House of Commons - The Private Rented Sector - Communities and Local Government Committee

The Private Rented Sector - Communities and Local Government Committee Contents

6 Increasing supply

132. While it was not our intention to focus upon supply in this inquiry, we cannot leave it as the elephant in the room. We heard from a number of witnesses that increasing supply was an important way to raise standards and tackle issues of affordability in the sector.[272]The landlord, Grainger plc, said that "many of the problems in the PRS are a result of the significant lack of supply and therefore lack of choice for the consumer".[273]In this final chapter, we will consider the Government's current proposals to boost supply in the sector, notably its work to attract large scale institutional investment. In doing so, we will revisit some of the issues raised in our 2012 report on the Financing of New Housing Supply.[274]

Institutional investment

133. Historically, the private rented sector has not played a major role in increasing the supply of new housing. Indeed, although the sector has seen substantial growth over the past decade, this growth has not made a significant contribution to new build.[275]In recent years, however, a focus has been placed on the potential for institutional investment in new large-scale developments of market rented housing, and we commented on the potential of this "build-to-let" development in our earlier report:

Increased investment from large financial institutions and pension funds may not be a panacea, but could make a significant contribution to the building of new homes in both the private and social rented sectors.[276]

HOUSING ASSOCIATIONS

134. We also heard about the contribution housing associations could make to new build, market rented housing. The National Housing Federation stated:

Housing associations [...] as established developers and managers of rental housing, are well placed to move into market rental and many are already doing so, especially in student housing but increasingly in other areas. A key aim for them in doing so is to make prospective tenants a better offer than is currently available, thereby raising standards. Moreover, they are likely to develop new housing for the purpose, in contrast to some other investors who might prefer simply to acquire existing stock and thus not increase overall housing supply.[277]

MONTAGUE REVIEW

135. In November 2011, the Government published Laying the foundations: a housing strategy for England. This strategy included a commitment to put in place "an independent review of the barriers to investment in private homes for rent".[278]This review, chaired by Sir Adrian Montague, published its report in August 2012. The report's recommendations included: making use of flexibilities in the planning system; the establishment of a task force to support build-to-let development; the allocation of public sector land for build-to-let; and the use of targeted incentives to encourage the development of build-to-let business models.[279] The Government told us that it had taken up the key recommendations in Sir Adrian's report: it referred in particular to a new equity fund, a housing guarantee scheme and the creation of an investment task force.[280] We now consider each of the measures.

BUILD TO RENT FUND

136. The Government explained that the Build to Rent fund was

A new £200 million fund providing equity finance to house builders and developers. It will support the building of large demonstration projects of purpose-built private rented housing, showing the viability of the build-to-rent market and increasing investor confidence.[281]

In the 2013 Budget, the Government announced that it would expand the Build to Rent Fund from £200 million to £1 billion.[282]

137. One question arising from the introduction of the fund is whether it will lead to additional homes being built or merely speed up the delivery of those already in the pipeline. Richard Blakeway, Deputy Mayor of London for Housing, Land and Property, said that the fund would "certainly help to contribute to overall housing numbers, and I think we can be very confident that these homes would have been built far slower if they had not benefited from the fund".[283] Neil Hadden, Chief Executive of Genesis Housing Association, one of the successful bidders for resources from the fund, said that, while development would have gone ahead anyway, the fund had influenced decisions about tenure mix:

we already own the sites and we were going to develop them anyway. The issue was what tenure mix we would deliver on those sites. This fund came along, so we said, "Okay, we might as well see whether it works for us".[284]

Mark Prisk, the Minister, said that amongst the successful bidders was a good spread of new providers and locations.

138. We welcome the introduction and expansion of the Build to Rent Fund. The Government should take steps to ensure that the fund makes a net addition to new housing, as well as speeding up the delivery of those homes already in the pipeline.

HOUSING GUARANTEE

139. The Government evidence also referred to the introduction of a

£10 billion debt guarantee scheme to support the delivery of i) new homes purpose built for private rent and ii) up to 15,000 additional affordable homes. The scheme will use the Government's fiscal credibility to reduce the cost of borrowing for housing providers, while attracting investment from fixed income investors seeking a stable, long term return on their investment without exposure to residential rental property risk. We are currently seeking input from organisations suitably qualified and experienced to help set up and deliver the scheme.[285]

140. Neil Hadden, Chief Executive of Genesis Housing Association, said that guarantee would not necessarily affect his commercial investment decisions

because we can borrow money quite cheaply anyway. There will be a fee that goes to the [Homes and Communities Agency], and there will be a fee that goes to the aggregator. By the time you have totted all that up, with the guaranteed low cost of borrowing it will perhaps not be much different from what we can borrow at anyway.[286]

He said that it was difficult to say whether the guarantee would be of interest "because all the details of the scheme are not yet known".[287]

141. We asked Mark Prisk about the likely impact of the guarantee. He said that it was "unclear sometimes as to whether, simply by announcing your intention to do something, you affect the market without having done it yet".[288] Following his oral evidence, the Minister made a Written Statement about the outcome of the procurement process for delivering the private rented sector guarantee scheme:

The response to our invitation to tender for delivery of the scheme indicated a demand from larger investors for individual direct debt guarantees and that Government should take the first steps in developing this new market. We are in conversation with the sector and committed to exploring all of the market-led options, which will lead to guarantees becoming available as soon as possible. [...] Some potential borrowers are already discussing applications with my officials and others are invited to do the same. A formal application process will open shortly.[289]

This statement followed reports in the press that no private company had formally expressed an interest in running the scheme.[290]

142. It remains to be seen how much impact the guarantee scheme for the private rented sector will have in delivering additional new homes. The policy may be well-intentioned in its aim to encourage organisations to have more confidence to invest in the sector, but the Government needs to measure results. We invite the Government in its response to our report to update us on the number of applications it has received for the private rented sector guarantee scheme, and to provide an estimate for the number of additional homes it expects the scheme to deliver. If there is any doubt that the scheme is going to deliver the homes required, we recommend that the Government rapidly explore other options for the use of the resources identified.

