Financing of new housing supply - Communities and Local Government Committee Contents

3  The private rented sector

Smaller landlords

42.  We have seen that investment by large financial institutions and pension funds offers a potential source of finance for new housing in the private rented sector (PRS).[99] However, many consider that the sector will continue to be dominated by smaller landlords.[100] Paragon Group described buy-to-let landlords as "the backbone of the PRS", saying they accounted for "89% of landlords and 71% of properties".[101] The British Property Federation said that "probably the most significant source of private sector investment in housing over the past decade has come from small investors buying standalone property";[102] however, it added that such investment had "not made such a powerful contribution to new build stock".[103] The Residential Landlords Association (RLA) agreed that "generally PRS landlords do not purchase new dwellings"[104] but said that the sector made an important contribution to new housing both by recycling "existing stock enabling owner/occupiers to buy new properties" and "by converting older stock", for instance sub-dividing large houses into flats.[105] It also said that "in the boom" before 2008:

the PRS helped to fund many new developments [...] often through off plan purchases, particularly of new apartment developments. By putting down initial deposits and pre-purchasing PRS investors gave developers the necessary funding and confidence to proceed with these developments. This is, of course, no longer feasible.[106]

Issues in the private rented sector

43.  Paragon Group suggested that the decline in the availability of mortgage finance had made a significant impact on the private rented sector:

Buy-to-let was significantly affected by the credit crunch with an 81% decrease in the value of new loans, and the number of buy-to-let products declining by 90% from July 2007. Although buy-to-let lending has entered a period of recovery, it remains difficult for private landlords to access finance for property purchases, thus contributing to the current market dysfunction.[107]

Nigel Terrington, Paragon Group's Chief Executive, referred to buy-to-let having had "a good year", saying it was "one of the only growing sectors within the mortgage space"; however, he added that "it is actually a big percentage on a very low number".[108]

44.  The RLA argued that the sector was not as profitable as it was perceived to be, and that the picture of it "doing well" because of rising rents and increasing demand was "highly misleading". It suggested that those landlords who had invested during "the boom" now realised that the capital appreciation upon which the sector's business model had been based had been "a mirage".[109] It explained:

Returns are currently too low now that capital appreciation is no longer part of the equation. There needs to be a significant adjustment to provide a worthwhile return on investment in the PRS. Otherwise, large scale disinvestment will follow.[110]

Mark Butterworth, Director of the RLA, considered that yields were "being eroded" because "the costs of running a property keep going up, the tax take keeps going up and there is more and more regulation coming in". He added: "Just because rents are going up the odd per cent here or there, or a few per cent in London, that is not generating enough to cover that loss of yield".[111]

45.  A number of witnesses suggested that changes could be made to the taxation system to encourage private landlords to expand their businesses. Paragon Group suggested the creation of a "business environment more akin to that of countries with comparable private rented sectors where landlords benefit from more competitive taxation regimes and are able, in some cases, to offset capital losses".[112] The housing charity, Shelter, considered that the taxation system hindered growth amongst private landlords because it treated their rental income "as investment rather than trading income".[113] It argued that "landlords operating to professional standards should be treated as professionals by the tax system and offered the same level of encouragement to grow as other small businesses, while being equally subject to effective regulation".[114] The RLA said that there was need for "a structural reform of taxation in the PRS" and "an immediate step to be taken by giving PRS landlords deemed trader status in the same way as furnished holiday lettings are treated".[115] The British Property Federation suggested the creation of "Housing Zones" that offered "tax incentives to investors in new build", which:

would have to be designated by local authorities to stop building in the wrong place, and be approved by HM Treasury to keep costs under control, but could help force more buy-to-let funds into new build. A capital gain tax relief for example might be the best incentive as many investors are disappointed the current capital gains tax regime, with a flat 28%, makes no distinction between long-term investors and property speculators.[116]

The private rented sector: conclusion

46.  While it is right to consider the potential for large institutions to invest in the private rented sector, it is also important to remember that the sector is, and will continue to be, dominated by small companies and individual landlords. Although these smaller landlords tend to invest in existing property, they do make an indirect contribution to new housing supply, and in the past have provided upfront funding for development by buying property 'off-plan'. There are a number of issues facing those in the sector: the financial crisis had a significant effect on the availability of buy-to-let mortgages; many landlords no longer have the benefit of capital gains; and there is some concern about the levels of return. We have heard that the burden of regulation and taxation has deterred landlords from expanding their businesses. While constraints on mortgage finance will continue to affect investment in the sector, the Government could provide some support by taking steps to address this burden. We recommend that the Government bring forward a set of proposals to simplify the tax and regulatory structures that apply to private landlords. These proposals should aim to create an environment in which small private landlords are encouraged to expand their portfolios and invest in new build housing.

99   See above, paras 14-22. Back

100   See above, para 15. Back

101   Ev 149 Back

102   Ev 105 Back

103   As above Back

104   Ev 142 Back

105   Ev 145 Back

106   Ev 144 Back

107   Ev 150 Back

108   Q 206 Back

109   Ev 144 Back

110   As above Back

111   Q 219 Back

112   Ev 151 Back

113   Ev 86 Back

114   As above Back

115   Ev 147 Back

116   Ev 106 Back

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Prepared 7 May 2012