Memorandum by the British Property Federation
(BPF) (AH 91)
INTRODUCTION
1. The Private Rented Sector (PRS) is vital
to delivering flexible tenure for a mobile workforce and providing
housing where social renting or home ownership is not applicable
or affordable. A strong PRS can also contribute to increased supply
and more affordable housing in the UK.
2. The overall size of the rental sector
in the UK is one of the smallest at 10-12% compared to other developed
countries. The UK is peculiar in its renting system with its high
reliance on social rather than private renting. The majority of
countries have a two-thirds or more emphasis on the private sector,
whilst the UK is below a third. Despite this, the last 15 years
has seen a steady revival in the PRS that has been underpinned
by deregulation of rents that has allowed market forces to operate
effectively.
3. The PRS provides a tenure that is affordable
and flexible for people who lack the means for home ownership,
but are not eligible for social housing. The Joseph Rowntree Foundation's
(JRF) work on affordability shows in many areas across the country
there is a huge problem of affordability for first time buyers.[193]
In 40 local authority areas, 40% or more of all younger working
households can afford to pay more than a social sector rent, but
still cannot afford to buy at the lowest decile (10%) point of
local house prices. Affordability is most problematic in London,
with house-price-to-household-income ratios lower than four to
one in only two areas outside London. Elsewhere, the South East
and the South West have the highest proportion of younger working
households falling into an intermediate housing market. Younger
buyers face affordability difficulties in the South East (52.9%)
and in the South West (51.5%).
4. It is not the BPF's desire to force people
into the Private Rented Sector, who would otherwise want to buy.
All of the main political parties are right to try and meet peoples'
aspirations for home ownership, providing that is done in a responsible
way, which highlights their obligations. For example, the long-term
debt and repairs and maintenance that go with owning a home, because
if there is one thing worse that being unable to afford your own
home it is having it repossessed.
5. There are, however, good reasons to suggest
that the PRS will need to at least stand still, if not expand
over the next decade to cater for a number of trends. The aforementioned
JRF research highlights that unless there is a dramatic turnaround
in house building or the provision of social housing, many people
will face no choice other than the PRS. Council of Mortgage Lender
research (see box 1) also shows that more young people are living
in the PRS and staying longer out of choice, to reflect their
lifestyles. The significant expansion of higher education and
increasing inward migration has also fuelled demand for PRS accommodation.
| Box 1—What social and economic factors affect first-time buyers' attitudes and behaviour?
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| — Declining short-term aspirations for home-ownership mirror low home-ownership rates among young households. However, home-ownership remains the long-term preference for around 80% of young households.
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| — Quantitative research shows that young households indicate positive attitudes to renting in their twenties for mobility, flexibility, property type and quality benefits, but still ultimately want to buy.
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| — A greater propensity and comfort with taking on non-mortgage debt (as well as student debt) at a young age, seems to deter commitment to a mortgage at an early age.
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| — Lack of saving and growing evidence of a "want it, have it" mentality may also depress the willingness to buy earlier.
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| — Over the last few years young people have shown relatively cautious attitudes to major purchases and relatively flat consumer confidence has driven their behaviour.
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| — Lower relative incomes of under-30s, compared to the working population as a whole has resulted in additional income constraints for potential first-time buyers.
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| — Life-stage factors, such as marriage and having children, which are increasingly seen as triggers for home-ownership, are occurring later than in the past, driving the age of house purchase up.
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| — Young people seem relatively content with buying their first property at age 30 and above.
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| Understanding first-time buyers, Jackie Smith and Bob Pannell, Council of Mortgage Lenders, with Alan Holmans, University of Cambridge and Andrew Thomas, BMRB, Council of Mortgage Lenders, July 2005
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6. The challenge for the sector is to ensure that whether
by force or choice, those that live in the PRS receive a quality
service so that they stay a bit longer and are happy to see their
sons and daughters use the sector in the future. Unfortunately,
the sector does suffer from an image problem, with the vast majority
of decent landlords dragged down by the practices of a few. A
lot of good work is and can be done to change this. At the small
end of the market the use of accreditation schemes and membership
of landlord bodies is growing. The expansion of institutional
investment would also help raise the quality of the sector. And
the use of proportionate and well-enforced regulation can help
the sector divest itself of those who drag it down.