TASK FORCE

143. The Government said that, in response to the Montague review, it was establishing a

new, expert PRS investment taskforce to facilitate deals and support the delivery of rented homes through bringing together developers, management bodies and institutional investors. This taskforce will address barriers around the relative unfamiliarity of large scale private rented schemes.[291]

We asked Sir Adrian whether the task force was needed because the Government lacked the capacity to carry out such a role:

If you look at the skills you or I would expect a task force to have, I think it is institutional investment, development finance, land-use planning, property management, and the ability to broker deals. Now, I know that civil servants are renaissance men, but they do not necessarily have training in these areas.[292]

He did not think this was "a quango, because it is intended to be a task force with a limited life of two years" and said that it was aimed at kick starting the process.[293] A number of task force members have now taken up post.[294]

144. We welcome the establishment of the task force to promote and broker investment in build-to-let development, and are pleased that the task force is already in operation. It is important that this task force does not become another quango but quickly delivers on its objectives. We invite the Government, in its response, to set out the progress made by the task force in its first few months of operation. This update should quantify the amount of additional investment brokered, and the number of additional homes it would deliver.

IMPACT ON THE SECTOR AS A WHOLE

145. While it is hoped that the focus on build-to-let will lead to the development of additional, new homes, it is also important to consider its impact on the wider private rented sector. As we have seen, one of the main arguments in favour of boosting supply is that it will lead to improvements in quality and affordability. The focus of the Montague Review, however, was very much on the "higher end" private rented markets. While Sir Adrian said that that increasing the supply of a higher quality accommodation would "have beneficial knock-on effects on the low quality stock at the lower end of the private sector", he did not see this as a particular area of focus for his review:

We were concerned more to try to raise the average level of stock by commissioning new units of an undoubtedly high character, so we did not focus on improvements at the lower end at all.[295]

146. It appears, then, that the impact of institutional investment in new supply on other parts of the private rented market relies on a trickle-down effect. Nigel Terrington, Chief Executive of the buy-to-let lender Paragon Group warned that large scale build to let development could lead to "the creation of what may be almost rented ghettoes when you perhaps wanted a more integrated housing market".[296] Dr Tim Brown of De Montfort University, himself a member of the Montague Review group, suggested that the focus on institutional investment had diverted attention from other parts of the market:

There has, of course, been considerable debate and discussion on the potential of institutional investment for build to let as evidenced by the Montague Review findings and the subsequent actions of the Government. This has, to some extent, diverted attention away from the issues of quality of the existing private rented stock and its regulation.[297]

147. When we asked Mr Prisk whether the focus of the Build to Rent scheme was on the development of new housing for the middle class, he replied that

this is a sector that needs an injection of investment, further to what it has already had. If you do that, not only do you get the additional dwellings themselves, but that then starts to open up the market more and give tenants genuinely better choice, both overall but also, most importantly, in the locality they are seeking. If you like, by growing the market it will give all tenants greater choice. [...] I have certainly been to see a number of schemes, one or two of them in the east end, where they have quite a range of steps, as it were, in terms of the tenancy and the rental package, for those who are young people not looking to spend a fortune through to a more serviced facility, as it were.[298]

148. Efforts to promote high-quality build-to-let development have commanded significant amounts of government attention and resources. One of the main arguments in favour of this approach is that it will lead to improved choice, quality and affordability across the whole of the private rented sector. It is too early to assess the impact, but a key part of the evaluation of these measures must be the impact they have on the sector as a whole. If, in a year's time, there is no evidence of this broader effect, the Government must reconsider its strategy and look to other measures to boost supply across the sector as a whole.

Other measures

149. In addition, the focus on new supply has to consider other tenures. Increasing the supply of affordable housing and building more homes for owner occupation will also alleviate pressures on the private rented sector. In our report on the Financing of New Housing Supply, we set out a number of measures the Government could take to boost housing across all tenures. These measures included:

an expansion of the Green Investment Bank to cover housing;[299]
clarifying plans for delivery of affordable housing post-2015;[300]
consulting on arrangements for the future financing of housing associations;[301]
lifting the local authority borrowing cap and enabling the sharing of borrowing power between local authorities;[302]
the establishment of pilot schemes to support large volume self-build.[303]

150. Given that our report highlighted the extent of the housing shortfall and the need for urgent action to build more homes, we were disappointed that the Government rejected a number of our key recommendations. There is an urgent need to boost supply across all tenures of housing. We recommend that the Government revisit the Committee's report on the Financing of New Housing Supply, and set out proposals to implement those recommendations it initially rejected.

272 See, for example, Ev 298 [Department for Communities and Local Government], Ev 153, para 3.12 [Residential Landlords Association], Ev 274, para 14 [National Union of Students], Ev w274, para 2.5 [Crisis]. Back

273 Ev 221, para 1.6 Back

274 HC (2010-12) 1652 Back

275 Ev 298-299, introduction Back

276 Financing of New Housing Supply, summary, p 3 Back

277 Ev w266, para 1.8 Back

278 Department for Communities and Local Government, Laying the Foundations: A Housing Strategy for England, November 2011, p 33 Back

279 Department for Communities and Local Government, Review of the Barriers to Institutional Investment in Private Rented Homes, August 2012; see also "Montague Plan offers boost to private rented sector", DCLG press release, 23 August 2012. Back

280 Ev 298-99 Back

281 Ev 298 Back

282 HM Treasury, Budget 2013, March 2013, para 2.26 Back

283 Q 407 Back