Are Housing Associations ready to tackle the Private Rented Sector?
May 20, 2013 Leave a Comment
One of the most striking trends in the British housing market over the last decade has been the growth of the Private Rented Sector (PRS). The sector accounts for around 4.8 million (17%) of the 21.5 million households in England, having risen from 3.4 million in 2005.
It’s a trend that shows no sign of slowing down with some in the sector estimating that the country will need an additional 1.1 million rented homes by 2016. Rising house prices are, of course, a key driving force behind this. While many people are choosing to rent there are others that will have no choice in the matter as the dream of home ownership becomes increasingly unrealistic, especially in London and the South East.
The PRS came under the political spotlight at the end of January, when it was the subject of a lengthy Commons debate, and earlier this year Housing Minister Mark Prisk told the Spectator that he wants to make the sector “bigger and better”.
Social housing organisations could have an important role to play in this plan as they are increasingly, and have been doing so for some time, diversifying into the Private Rented Sector.
Why? The short answer is that it creates a virtuous circle. Housing Associations have always engaged in a degree of commercial, or near-commercial, activity to provide a return that can be reinvested in to social housing. Providing private rented housing has always been part of this work, given the similarities with the Associations’ core functions as managers of sub-market rented housing.
The degree to which they’ve done this has always been partly dependant on or influenced by the financial framework set by the government. The 2010 spending review saw a 67% cut in the government grant for new affordable homes – the average grant rate is now very low, which means Housing Associations need to fund the vast majority of every home they build. They do that through a combination of private borrowing and committing their own resources generated from commercial activities.
There is another element at play here though. Providing properties for private rent is about also catering for the wider housing need, and many Housing Associations would interpret that as being part of their core purpose. This is especially true in an environment where many households find themselves squeezed between an inability to access rationed affordable and social housing, yet locked out of any prospect of being able to enter owner occupation.
In many respects these organisations are absolutely ready to tackle the PRS. They are, after all, experts in managing rented property; housing management, maintenance, repair and long-term investment is their bread and butter and they have become highly sophisticated in the way they deliver it. In many cases these are big operations that manage tens of thousands of homes while others, small scale Associations, are deeply embedded in their local area.
But that’s not to say there aren’t challenges. A private rented property is a market product in a way that social housing is not, and it is also highly localised. Housing Associations need to make sure they really understand the local market and what kind of properties that area wants.
As any property analyst will tell you, it’s the little things that can have a big impact on value and rent, and there are a lot of them. Housing Associations will have to consider a huge number of factors – not just the area the property is in but things like; what side of the street it is on, what floor the flat is on and how it has been furnished etc. All these little variables can make a difference, and Housing Associations need to make sure they have a sophisticated understanding of the PRS market complexities.
Private rented property is, arguably, much more sensitive to some of these factors than the equivalent affordable and social rented homes, which tend to make up the majority of Associations’ day to day business.
Another key challenge is the speed at which the local market can change. Rents are both highly localised and hugely sensitive to activity in the local economy.
For some people living in the PRS, they’ll be able to afford a property in a certain area one year but not the next. So Housing Associations need to be flexible and fleet of foot to make sure they are able to reflect the way in which a local market has changed. Effective asset management is as important as getting the property management correct. Flexibility and agility are also crucial to ensure organisations can rework their business plans quickly and efficiently if the economy shifts and home ownership begins to rise again.
There’s no reason that Housing Associations can’t be successful in the PRS, but the challenge is to make sure that they truly understand the market they are entering. By doing this they can achieve a return which can be reinvested in social housing.
Housing Associations are using a mixture of different strategies to ensure they achieve this outcome. Some are recruiting specialist staff, with experience of the PRS, while some are relying on their existing housing management staff to provide the service required. In both cases there will often have been extensive research and analysis into the benefits and pitfalls. There really isn’t a single, fit all, model.
I believe Housing Associations have a lot to offer to the PRS as they are experienced in the management of large-scale housing stock and delivering a very high quality service.
Housing Associations are very different to most operators in the PRS where the vast majority of properties are owned by individual, small-scale landlords who typically own a small number of properties and simply can’t offer the same scale of investment or planned maintenance as a Housing Association or institutional investor.
So what does the future hold?
I think we can expect to see more Housing Associations moving into the PRS where there is a strategic and commercial incentive to do so.
I believe social housing organisations are already making a valuable contribution to the PRS and, when more Associations embark on private rented schemes, they are as likely to build new homes as they are to seek to acquire properties, which would help to boost overall supply.
Getting to grips with the market will be a challenge but, for me, the bottom line is that the more operators there are involved in the PRS the better. This is because, in many markets, there is simply not enough housing stock to meet the demand. The supply of homes available for people to live in needs to increase and Housing Associations that start to provide private rented homes will play a valuable role in satiating demand. Also, greater competition should incentivise landlords to improve the quality of their service, both in terms of the condition of their housing stock and the quality of their property management.
There is much to gain from Housing Associations entering the PRS; an increased housing supply, market pressures helping to drive up standards of housing and property management, and the potential for the Housing Associations to generate returns that they can reinvest into social and affordable housing. The challenge for the Associations is to carefully assess the potential for private renting in their areas of operation, and to decide whether they should enter the market.
They will need to make sure that they can provide a quality product that is competitive and economically successful. If they are successful then the returns from their private rented properties can be reinvested for social purpose, and provide the much needed high quality and well managed social housing that will meet the needs of people who might otherwise struggle to access housing in the market.