Communities and Local Government CommitteeWritten evidence submitted by Delancey Real Estate Asset Management Ltd

1.0 Background

1.1 Delancey Real Estate Asset Management Ltd (Delancey) is a private company that provides investment advisory services through exclusive mandates to major international family and institutional investment houses and is a leader in the UK real estate investment sector.

1.2 Delancey is advising QDD Athletes Village (UK) Ltd, a company set up to acquire for £557.5 million the private homes in East Village, the former Olympic Village, being developed by the Olympic Delivery Authority. QDD is a 50/50 joint venture between Qatari Diar, the Qatar sovereign wealth fund, and Delancey’s principle client fund. Handover of the 1439 private homes ( there are a further 1,379 social rented homes in East Village) is anticipated to begin towards the middle of this year and continue to the early part of 2014, together with six development sites with outline consent for a further 2000 homes.

1.3 QDD’s business plan is to make at least 1,000, and possibly all, of these homes available for the private rented sector, and to set up its own on-site letting and management operation to ensure a high level of service is provided to its tenants. This will create the first major commitment of scale to the private rented sector since this investment opportunity was opened up with the introduction of the Housing Act 1988.

1.4 For Delancey clients, it is anticipated that further significant investment will be made into the private rented sector to expand the portfolio of mid-market homes in a variety of locations around London, and possibly elsewhere in England, with a significant commitment to the quality and expertise of letting and management operations.

1.5 Delancey therefore has particular experience of the attitude of major investors towards the private rented sector, and an interest in ensuring that this market prospers, and these comments focus on the issues that are particularly relevant to that market.

2.0 Introduction

2.1 In the 25 years since the Housing Act 1988 came into effect, providing private residential property owners and occupiers with choice and flexibility to agree tenancy lengths at open market rent levels, the private rented sector has grown to approximately 15% of all household tenures from a low approaching 7%, at which time properties were held on regulated tenancies giving security of tenure to occupiers at rents set by Rent Officers. Over the previous 35 years, there had been a substantial and rapid decline in the private rented sector from in excess of 50% of all household tenures.

2.2 In the 1970s and 1980s, political emphasis was on owner occupation, with private landlords even being described as becoming almost as extinct as the dinosaur. It is little surprise that, as a result of experiences prior to 1988, institutions have been slow to become involved in the private rented sector, in which they used to be major participants. That is now beginning to change with confidence returning to private renting as a longer term investment opportunity.

2.3 This improving investor perception comes at a potentially opportune time. The UK is going through a seismic socio-economic change post the financial crash. House prices particularly in London continue to escalate with chronic supply shortages whilst availability of finance to support house purchases is increasingly constrained. The average deposit for a homebuyer in London is now around £100,000; a figure out of reach to many on average earnings and first time buyers. Little is set to change in the short to medium term and the solution for many is to turn to renting as a long term housing solution. This growing demand from people in good jobs earning decent salaries creates an interesting investment proposition for large scale investors. If the political, fiscal and economic environment is made accommodative we believe this institutional capital could begin to finance new housing delivery of considerable scale for rental and through large scale, dedicated professional management businesses.

2.4 With probably all Assured Shorthold Tenancies being for terms of less than seven years, responsibility for, and the cost of, operating residential rental properties falls to landlords, including all structural and external maintenance, repairs and redecoration, all sanitary and heating installations, everything in the common parts of blocks of flats such as lift maintenance and utility costs, and insurance. In its 2011 UK Residential Index, IPD identified non recoverable operating costs accounting for over 27% of gross rental income.

2.5 In reviewing the private rented sector at the present time and considering any changes to it, it is important to keep in mind lessons learned from previous attempts to influence this market.

3.0 The Quality of Private Rented Housing

3.1 Only 16% of the private rented sector involves post–1990 property, with 40% being pre–1919. Even though older property is generally more onerous from a maintenance perspective, for which landlords remain responsible, a recent survey found that 72% of private tenants were satisfied with the level of maintenance and repairs provided by landlords. There was a similar percentage for housing association tenants, with a lower percentage for local authority tenants and owner occupiers.

3.2 With the high level of operating costs referred to above there may be temptation, for some landlords, to attempt to limit expenditure on maintenance and improvements. Incentives, such as capital allowance for improvements and reduced VAT, should be considered, possibly where linked to longer term tenancies as proposed by Shelter in its recent report, or where landlord licensing schemes, such as those implemented by a local authority, are in place.

3.3 It is fully recognised that there are landlords who are unsatisfactory, and a 72% satisfaction level provides room for improvement. The nature of the residential rental market is that it requires considerable management involvement by landlords, with requisite skills, and, with tenants having the ability to move relatively easily, landlords need to ensure they provide a good level of service to retain tenants. Increasing the overall supply of housing, and availability within the private rented sector, will create more competition between investors and give occupiers greater choice, and is the most likely way of raising standards.

4.0 Levels of rent within the private rented sector—including the possibility of rent control

4.1 Gross income returns from residential property, as a percentage of capital value, are generally low by comparison with other forms of property investment. With potentially higher non recoverable operating costs than other forms of investment property, net income returns can be even lower.

4.2 Investors in the private rented sector have differing aspirations. Institutional and corporate investors seek income, and the low income returns from residential property are sometimes cited as a barrier to entry. Private investors include those in need of income as well as those for whom income is less of an issue, as they are more concerned with the preservation of capital and the prospect of capital appreciation.

