3 The private rented sector |
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).
However, many consider that the sector will continue to be dominated
by smaller landlords.
Paragon Group described buy-to-let landlords as "the backbone
of the PRS", saying they accounted for "89% of landlords
and 71% of properties".
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
however, it added that such investment had "not made such
a powerful contribution to new build stock".
The Residential Landlords Association (RLA) agreed that "generally
PRS landlords do not purchase new dwellings"
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.
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
Issues in the private rented
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.
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".
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".
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.
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".
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".
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".
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".
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".
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.
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
See above, para 15. Back
Ev 149 Back
Ev 105 Back
As above Back
Ev 142 Back
Ev 145 Back
Ev 144 Back
Ev 150 Back
Q 206 Back
Ev 144 Back
As above Back
Q 219 Back
Ev 151 Back
Ev 86 Back
As above Back
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Ev 106 Back