourishing market for purpose-built private rented accommodation, would boost the construction of new homes in London. It is important not to overstate the potential of this opportunity – it is not the ‘silver bullet’ to solve the housing supply issue, but it could be part of the solution.
The Greater London Authority (GLA) recently published new evidence about the PRS in London, “The Mayor’s Housing Covenant: making the Private Rented Sector work for Londoners”, (p.29) which demonstrates the increasing strength of the sector. It shows that a quarter of London’s households (over 800,000 people) are private renters, meaning that private renting has overtaken affordable housing as the main form of renting in the capital. This also makes London by far the largest location for renting in the UK. Estimates suggest that the rise in private renting is set to continue and the proportion of Londoners living in the PRS is projected to increase from 25% to 37% by 2025. It is likely that at some point in the 2020s private renting will become London’s largest housing tenure.
It must be acknowledged that the rapid growth of private renting is not necessarily a reflection of Londoners proactively choosing the sector as their preferred tenure. London’s high property prices and the lack of affordable mortgage finance (without a large deposit) have meant that buying a home, particularly for first time buyers, is a real challenge. But equally, over time, perceptions about renting have changed and for many, especially young professionals moving into London for the first time, renting is the logical choice to match their lifestyle.
Previous attempts to stimulate institutional investment into the Build-to-Rent sector have not had much success so, if the sector is to help build more houses in London, it seems likely that some form of public policy support is required. The commissioning of the Montague Report and the Government’s response to date are steps in the right direction. However, how the Government’s work in this space fits in with the Mayor’s work is not entirely clear.
The Government’s £200m Build-to-Rent Fund will be jointly administered by the Government and the Mayor where London applications are being considered. At the time of writing no decision has been taken about the Mayor’s role in the Government’s £10bn debt guarantee scheme (which will also be used to support affordable housing).
It is also unclear what will be the exact role of the Government’s Private Rented Sector Taskforce and how it might work (or not) with the Mayor. It is likely that these questions will be resolved sooner rather than later but in the meantime this uncertainty is a deterrent to investors.
So perhaps the Mayor should plough his own furrow with regard to stimulating more investment; indeed there are signs that he is already doing so. The Mayor recently altered London planning guidance to state that the planning system at both a local and strategic level should provide positive support to private renting, especially ‘by recognising the distinct economics of the sector relative to mainstream market housing when undertaking viability assessments.’
The next step could be to strengthen London Plan policy itself, rather than accompanying guidance, on Build-to-Rent developments. The Mayor’s land holdings and assets, which have recently been expanded, could be used to support private rented developments. Some sites will be more suitable than others for this type of development and these should be brought to the market as soon as possible and, where appropriate, payment for the land deferred or the land offered as an equity investment.
Perhaps more than anything else the Mayor should issue a comprehensive ‘offer’ to the market. This would bring together, in one document, all the strands of work currently underway and explain to interested parties what London will do to support investment into the sector. Importantly, it should also state what is expected of Build-to-Rent developments in return for public policy support, particularly where scarce public resource may be invested.
Build-to-Rent developments can offer significant public benefits, whether through building more homes or regenerating derelict sites. Perhaps it’s time that London started to see the sector fulfil its potential.