7. The rest of this paper explores how policy can help
a quality PRS contribute towards the twin challenges of affordability
and housing supply.
INSTITUTIONAL INVESTMENT
8. One way in which BPF members, such as Unite and Moorfield
Domain, increase supply is to fundamentally change the make-up
of the marketplace. For example, the provision of every student
block with 400 beds frees up at least 80 houses for families.
Such accommodation can be built relatively quickly using commercial
and/or modern manufacturing techniques.
9. Similarly, some large BPF institutional investors
invest in large scale private rented sector schemes, helping to
reduce pressure on housing supply and reduce the need for "house
sharing" in favour of high density living in blocks of flats—thus
freeing up family homes for families and for home owners that
would otherwise be used for buy-to-let purposes. This has the
added advantage of raising quality because large institutional
investors face public and media scrutiny in a way that small landlords
do not.
10. The US experience is pertinent, where large scale
residential property owners, through REITs, are able to mobilise
large sums of capital into the provision of private rented housing,
which meets standards rarely seen in the UK.
11. The Government is currently considering introducing
REITs in the UK. Encouraging some of this institutional investment
into the PRS could lead to a revolution in the sector.
PLANNING POLICY—PERPETUITY
12. Many of the BPF's institutional investor members
have considered investing in the intermediate rental market. The
prospect of regular rents and low levels of voids offers attractions.
However, to invest landlords must be able to make at least the
same returns as they would derive from other types of property.
13. Planning policy, as reflected in paragraph 16 of
PPG3, tries to promote flexibility in the provision of affordable
housing through planning obligations. Most local authorities,
however, ignore this in favour of a blanket policy insisting that
any social or intermediate rented housing is in perpetuity. This
discourages private investment in affordable housing since the
yields on residential property comprise rental income and capital
appreciation. If the rental income must be "affordable',
the only way of making affordable housing an attractive investment
for the private sector is to hold out the prospect of some long-term
capital return.
14. Such return need not be short-term, but the application
of at least some reasonable end date will radically alter the
value of the investment and would encourage more investment in
intermediate rented housing.
15. The BPF would like to see the forthcoming drafting
of Planning Policy Statement 3 (PPS3) promote the flexibility
that PPG3 intends, by building in a general presumption against
affordable housing being in perpetuity unless the local authority
could justify otherwise.
TAX REGIME
16. Current stamp duty rules also work against encouraging
institutional landlord investment in the sector. Large landlords
have to pay the highest rate of duty when buying blocks of apartments
even though individual units within them may fall into lower duty
bands. Individual landlords cannot transfer liabilities for capital
gains tax across their property assets, which limits their flexibility
in response to changing patterns of demand and reduces the potential
for large scale investment in the residential sector.
HOUSING BENEFIT
17. Another way in which the PRS contributes to the provision
of affordable housing is through its interaction with the housing
benefit system.
18. More and more private landlords are not offering
accommodation to housing benefit claimants. This can be seen from
recent Government evidence. The percentage of social sector tenants
receiving Housing Benefit (62%) was similar to that in recent
years, but the percentage of private sector tenants (20%) was
the lowest since data was first collected by the Survey of English
Housing in 1993-94.[194]
19. A major contributor to this decline is the poor administration
of Housing Benefit (HB). A good benefits service contributes to
effective anti-poverty work and regeneration, but a poor service
failing to pay benefit on time adds to social deprivation and
to the problems that vulnerable people face.
20. Processing times are a clear issue for landlords
and tenants. Across England and Wales, the quality of housing
benefit administration varies widely. In 2004-05, the best local
authorities processed new claims in as little as 14 days on average.
