Memorandum by the British Property Federation
SUMMARY
Growth in the private rented sector is needed
to cater for increasing numbers of people, who are ineligible
for social housing, but cannot afford to buy their own home.
Policymakers should be considering the contribution
that private institutional investors can make to delivering a
high-quality private rented sector, which is contributing to housing
supply and better meeting intermediate market needs.
The institutional sector proportionately accounts
for less of the private rented sector than it did a decade ago,
reflecting significant growth in buy-to-let, but also tax and
regulatory policies that have worked to discourage institutional
investment.
To address these the Federation advocates:
i. Applying stamp duty on the average, rather
than aggregate value of portfolio transactions.
ii. Reducing the rate of VAT on residential
refurbishment costs.
iii. Consideration of the potential barriers
to residential REITs.
iv. Pursuing the Law Commission's Draft Bill
on Renting Homes.
Necessary growth in the Private Rented Sector
could add to supply, or compete with owner-occupiers for housing
stock. We believe the Government should be encouraging the former,
a build-to-let sector, which might have some of the following
characteristics:
i. A qualifying rental spectrum, say 75%
to 85% of average local private rents.
ii. Some kind of intermediate tenancy, which
provides a slightly longer period of security of tenure of say
between three and five years.
iii. Exemption from some (s106) planning
gain requirements.
iv. Some kind of Code of Standards or Accreditation
Scheme, which was open to private managers and housing associations
and backed by a dispute resolution body, such as the Housing Ombudsman
Scheme,
v. The ability for the tenant to staircase
into shared or full ownership at some future date.
vi. No dictation of the property manager
as part of gaining planning consent.
vii. To promote take up, some sort of tax
incentive, or rental guarantees could be provided, as is the case
with private sector leasing schemes.
Part of the rationale behind introducing the
Local Housing Allowance is the laudable aim to give housing benefit
claimants more choice. That aim, however, will remain significantly
unachieved, whilst other facets of the housing benefit system
remain unresolved. Some local Authorities' performances at paying
new claims needs to significantly improve. If claimants are going
to be in position to secure accommodation on the same terms as
non-claimants, the BPF would also advocate that:
i. Housing benefit payment should be paid
in advance.
ii. The Government should be seeking to act
as guarantor for legitimate housing benefit payments.
iii. The Single Room Rent should be scrapped.
iv. There should be a national minimum housing
benefit rent assessment, which takes into account the reasonable
costs incurred in managing and maintaining a property.
ABOUT THE
BRITISH PROPERTY
FEDERATION
1. The British Property Federation (BPF)
is the voice of property in the UK, representing organisations
owning, managing and investing in property. This includes a broad
range of businesses comprising commercial property owners, financial
institutions investing on behalf of life assurance and pension
funds, corporate landlords, local private landlords, developers
in commercial, residential and mixed-use property as well as all
those professions that support the industry, such as law firms,
surveyors and consultants.
2. Our members are significant investors
in property, with substantial investments in residential property
for rent. BPF members also deliver significant residential development,
often as part of broader large-scale mixed use developments. They
are not traditional house builders, but are skilled at using commercial
property construction techniques and regeneration expertise to
create sustainable communities on urban brownfield land. Often,
through joint working between commercial developers with investors
and housing managers, including housing associations, to deliver
mixed tenure and mixed use schemes.
TRENDS IN
THE PRIVATE
RENTED SECTOR
3. BPF members invest in the private rented
sector in a variety of ways. Some are developers and managers
of student accommodation, others seek to provide accommodation
for key workers, at least one fund we know of provides first step
accommodation for young workers migrating to London, another runs
a fund providing accommodation for inward investors trying to
place staff in the UK, some provide accommodation across the UK
to a mixture of tenants on and off benefit, others focus on premium
properties where the tenant is renting out of choice.
4. Such variety is also seen in occupiers
in the sector:
— households unable to access social
housing, and who may not be in a position to buy;
— students away from home for the first
time;
— people on the move because of their
job;
— migrants to this country;
— those who have divorced or separated;
— and younger workers who through choice
prefer to rent rather than buy.
