Communities and Local Government CommitteeWritten evidence submitted by Grainger plc

Executive Summary

1.1 Privately renting in the UK is set to continue to rise, and we applaud the Committee’s continued interest in the sector.

1.2 The past year has seen a significant increase in interest among institutional investors in the private rented sector (PRS). While a few have formally invested in the market, a significant number have been closely monitoring and actively exploring opportunities in the market. It is important for the future of the UK housing market, in order for it to increase housing supply and improve the quality of the sector (see comments below), that this interest is maintained and converted into real investment in the PRS. Efforts to improve the sector through regulation must not discourage potential institutional investors from entering the market. There are a number of possible routes, which are more market-driven than regulatory, which could address the many of the problems in the sector. We would strongly encourage exploring these in the first instance.

1.3 Makeup of the PRS—It is important to note that the private rented sector is not homogenous and that any examination of the sector recognises this diversity and does not assume that a certain solution that works for the more recognised Assured Shorthold Tenancies (ASTs) will work for the other tenure types in the PRS. Among the different tenure types within the PRS not all are let at a market rent. Regulated Tenancies, for instance, are typically set below market rent. Regulated Tenancies in particular have very different characteristics than the more widely recognised AST. The creation of new Regulated Tenancies ended with the Housing Act 1988, however a significant number still exist today, because under a Regulated Tenancy a tenant has security of tenure (with the right to live in the property until the end of their life). In addition, Regulated Tenancies typically have a sub market rent which is set by a local rent officer, and the tenant has substantially more responsibility in terms of repairs and maintenance than in an AST. These characteristics mean that the landlord has less scope to improve the quality of the property during the tenancy and that the tenant must keep up the property themselves to a greater extent.

1.4 It is important that the Committee recognises the diverse tenures within the PRS throughout this inquiry and when considering its recommendations.

1.5 We fully support the ambition to drive up the quality of rental accommodation, but believe that much of this can be done through market-led initiatives rather than regulation.

1.6 We believe 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.

1.7 We believe many of the problems can be eased through increased supply in the PRS and greater institutional investment in the sector.

1.8 Furthermore, we believe that a very real positive impact can be made in the PRS simply through greater awareness of rights, responsibilities and best practices among landlords, agents and tenants. Many difficulties arise in the sector because of lack of understanding among all parties, and an educational marketing campaign would go a great way to improving the sector.

1.9 A number of policies and measures introduced in 2012 are due to take effect in 2013, which are aimed at supporting greater institutional investment in the PRS, including the £200 million equity fund for Build to Rent projects and the £10 billion government guarantees for new built PRS and the Government’s PRS Taskforce. We encourage the Committee to consider this inquiry in the context of these forthcoming changes.

1.10 Any examination of regulation of landlords and agents (managing and lettings agents) must be careful to draw accurate distinctions between both roles. It is important that landlords are not set expectations which more clearly fall to the responsibility of agents, and vice versa.

About Grainger plc

2.1 Established in Newcastle upon Tyne in 1912, Grainger is the UK’s largest listed residential property owner, manager and developer, and has a substantial business operation in Germany. Grainger directly owns over £2 billion of residential property assets and a further c.£900 million residential property assets under management.

2.2 Grainger owns or manages nearly 40,000 properties in the UK and Germany. Grainger’s business, focused solely in the residential property sector, includes trading investment, property management, fund and asset management, development and refurbishment. Grainger is also a leading provider of equity release products through its subsidiary brand, Bridgewater Equity Release.

2.3 Grainger is a co-investor in and the fund and asset manager for one of the UK’s largest, institutionally-backed, private rented sector residential investment funds, G:res, which has approximately £400 million of residential assets in UK.

2.4 Grainger is a constituent of the FTSE 250 index on the London Stock Exchange and the FTSE4Good index.

2.5 Grainger is an active member of the British Property Federation. We have reviewed the Federation’s written evidence for this inquiry and we commend it to the Committee.

The quality of private rented housing, and steps that can be taken to ensure that all housing in the sector is of an acceptable standard

3.1 We fully support the ambition to drive up the quality of rental accommodation, but believe that much of this can be done through market-led initiatives rather than regulation.

3.2 Poor quality rental accommodation is in many ways made possible by the severe lack of supply, which forces many individuals to live in accommodation that they would otherwise not have chosen but for the lack an any suitable alternatives. By significantly increasing the supply of newly purpose-built rental accommodation (also known as Build-To-Rent or Build-To-Let), demand would eventually erode at the poor quality, bottom end of the market, forcing those landlords to invest in their properties in order to attract tenants.

