Private Rented Sector – Back to the future
July 1, 2013
Back in the 1980s it was very hard to find a house or a flat to rent – the rent control regime of the Rent Acts had all but killed the Private Rented Sector.
Weeks would be spent trying to identify accommodation that was available to rent. Not only did that mean that the accommodation available was of poor quality as no-one was prepared to invest in Private Rented Sector accommodation, it also meant that you had to sign your life away on weird company lets and bizarre licence arrangements.
This must have hindered economic growth. Thirty years on, certainly in London and other major commercial centres in the UK, we are finding again, but for different reasons, that finding somewhere to rent is getting tricky.
Now it is not about rent controls, but a lack of supply caused by many different factors.
To date, there is not a clear and trusted brand, or brands, delivering significant quantities of good quality residential stock for the Private Rented Sector for which there is clearly a market.
Aside from a few examples the majority of national house builders do not include the provision of rented accommodation as part of their business models. Whilst the market for build for sale remains healthy there is no obvious business imperative for them to change from their current activities.
Pension funds and institutional investors are starting to show a keen interest in investing in the UKs Private Rented Sector but they have little or no desire to manage the stock. Invariably, they do want “another” to manage their stock for them and so would rather share the investment with a suitable joint venture partner.
Local authorities could move into providing private rented accommodation, but it is complicated for them and not least because they would need to carry out such activities through an arm’s length company. Also few local authorities have the housing functions and the people to be able to fulfil this purpose.
Housing associations are, on the face of it, the most appropriate vehicle and, of all the alternatives, have perhaps the greatest available resource for residential property management. But for Housing Associations it could be difficult to shift their focus because of charity law restrictions as their regulator’s might have the view that they ought not to provide Private Rented Sector accommodation but focus on their main initiative. This is something that is also noted in Labour party chatter as they see a Housing Associations sole purpose is of housing the poor and socially disadvantaged.
It was interesting to read the views of a number of major Housing Associations, in regards to their Private Rented Sector plans, in the Spring/Summer edition of PRSupdate.
As bad as it may seem all is not lost, however, as there are players who are more than capable of collaborating to produce some of the stock that is much needed.
Further liberalisation is going to be needed to open up the market, and make it more attractive to investors, including some or all of the following:
- Make market renting a permitted activity for Housing Associations so that they do not have to operate within the investment restriction.
- Pension funds and institutional investors would be happy to team up with a good management covenant and that, unquestionably, could include Housing Associations.
- Liberalise planning – A growing economy needs decent housing and plenty of it, particularly in the priciest parts of the country. Reduced CIL/s106 costs and, perhaps, an automatic ability to change the uses of a variety of different buildings to market rented (subject always to appropriate quality standards) might be ways of opening up supply that might also attract the national house builders and other developers.
The role of local authorities and Housing Associations
Both providers of traditional social housing are free to enter the Private Rented Sector, and use their management skills and resources to provide an excellent service. Their constraints, and appetite, are different.
A local authority is free to set up a private rental scheme for the general public, but in practice will always do so in a separate company. The operation of the rental business will therefore be separate and apart from the council’s own business.
A local authority which owns a property and rents it out creates a secure tenancy on statutory terms, and with the right to buy. The discount granted on the right to buy would mean that market rented stock would automatically devalue.
While the rent that can be charged under a secure tenancy is not formally limited by statute, the effect of the general controls on local authorities finances is such that there are potential disadvantages for the local authority that charges a market rent on a secure tenancy.
Of course many local authorities have experience of being intermediaries in the private market when providing homes for homeless families, and that experience could put to good use in a wider context.
Local authorities with concerns about the way in which rented properties are managed are already planning to provide agency services, as well as direct provision. Others are looking to use their prudential borrowing powers, and their pension funds, to kick start the market. Profits can be used to maintain services or bolster the pension fund.
Oddly, Housing Associations that are registered providers probably face more difficulty despite being free of the constitutional limits on councils.
Housing Associations are most commonly charities and registered providers. This means they are limited by the regulatory committee of the HCA and the Charity Commission.
The HCA is currently suggesting that, in the interests of protecting the state’s investment in social housing, nothing should be done which runs the risk of social housing assets being called on to underwrite any other activity, such as private renting.
While this makes the regulator’s job easier, it is doubtful if the legal framework for the regulator really justifies this stance. In any event it is possible to separate the activities to make them regulator proof, and this is the route many larger Housing Associations are already adopting.
The charity challenge is most easily dealt with if the activity can be treated as an investment. The income from a charitable investment should be tax free for the charity, if it is used for charitable purposes so there is no fiscal burden that differs from the mainstream activity.
However, private renting may also represent a charitable activity. Broadly, the test for whether the provision of housing is charitable or not depends on the answer to the question: “Without this provision, can the tenant be reasonably expected to house themselves and their family at a decent standard out of their own resources?” If the answer is “no”, then the provision may be charitable.
There is a clearly a need and appetite for good quality Private Rented Sector accommodation and it is also clear that there is unlikely to be a one size fits all solution.
It is our opinion that the creation of a new asset class will make a real difference to the number of homes provided and to the people who live in them.