5. The chart below illustrates that nearly
half (47 %) of current demand for private rented property is from
people who fall between affordable home ownership and state-supported
renting, what is often termed the intermediate market.
Figure 1—Source Hometrack.
6. Separate analysis by Hometrack predicts
that on current demographic trends, 33,000 new renting households
will need accommodated each year up until 2021. Hometrack, however,
stresses that this might be an under-estimate because recent net
migration figures are so hard to ascertain and many migrants end
up in the private rented sector. The number of renters will also
be affected by social and economic factors, which are hard to
predict, because we do not know what future social and economic
policy will be.
7. This introductory analysis highlights
four points:
i. The sector is increasingly being innovative
in serving particular niches of the market.
ii. Such diversification is, however, leading
to even greater variability in the standards of management and
accommodation in the sector, which vary significantly.
iii. Growth in the sector is currently coming
from a number of quarters (young people buying later, the expansion
in higher education, etc.) but predominantly from expansion of
the intermediate market and unless there is a significant increase
in the provision of social rented housing or the Government's
various home buy schemes, that trend will continue and accelerate.
iv. Based on past trends continuing, the
sector will need to expand and unless there is policy change,
in some areas that will lead to continued competition between
potential owner-occupiers wishing to buy and potential investors
wishing to buy-to-let.
8. Policymakers should be considering the
contribution that institutional landlords could make to resolving
some of these issues:
— delivering a high quality PRS;
— contributing to housing supply;
— better meeting intermediate market
needs;
— and, driving innovation in the sector.
9. It is, however, the "private"
rented sector and to satisfy all these objectives the sector must
generate sufficient returns to make it an attractive and viable
investment.
INSTITUTIONAL INVESTMENT
IN THE
PRS
10. The last decade has seen a boom in buy-to-let
investment. However, institutional and corporate landlords' share
of the private rented sector has declined. In 1994 the make up
of landlords was fairly evenly split between companies/organisations
(50%), and individuals/couples (47%).[26]
By 2003 two-thirds of landlords were individuals/couples, with
only one third of these full time landlords. Part of this is explained
by the growth in buy-to-let, but it also reflects other policy
changes which have made the sector relatively disadvantageous
to large corporate and institutional landlords.
11. At least part of the reason why the
institutional sector is not experiencing the same growth as individual
investment lies in returns. Yields from residential renting are
currently low reflecting high house prices and relatively low
rents. True income returns for the individual investor are often
cross-subsidised through their own work in managing their properties.
Individual investors will also have different comparators, mostly
equities, whereas institutions will compare returns on large scale
residential investment with the returns seen in commercial property.
12. To provide competitive returns existing
residential vehicles often trade properties and thus bolster returns
by releasing capital appreciation. This is not ideal, however,
as investing institutions, such as pension funds, will be investing
in residential property as much for the income it generates as
any capital returns, to help pay pensioners. Funds will therefore
seek to replace units that are sold, but as is set out in the
"tax" section below, institutional investors' portfolio
purchases will normally attract the highest rate of stamp duty,
versus the individual investor who may be paying lower rates.
Trading will also make residential vehicles ineligible to become
Real Estate Investment Trusts (REIT).
13. There is perhaps a misconception that
institutions will only be interested in the expensive end of the
rental market, but actually the contrary will often be true. It
is the yield that is important, not the rent in isolation. Property
at average or affordable rents will be less expensive to buy,
rents will better reflect average earnings growth or inflation,
which pension funds like to track, and such property will be less
prone to voids than a 5-bed executive home, which will only appeal
to a small marketplace.
BARRIERS TO
INSTITUTIONAL INVESTMENT
14. There are several tax and regulatory
policies, which although perhaps not intentional work to discourage
institutional investment:
Tax
15. The large PRS investor who trades portfolios
of property suffers stamp duty on the aggregate value of their
transaction, rather than a charge related to the housing unit
value. This means that in nearly every transaction the large investor
will be paying the highest rate of stamp duty, 4%, compared to
the unit-by-unit buyer who is either exempt or incurs a far lower
rate of tax. Large investors in the PRS tend to invest in property
on average rents, which are easier to let and should incur lower
duty. It is also far better from a service and management efficiency
perspective to have blocks of units. The perverse impact of this
tax situation is that it encourages large investors to trade in
individual units.