3.3 Quality in the private rented sector (PRS) can be split into two categories: (a) quality of the building and dwelling; and (b) quality of the management and service received by the tenant(s).

3.4 The quality of the building/dwelling can in many circumstances be improved up to a decent minimum standard through better enforcement of existing regulation, such as building regulations and environmental health regulations. In addition, the introduction of the Green Deal, and the clear “carrot and stick” approach taken by the Coalition Government, could be a strong driver for improving the existing stock of rental accommodation. Grainger is hopeful for the Green Deal’s success and is actively exploring ways of using the Green Deal to make energy efficient improvements to some of our eligible properties. Furthermore, the funding available for hard to treat properties through the Energy Company Obligation (ECO) provides further support for improving poorer quality, and less energy efficient properties. ECO funding could also go a long way to improving the quality of the poorest stock in the rental sector. It is important that both the Green Deal and ECO are promoted sufficiently to the sector so that take up is as great as possible, thereby making the biggest positive impact on quality in the sector.

3.5 The quality of management in the private rented sector is also very important. As the UK’s largest listed landlord, with our own in-house property management team, we pride ourselves in our professionalism and we recognize the importance of our relationship with our tenants and the communities where we operate. This is an integral part of our Corporate Responsibility programme. As part of our general course of business we regularly survey our tenants to monitor satisfaction levels, we have an established formal complaints process, we follow best practices and we have a very active professional development programme, whereby employees get training and are able to pursue a number of different qualifications in residential property.

3.6 Investing in developing our people is a key part of what Grainger does, because our business relies on having a skilled, qualified and capable team. Opportunities to develop professionally at Grainger are comprehensive, including internal and external training on a range of property-related and more general business-related topics such as influencing and assertiveness, negotiation skills, dampness in buildings and Japanese knotweed; on-the-job experiences via involvement in cross divisional projects; and participation in seminars and other educational events.

3.7 Grainger also provides staff with further education assistance and support to achieve relevant professional qualifications, with the majority receiving 100% sponsorship from Grainger. Grainger sponsors a wide range of courses, including accounting (AAT, CIMA), degrees, masters and MBAs. One of the most popular is the Royal Institution of Chartered Surveyors (RICS) Assessment of Professional Competence (APC), which is the main route for property professionals to become Chartered Surveyors. Grainger employees have achieved a 100% first time pass rate for this qualification.

3.8 Management standards in the PRS are highly variable. There are many small landlords that provide very high quality management, but there are still a significant number of sub-standard operators who provide a poor quality service.

3.9 One way the overall level of management standards can be improved in the PRS is through greater institutional investment in the sector. Management standards for institutionally-owned accommodation will be required to meet certain standards by the institution and there will be very little tolerance for sub-standard management by institutions for reputational reasons.

3.10 It is also important that professional qualifications and professional development, including training, is encouraged throughout the sector. Professional development in the residential sector has improved greatly in the last decade, but more should be encouraged and it is likely that greater interest in the sector by institutional investors, which in turn will create greater job opportunities, will drive it even further. An industry-led, government-backed kitemark system could support this drive for professionalism and minimum standards in residential property management.

3.11 Deposit protection –Take up of tenancy deposit protection schemes among landlords and agents is one area which could be improved. Despite efforts to make tenancy deposit protection a requirement in the private rented sector, there are still many cases where deposits are not protected in an approved scheme. These cases inevitably give the sector a poor reputation. It is important that there is greater enforcement of take up of deposit protection schemes, and that tenants are clearly made aware of their right to having their deposit protected, but also under what conditions so that they do not expect the full deposit returned to them if the accommodation is not returned in an acceptable state.

Levels of rent within the private rented sector—including the possibility of rent control and the interaction between housing benefit and rents

4.1 We believe that market rented housing provides an acceptable alternative to individuals that are unable to afford home ownership. Although there are a growing number of households being forced into private renting whereas previously they would have purchased a home, PRS is also growing as tenure of choice among individuals that prefer the flexibility of privately renting and simply don’t want to own and take on the associated commitments and responsibilities.

4.2 Recent figures from the Valuation Office Agency (VOA) show that over 60% of local authorities in England have seen market rent increases below CPI, demonstrating that the perception of rapidly rising rents is not occurring in every location across England.