4.3 Rent levels within the private rented sector are entirely a function of the open market, with rents on a initial letting reflecting all the relevant circumstances at that time. A curiosity for landlords can be that there may be little difference in rent level for a property whether it is let on a furnished or unfurnished basis. It can be more difficult to reassess rents during the course of a tenancy or at lease renewal. Although demands by landlords for high rent increases are sometimes quoted, it is considered that these are unusual, and it is not uncommon for tenants to demand lower rents as a condition of renewing a tenancy or remaining in occupation where they have a break.

4.4 With shorter leases of, say, a year, where a tenant renews the lease a landlord may consider the level of passing rent but may decide not to adjust it or may make only a marginal adjustment. In other situations, possibly with longer leases, rent levels may be adjusted in line with a predetermined formula such as a fixed percentage or linked to RPI. The Shelter report, and the findings of the JLL research paper that formed part of it, make recommendations to encourage private investors to consider alternatives to open market increases.

4.5 One of the strengths of ASTs and their application to the rented sector is the opportunity that they provide for different landlords to offer choices, including ones that apply to rent levels and means of reassessment.

4.6 It would be a retrograde step for government to attempt to interfere in this market. Any suggestion of the introduction of rent control would repeat the effect from the past, with the type of landlord that should be encouraged to participate in the market making the decision to have no involvement.

5.0 Regulation of landlords and of letting agents

5.1 We appreciate why some local authorities are attracted by the prospect of regulating landlords, as illustrated by Newham, but question the real benefit of introducing a scheme that involves all private landlords, yet excludes social landlords, and is borough-wide or even potentially country-wide unless a very simple solution is proposed. There is a risk that resources are spread too thinly to do little more than act as ineffective administrators, rather than concentrating on enforcing existing rules and on poor landlords, who may well be agile enough to attempt to avoid detection unless pursued vigorously.

5.2 We would support the regulation of letting agents.

6.0 Tenancy agreements and length and security of tenure

6.1 The flexibility of lease lengths that is a feature of ASTs may not be widely appreciated. With buy-to-let investors being a significant part of the market, and many mortgage lenders requiring buy-to-let investors to offer tenancies of no longer than 12 months, it can be assumed that this is the length of an AST. There are however landlords who have, for many years, granted tenants longer leases providing them with security for, say, three years, whilst at the same time enabling tenants to give 2 months’ notice to vacate at any time after the initial six months.

6.2 Investors have differing requirements, varying form “accidental” landlords resulting from of an inability to sell, people working away from home for a period of time, retailers letting out residential accommodation above a shop, those seeking a medium term alternative to the stock market and longer term professional investors and institutions. ASTs enable all of these differing requirements to be met, and encourage as much accommodation as possible to be made available for occupation.

6.3 The introduction of ASTs opened up the possibility of shorter term lettings for those in need of housing without wanting to purchase. More recently renting has begun to be seen again as providing choice and an alternative to purchase, for a home over the longer term. It is anticipated that this will be matched by some investors being attracted by the opportunity to achieve longer term commitments from tenants. For some investors, a concern about granting longer leases is the length of time it takes to achieve vacant possession where it is necessary to follow court proceedings for arrears of rent or other breaches of a lease, including anti-social behaviour impacting on other residents.

6.4 For some landlords, there would be attractions in having longer term tenancies of, say, five years as proposed by Shelter, but without a tenant’s ability to vacate on two months’ notice, to give greater certainty of income that is more similar to commercial property. However residential tenants generally appear to prefer their ability to retain their flexibility.

6.5 It is most unlikely that any investor would be willing to consider leases of as long as 10 or 25 years, as has at times been aired as a way of reducing rent levels with tenants encouraged to take on responsibility for maintenance. Any lease over 21 years is enfranchiseable, and not therefore something a landlord will create. A 10 year lease with service charges would be subject to the consultation requirements of long leasehold property, and a management challenge for landlords. Experience demonstrates tenants’ reluctance to spend money on maintenance unless they have very long leases.

6.6 Even long term investors will wish to retain the ability to achieve vacant possession at some stage when planning a disposal. Unlike commercial property, residential property generally has a lower capital value when tenanted by comparison with values for vacant possession. Investors will therefore want to be able to obtain vacant possession when anticipating a sale.

6.7 Any indication of a statutory imposition to introduce security of tenure for tenants would result in the majority of existing investors abandoning the private rented sector, and discourage potential new entrants to the market.

6.8 We believe that the market, left to its own devices, will continue to evolve and offer a wider choice to reflect the changing, and varying, requirements of occupiers. That is not to suggest that all owners will offer a range of options for occupiers, but rather that owners may establish their own opportunities in response to the market.

7.0 Summary

7.1 The private rented housing sector is beginning to be accepted as providing an alternative to ownership for residents considering longer term occupation, as well as retaining its attractions for those with short or medium term requirements. Investors need to have confidence that there is a long term future without the prospect of government intervention, and without a return to the sort of controls that existed not all that long ago, to be encouraged to participate in the sector. If the political, fiscal and economic situation is accommodative we believe we are at a point where significant new institutional capital could begin to finance new housing delivery of considerable scale for rental and through large scale, dedicated professional management businesses.

7.2 Improvements to the quality of accommodation and standards of management can certainly be made, but the way to do this is by way of incentives rather than restrictions and increase the amount of available property. At the same time, it would be beneficial for more information to be made available to landlords, tenants and professional advisers covering such matters as the range of lease lengths that can be granted under ASTs, differing options for reviewing rent levels, the extent of landlords’ repairing obligations and the level and cost of services that can be provided by letting and managing agents.

7.3 The private rented sector can play a valuable part in helping to increase the amount of accommodation that is created, but it will only ever be one choice for occupiers and the creation of more homes whether for sale or to rent is essential.

January 2013