The worst performing authority—Chelmsford—took nearly
120 days on average.[195]
Remember this is an average, and thus some citizens will have
been waiting well in excess of 120 days—these some of the
least well-off members of our society. As rents are also only
paid in arrears for housing benefit tenants, compared with in
advance for tenants paying their own rent, it is easy to see why
the majority of landlords are opting to focus on the latter.
21. The Housing Benefit Reform Bill, which should be
introduced during this session of Parliament, will seek to extend
the Local Housing Allowance (LHA) scheme to all PRS tenants receiving
benefit. This scheme gives a fixed rate benefit to tenants in
a given area who can use this to find accommodation of their choice
in the PRS. It is hoped to financially empower tenants to select
the standard of accommodation they desire. The LHA was introduced
in 9 Pathfinder areas across Britain from 2003, and the Government
aims for all private sector tenants to move onto the LHA scheme
by 2008.[196]
22. So far, evidence from the Pathfinders suggests that
processing times have speeded up, reflecting that the rent assessment
process performed by the Rent Service is far simpler. However,
processing times within the Pathfinders still vary significantly,
reflecting that the efficiency with which local authorities perform
the task of handling benefit applications still varies, and that
simplification of the rent assessment process on its own will
not change this. As a starting point, over the next two years,
the BPF would like the Local Government Association to take the
lead in trying to get all local authorities to a level of performance
that matches the current threshold for the lower quartile performance
of 42 days.
23. The Government's evaluation of LHA shows that 56%
of respondent landlords and letting agents said it would make
them less likely to let to HB tenants.[197]
Difficulties seem to emanate from the experience of tenants in
rent arrears who are directly paid Housing Benefit. There is a
wide consensus from the BPF to Shelter (see box 2), that advocates
retaining the option for tenants to have their benefit paid to
their landlords directly.
| Box 2—Shelter recommends: |
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| "It is right that tenants should be empowered to take responsibility for their finances and their employment and housing choices. However, changing the method through which the Government pays Housing Benefit is unlikely to have a significant impact. Instead, the Government should build on measures to tackle financial exclusion, including help to access and use financial services, improving financial literacy and increasing the availability of independent financial advice.
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| Tenants should be able to opt to have Housing Benefit paid directly to themselves or their landlord. Under the LHA scheme for private tenants, any additional Housing Benefit, above the level of the rent, would need to be paid to the tenant."
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| Shelter Policy Briefing, Housing Benefit, Jenny Neuburger and Grainia Long
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24. The forthcoming Housing Benefit Reform Bill provides
an opportunity for Parliamentarians to protect some of the most
vulnerable in our society and support good standards in the private
rented housing. The British Property Federation advocates other
measures which support these objectives:
(i) Abolish the Single Room Rent
The Single Room Rent (SRR) is a lower rate of housing benefit
paid to young people under 25, which enables them in theory to
rent shared accommodation. Under the Local Housing Allowance there
will be a broadly equivalent "shared room" rate. The
BPF is calling for the abolition of Single Room Rent, because
it is often set so low that it prevents young claimants obtaining
accommodation in the private rented sector and facing the prospect
of homelessness or informal accommodation arrangements as a result.
It drives those who can just about afford to rent into some of
the worst accommodation in the private rented sector. It leads
to debt and eviction as young people struggle to pay the excess
between the SRR and market rents. It forces our young people,
who are at an age when they are not worldly wise, to share with
people who will exploit their vulnerability, drug dealers, etc.
Ultimately, the SRR represents age discrimination.
(ii) Use Housing Benefit payments to support standards
in the Private Rented Sector
The UK tax payer spends over £12 billion a year on housing
benefit. None of this money comes with any guarantees of service
standards in return. On the basis that such money is not being
spent discerningly the taxpayer is therefore subsidising poor
standards by some landlords in the private rented sector.