4.3 In those specific locations where rent levels are increasing faster than inflation, we believe local authorities should address this through a more favourable housing supply policy for rental accommodation as well as homes for sale. Encouraging increased supply would be much more preferable for various reasons, both economic and social.

4.4 Rental growth is a key consideration for potential investors in the sector, and regulating market rents in any way would significantly discourage potential investors in the sector, at a time when the sector is in need of greater investment and increased supply.

Regulation of landlords, and steps that can be taken to deal with rogue landlords

5.1 It is as important to tackle rogue landlords as it is to ensure that there continues to be a business-friendly regulatory environment, which will continue to support and encourage institutional investment into the private rented sector.

5.2 The financial proposition for investment in the PRS in the UK is fragile and quite new for many institutions. It is not easy to structure a Build to Rent investment opportunity that is commercially viable and further regulation will make that difficulty even greater. It would be detrimental for future growth and investment in the PRS at the present time—when we are at the cusp of significant institutional investment in the PRS—to introduce greater regulatory burdens.

Regulation of letting agents, including agents’ fees and charges

6.1 We support the amendments to the Enterprise and Regulatory Reform Bill tabled by Baroness Hayter, which would make it compulsory for letting agents to offer third-party redress, and bring them within scope of the 1979 Estate Agents Act. The campaign has been led by RICS and WHICH.

6.2 We strongly believe that agents should be part of either ARLA or another similar body with powers to drive up standards and encourage best practice.

The regulation of housing in multiple occupation (HMOs), including the operation of discretionary licensing schemes imposed by a local authority for a category of HMO in its area

7.1

Tenancy agreements and length and security of tenure

8.1 The Montague Review recommended that local authorities support Build-To-Rent projects by reducing the level of Section 106 obligations on such schemes, because of their more difficult economics. In return for a reduced Section 106, Montague suggested that local authorities demand that the developer or institution building the rental accommodation makes a commitment that the properties will be rented (and not sold) for a 10–20 year period.

8.2 This covenant, commitment or guarantee will mean that these new rental homes will not compete with the supply of for-sale homes, and will be purely additional to the UK’s housing supply.

8.3 As so few Build To Rent projects go ahead today because of viability issues, a reduced Section 106 obligation will not therefore decrease the total number of affordable homes delivered through Section 106 as they would not have been delivered anyway if the Build To Rent project did not go ahead.

8.4 The power for local authorities to consider lower Section 106 obligations because of viability issues is already in place and we would encourage greater use of this power among local authorities to encourage Build To Rent

8.5 It also means that the landlord will be able to more easily offer longer term tenancies and stability in tenure since the properties will only be available for renting for that period and landlords will want to reduce void periods as much as possible.

8.6 It is important however to provide the necessary flexibility in tenancy agreements to allow the market to operate effectively. Any future longer-term agreements will need to protect the landlords’ right to gain possession in the case of arrears, anti-social behaviour and the sale of the property. Failure to protect these rights will have a significant detrimental impact on investment in the sector.

8.7 In addition, one of the biggest barriers to longer term tenancies is the significant negative impact they could have on property valuations. Any future long-term tenancy agreements will need to be drafted in such a way as to avoid this, otherwise take-up among landlords will be very minimal.

8.8 Growth in the private rented sector is not just by force, there is also a growing cultural acceptance and preference for privately renting in the UK. To many individuals, one of the attractions of privately renting is its flexibility. In an economy with a growing fluidity in the labour market and changing lifestyle behaviours, a growing number of individuals prefer not to get tied into long term contracts.

How local authorities are discharging their homelessness duty by being able to place homeless households in private sector housing

9.1

Conclusion

10.1 The private rented sector has seen more growth than any other sector in recent years. It has been capable of absorbing this large number of new households because of its flexibility and its increasing interest among investors, especially institutions.

10.2 It is critically important that the sector continues to be able to grow, as well as improve (both in the quality of accommodation and management).

10.3 Any proposals to improve the sector must be done so carefully to ensure that investment into the sector will continue.

10.4 There are a large number of investors and operators in the sector that are very supportive of improving quality in the sector, including Grainger, and it is important that these organisations are involved and take a leading role in discussions around ways to improve the private rented sector.

10.5 Grainger is very willing to take a leading role in these discussions with the Government, Parliamentarians, third sector organisations and others in order to lend our perspective and private sector expertise.

January 2013

Prepared 16th July 2013