The BPF recommends the stamp duty rule should
be amended to, at worst, a charge based on the average unit value
of the transaction. This should be easier to calculate than a
unit-by unit basis, where individual values may not have been
agreed.
16. The residential property investor is
at a comparative disadvantage to the commercial property investor
as VAT is not recoverable on refurbishment costs; causing a drag
on returns. The small investor is often able to mitigate this
through self-management.
We recommend reducing the rate of VAT on residential
refurbishment costs.
17. Real Estate Investment Trusts become
operative from January 2007. These will open up indirect property
investment to individual investors and pension funds. It remains
to be seen how many residential REITs will develop. Early indications
are that there may be one investing in the private rented stock
of housing associations and perhaps one private sector inspired
residential REIT. A particular problem that might limit the number
of residential REITs is the requirement for a full stock exchange
listing, which not many existing vehicles can justify in terms
of their size.
It will be important to consider the take up
and potential barriers to residential REITs in the light of experience.
Regulatory
18. Too often policy and lack of enforcement
has meant that regulation in the PRS has caught the "innocent"
majority, whilst the "guilty" minority have simply continued
to perpetrate the practices that regulation was meant to solve.
19. There is a feeling amongst the landlord
community that regulation of the sector has reached the stage
of being counterproductive, because without sufficiently targeted
and enforced regulation, the gap in cost competitiveness between
the compliant and non-compliant is widened.
For larger landlords there are two particular
frustrations:
i. There are market mechanisms that help
regulate the behaviour of larger landlords. The likelihood of
adverse publicity and impact on reputation is a significant threat
that impacts on larger landlords' behaviour.
ii. Much housing regulation is enforced through
local authorities. They are given significant discretion and scope
in their enforcement. For example, on the licensing of houses
in multiple occupation, everything from fees to amenity standards
and the forms that landlords need to fill in is left to the discretion
of the local authority. For a large landlord operating perhaps
in 100 local authority areas, this is a huge and administratively
burdensome challenge.
20. We agree that tenants need protecting
from the unscrupulous but, despite several Housing Acts the unscrupulous
continue to thrive. There must be better ways of protecting tenants
than the plethora of Acts of Parliament, secondary legislation,
codes of practice and other measures currently imposed on the
sector.
21. The Law Commission's work on Renting
Homes, recently published as a draft bill, is a step in the right
direction. It seeks to put the contract at the centre of the law
and put it on a consumer footing. It would make it obligatory
to have a written agreement that covered the key elements of a
tenancy: its scope, length, check in and check out procedures
and other core terms, such as possession. The obligation to have
a written agreement would ensure that tenants were protected by
consumer law.
WHAT COULD
THE INSTITUTIONAL
SECTOR CONTRIBUTE?
22. Research for the Barker Review by Glen
Bramley showed that approximately 90,000 new households a year
are in need of affordable housing. At present, social housing
provision, both through public-funded development and s106, is
providing about 40,000 units. Government shared equity schemes
are aspiring to deliver 110,000 homes by 2010, about an additional
22,000 units a year. The table below illustrates that there has
been little perceivable growth in the intermediate market. Supply
is therefore only providing for, and will continue to provide
for about a half to two-thirds of demand under current state-funded
programmes.