In areas of housing market collapse this raises questions
about how housing benefit levels are set. If standards are low,
then the average on which rent officers base housing benefit levels
will also be low, perhaps too low to sustain a decent level of
service. The BPF therefore advocates that there should a minimum
level of rents under which housing benefit does not fall. This
should reflect the costs of keeping a property well maintained
and meeting all statutory requirements.
The BPF also supports Shelter in calling for a statutory
Code of Management for the sector. We are not looking for anything
complex—just a simple 10 point Code, which decent landlords
will already follow.
Having compliance with the Code as an implied term in tenancy
agreements will provide landlords and tenants with a clear expectation
about management standards. Where a landlord is in breach of the
code, a tenant will have recourse to the Residential Property
Tribunal, which could order the repayment of benefit by the landlord
where a serious breach has occurred, although for most cases would
have a suite of more minor remedies.
CONCLUSION
25. The BPF has other members, large-scale commercial
and mixed use developers who are making significant contributions
to the issues of affordability and housing supply, both because
of the nature of the large-scale mixed-use developments in which
they engage and the contributions of affordable housing and other
infrastructure they are required to provide through planning obligations.
We felt, however, that these issues sat more comfortably with
the subject matter of the Committee's planned future enquiry on
funding and look forward to submitting further evidence for that
inquiry in due course.
26. For the purposes of this inquiry we have tried to
illustrate that there are good reasons to presume that demand
for private rented accommodation will continue to grow, supported
by demographic, lifestyle and other trends. Government policy,
however, can affect how that demand is met and in turn whether
it contributes to increase housing supply or not. By encouraging
institutional investment in the sector and sub-sectors such as
student accommodation, there is the opportunity to add to supply.
27. The Private Rented Sector is for some people their
only choice and is therefore satisfying a housing need rather
than necessarily a housing aspiration and should therefore figure
perhaps more prominently in housing policy, particularly since
the growth of other options in the short to medium term, whether
they be low-cost home ownership or social housing, are limited
by funding and physical constraints.
28. A major challenge for all those with an interest
in the sector is to raise its quality and standards. The Government
can help by encouraging investment and regulating in a proportionate
way, which truly targets the worst in the sector. Local authorities
can also help; the best engage in partnership with local landlords,
seeing their role as far more than just their enforcement duties.
The sector itself must do its bit through codes of practice, accreditation
schemes and other initiatives.
29. The PRS could be making a far greater contribution
to the issue of affordability, but will not do so whilst several
policy barriers remain. The inflexibility of most local authorities
on the issue of affordable housing being in perpetuity, means
it is not attractive to institutional investors, who might otherwise
invest. This seems a pity since with a bit of flexibility people
could be enjoying far higher standards of accommodation than those
they will be enduring, because of the lack of supply.
30. The sector could also be contributing more and better
housing to those on benefits if the housing benefits system worked
better. The introduction of the Local Housing Allowance will help
in some respects, but not in others. We hope MPs will use the
opportunity of the forthcoming Housing Benefit Reform Bill to
address some of the worst problems of housing benefit administration,
direct payment and single room rent.
THE BRITISH
PROPERTY FEDERATION
31. Part of the BPF's role is to be the voice of the
commercial property industry in the UK, representing all those
who invest in that sector, which will include companies, pensions
funds, investment fund managers and individuals who invest in
property. We also represent a wide range if investors in residential
accommodation" institutional and corporate landlords; small
landlords who are represented through affiliated local associations;
specific market players, such as student accommodation providers,
and mixed-use developers. The one part of the sector we do not
represent is house builders, who have their own association, the
Home Builders Federation (HBF).
193
Affordability and the intermediate housing market: Local measures
for all local authority areas in Great Britain, Steve Wilcox,
Joseph Rowntree Foundation, 2005. Back
194
Survey of English Housing 2004-05, Housing Statistics Summary
No 25. Back
195
DWP Housing Benefit Performance Statistics 2004-05. Back
196
DWP, 5 year plan, 2005. Back
197
DWP, Local Housing Allowance Evaluation, 7-Working with the
LHA, p 4. Back
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