Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Written Evidence


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?
  —  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.
  —  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.
  —  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.
  —  Lack of saving and growing evidence of a "want it, have it" mentality may also depress the willingness to buy earlier.
  —  Over the last few years young people have shown relatively cautious attitudes to major purchases and relatively flat consumer confidence has driven their behaviour.
  —  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.
  —  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.
  —  Young people seem relatively content with buying their first property at age 30 and above.
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

  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:
"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.
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."
Shelter Policy Briefing, Housing Benefit, Jenny Neuburger and Grainia Long


  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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