Table 1
PERCENTAGE OF NEW BUILD HOUSING THAT IS "AFFORDABLE"
IE AT SUB MARKET RENT OR FOR SHARED OWNERSHIP
|
| Year | 97-98
| 98-99 | 99-00
| 00-01 | 01-02
| 02-03 | 03-04
| 04-05 | 05-06
|
|
| NE | 15 |
13 | 11
| 9 | 12
| 5 | 8
| 9 | 11
|
| NW | 16 |
18 | 13
| 13 | 13
| 13 | 8
| 9 | 6
|
| YH | 14 |
12 | 10
| 10 | 9
| 7 | 8
| 7 | 7
|
| EM | 12 |
11 | 9
| 10 | 9
| 7 | 9
| 9 | 11
|
| WM | 17 |
16 | 17
| 14 | 13
| 16 | 12
| 15 | 15
|
| E | 13 | 15
| 10 | 12
| 12 | 11
| 12 | 13
| 14 |
| Lon | 32 |
31 | 31
| 30 | 24
| 26 | 30
| 24 | 26
|
| SE | 19 |
19 | 15
| 15 | 14
| 16 | 18
| 18 | 20
|
| SW | 16 |
15 | 15
| 13 | 14
| 13 | 16
| 15 | 15
|
| Eng | 17 |
17 | 14
| 15 | 14
| 13 | 14
| 14 | 15
|
|
| Source: House of Commons Written Answer 3rd July 2006.
|
23. We believe there is a huge opportunity to try and
address the shortfall, providing homes for those that need them
at affordable rents, with eventual opportunities to staircase
into ownership. What it requires is the development of a build-to-let
sector in the UK, where developers, funded by private capital
such as pension funds, provide additional supply of new-build
accommodation.
We recommend Government introduces an intermediate rental
product, which might have some of the following characteristics:
i. A qualifying rental spectrum, say 75% to 85% of average
local private rents.
ii. Some kind of intermediate tenancy, which provides
a slightly longer period of security of tenure of say between
three and five years.
iii. Exemption from some (s106) planning gain requirements.
iv. Some kind of Code of Standards or Accreditation Scheme,
which was open to private managers and housing associations and
backed by a dispute resolution body, such as the Housing Ombudsman
Scheme,
v. The ability for the tenant to staircase into shared
or full ownership at some future date.
vi. No dictation of the property manager as part of gaining
planning consent.
vii. To promote take up, some sort of tax incentive, or
rental guarantees could be provided, as is the case with private
sector leasing schemes.
24. There are several good reasons why policy makers
should be keen to promote large scale developers and investors
to invest in build-to-let:
25. The Barker Review identified the country is facing
an affordable housing shortage. Whilst Barker argued that increasing
the supply of housing for owner-occupation would eventually make
home ownership more affordable, her analysis showed that the short-term
impact would be limited. Even if all 39 of her recommendations
were implemented, the results would not be seen for two to three
decades.
26. There is little incentive for traditional house builders
to significantly raise output, because to flood the marketplace
would be commercial suicide. Therefore, house builders strategically
phase or restrict supply for sound commercial reasons. And although
the Government has said that social housing, built largely by
housing associations, will be a priority in the next spending
review, this will be taking place at a time when public finances
are expected to be under great strain. Therefore, in reality,
social housing may fail to plug the gap between demand and supply.
27. According to a recent Joseph Rowntree Foundation
report, there are 1.25 million people earning too much for social
housing and unable to afford their own home. This includes one
in five people under 40. There therefore needs to be a massive
expansion of the housing stock to meet this demand and until there
is it is within the private rented sector that many of such people
will live.[27]
28. If supply of housing overall cannot be increased,
such demand will have to be met from private house building, with
investors competing with potential owner occupiers to satisfy
demand, putting more pressure on house prices. If, on the other
hand, such pressures stimulate and increase supply, this will
not happen.
29. The Government is increasingly using public subsidy
to support the intermediate market, mainly through products which
subsidise low cost home ownership. This can be an extremely costly,
particularly where any subsidy is in grant form and therefore
a "one-off" payment, which carries no obligation to
repay it. BPF members, with far less support from Government,
could be expanding the intermediate market, through investment
in shared equity products and expansion of the intermediate market
for rent.
30. There is the opportunity to raise standards through
competition. The student sector exemplifies this well. Large scale
privately managed student accommodation has been introduced in
some places, demanding a response from other providers in the
market. Large scale PRS providers offering high levels of service
and intermediate renting would, we believe, have a similar effect
in the general rental market.
31. The keys to understanding how our members could play
a greater part is to appreciate that:
— Private developers and investors spending hundreds
of millions of pounds are going to want to sufficiently protect
their investments. They will want to appoint good property managers
and to have the discretion to do so. They will want to put in
place long term arrangements for managing the development as a
whole.
