The Private Rented Sector Needs Stock And Stability
March 1, 2014
London is on a roll and, while this is great news for the economy, one of the consequences is that housing demand continues to outstrip supply. While house builders are doing their best to play catch up, much of the new stock being brought to market is outside the price range of young buyers, whose only option is the Private Rented Sector (PRS).
According to the Greater London Authority (GLA), the PRS grew by 83% between 2000 and 2010, which has led to one in four households being rented. Demand on private rentals is at its highest since the 1970s, yet the supply is mostly sourced from existing stock, as opposed to new builds. Currently two thirds of landlords own fewer than five properties, and a significant number have been classed as ‘rogue landlords’. This is not unconnected to the fact that approximately one third of PRS properties in London fail to meet the ‘Decent Homes Standard’ as set out by the Department of Communities and Local Government.
As a result of these issues there is a strong and growing case for professional PRS providers to introduce institutional grade standards into the industry. However to attract these institutional investors, the PRS operators need to be able to show that they already adhere to the robust checks and balances that such investment sources will rely on. Government understands that this management platform comes at a cost, and that PRS operators require legislative support, probably through an extension of planning law, to deliver what is required. Initiatives are being rolled out, such as the PRS taskforce and Government sponsored Build-to-Rent funds, but the priority must be to enable the process of securing institutional investment, then quickly expand the supply chain.
Fizzy Living is a subsidiary of Thames Valley Housing, and is operating an institutional grade management platform. It has been able to deliver this through a direct cash injection which enabled it to purchase its current portfolio, set up the systems, hire the staff and deliver the service. It is now ready to escalate its procurement of new buildings, either as off plan purchases from developers, or by managing the delivery of its own product.
Fizzy needs to deliver a return to its investors, which is driven by the net rental income from its portfolio. Gross income is reduced by the management costs, which are substantially more comprehensive than those an amateur landlord, whose due diligence and reporting requirements are on a different scale (if indeed they are on a scale at all), faces. All of this has a direct impact on the purchase price. If you are a developer or house builder looking to sell your flats to the highest bidder, you would certainly not be negotiating with a PRS landlord (unless he lives in Hong Kong or Singapore).
The way to get over this hurdle is to recognise the benefits that professional landlords bring to the sector, and adjust planning obligations to pass the benefit back to the landlord. For example, institutionally backed landlords will require scale, so the first qualifier should be that buildings must provide a substantial number of flats. 50 would be a good starting point. The institution will require long term, stable income, and the market needs long term stability, so the second qualifier should be a commitment to keep the entire building as a rental product for up to 10 years. With those two qualifiers, the building should be exempted from S106 affordable housing, thereby levelling the playing field in the original viability calculation.
The PRS works for institutions and the market needs the stock and the stability. Now is the time to adjust the rules and deliver the product.