— Such developers will make money on income from
rent rather than quickly selling the property. As such, the sooner
they can provide accommodation the better, as it will bring income
on stream. Therefore, it is in their interests to meet demand
as soon as possible, ensure a high quality product to guarantee
long term returns and avoid any land-banking.
THE WELFARE
REFORM BILL:
32. Given the current Bill we did not feel our evidence
would be complete without mentioning some reforms we advocate
to housing benefit:
33. There is wide divergence in the performance of local
authorities' delivery of housing benefit. The latest DWP quarterly
performance figures demonstrate that the best performing authority
in 2005-2006 took 11 days on average to process a new housing
benefit claim, whilst the worst authority took 104 days on average.
Geography cannot explain the differences in performance as there
are authorities neighbouring each other whose performance varies
significantly.
34. Currently, the delivery of housing benefit entails
a two-part process. The rent is assessed by the Rent Service whilst
the claimant's housing benefit application is processed by the
local authority. To speed up the first part of this process, the
Government has tested a new housing benefit system, called the
Local Housing Allowance (LHA).
35. Two key facets of LHA have been piloted in the pathfinders.
The first is a simplified method for rent assessment, which rather
than having rent assessed for a particular property, seeks to
generalise a rent, based on an area assessment and the rooms that
should be required by the claimant. Clearly, such a system should
speed up process of rent assessment and therefore housing benefit
delivery, which early results show is happening. However, such
innovation is only able to achieve so much, as the second part
of delivery—claim handling by local authorities—is
left relatively untouched by the reforms. If the variations in
payment times and service are to be reduced, then the variable
performance by local authorities needs to be tackled.
36. The other major element of the LHA reforms is direct
payment. This has less to do with speeding up processing times,
and is more about providing housing benefit tenants with greater
choice over their accommodation. This is a laudable objective,
but has other implications and consequences.
37. If the rationale is to level the playing field between
those on and off benefit it will fail because there are other
tell-tale signs that identify benefit claimants. For example,
rent is normally paid monthly in advance in the sector, but housing
benefit claimants are normally paid in arrears.
We recommend housing benefit payments should be paid in advance.
38. A consequence of direct payments to tenants is that
housing benefit payments will lose their bond-like status. This
will make it more expensive for any private organisations trying
to raise finance to house housing benefit claimants, although
it will not affect the social rented sector where direct payment
will continue.
We believe that Government should be seeking to act as guarantor
for legitimate housing benefit payments.
39. The LHA forms part of the Welfare Reform Bill. Whilst
some fine-tuning is to be expected as part of the development
of a programme, some of the proposals in the bill are substantially
different from the pathfinders and they have not been tested.
Careful consideration needs to be given to these changes in Committee
stage.
40. More generally, there are other housing benefit reforms
that are long overdue. The Single Room Rent provided to young
people under 25 has its proponents who argue for it on theoretical
grounds. In practice, however, there is a significant scarcity
of the type of property it is meant to provide for, which leaves
the claimant either without roof over their heads or having to
pay rent which they cannot afford. As a result, this forces many
on to the streets or into informal accommodation arrangements.
It drives young people who can just about afford to rent into
some of the worst accommodation in the private rented sector.
It can also lead to debt and eviction, as young people struggle
to pay the excess between the SRR and market rents. It may force
young people, who are at an age when they are not worldly wise,
to share with others who will exploit their vulnerability. It
simply cannot be right that a policy forces young people, some
of whom will have just left home, are vulnerable, and are struggling
to put a roof over their heads to accept some of the worst standards
in the private rented sector.
We recommend the Single Room Rent is scrapped.
41. Housing benefit, at least in theory, is set to reflect
market rents. In some areas, however, the market itself will be
failing and therefore rents will be below what is sustainable
to keep properties well-managed and well-maintained.
We recommend there should be a national minimum housing benefit
rent assessment, which takes into account the reasonable costs
incurred in managing and maintaining a property.
26
2003 English Housing survey, ODPM Housing Research Summary, no
226. Back
27
Affordability and the Intermediate Housing Market, JRF, 2005. Back
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