Communities and Local Government CommitteeWritten evidence submitted by British Property Federation

Introduction

1.1 Thank you for this opportunity to contribute.

1.2 In 2008, the previous Government commissioned a comprehensive review of the private rented sector (PRS).1 It recognised some challenges, but also the sector’s positive contribution to housing the nation.

1.3 An expanded PRS has been critical to important objectives for successive Governments:

The growth in higher education would have been nigh impossible without it.

Labour mobility would be more constrained and unemployment therefore higher.

Fewer people would have been housed and fewer houses built.

It has helped support important inward migration and investment.

1.4 To ensure the PRS continues to grow and contribute to Government objectives one of the BPF’s priorities has been encouraging greater institutional investment in the sector and through it a contribution towards building more homes for rent. We welcome the cross-party support that has received.2

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

2.1 People should have private rented accommodation that is fit for purpose. The vast majority of landlords and agents agree with that and deliver it.

2.2 The quality of the sector is mainly determined by two factors—properties, and the skills of those who manage them. We have set out in appendix 1 statistics on the sector’s standards and quality improvement.

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

Rental statistics—the true picture

3.1 At present, growth in market rents is undershooting CPI in over 60% of local authorities across England. This is according to reliable figures, produced by the Valuation Office Agency, and based on nearly 500,000 measurements.

Between Sept. 2011 and Sept. 2012 (the latest data available):

Average rents grew by 1.31% in England.

Regionally, average rent was down by 1.41% in the North East. Most other regions saw small average rental growth. London was an exception, where average rents were up 3.32%.

In 198 out of 324 local authorities (LAs), rental growth was below 2.7% (current CPI).

In 98 out of 324 local authorities, rental growth was negative.

TABLE SHOWING RENTAL GROWTH ACROSS THE REGIONS

Region	LAs with negative rental growth	LAs with positive rental growth	LAs where rental growth exceeded 2.7%
North East	7	5	1
North West	16	23	10
Yorks & Humber	7	14	8
East Midlands	8	32	13
West Midlands	10	20	13
East	14	33	21
London	4	29	24
South East	20	47	25
South West	12	23	11

3.2 Even in London (see chart), rents have undershot RPI for most of the past decade. Whilst in the past two years they have been greater than RPI, the cumulative effect over the decade is still significantly below RPI growth.

3.3 The main contribution to recent “unaffordability” in London is not rampant rental growth, but slow wage growth, with average earnings growing significantly below trend.

Rents in London (Source: GLA)

3.4 The presentation of “rents” in the media often draws on flawed “surveys”. They can be based on advertised rather than realised rents, on small samples, and only take account of properties being re-let and therefore not with tenants in situ. This latter point in particular is a large contributor to overstated rental inflation. Landlords will tend not to invoke a rent rise every six or even twelve months for tenants in situ, but rebase their rent to market when a tenant moves on, which on average is every 20 months.3

Rent controls

3.5 There has been a near consensus in the UK that rent controls do untold damage to the market rented sector, harming investment, contributing to poorer property conditions, and leading to other perverse effects. We are therefore concerned to see the issue being put back on the policy agenda.

3.6 We are hesitant to draw on international comparisons, because there is often a multitude of different factors to take account of. One interesting aspect to illustrate, however, is rent controls in New York. There, perhaps the most perverse outcome is that by suppressing rents it has just attracted even more people to want to rent in central New York, and many of those enjoying rent controls are not on lower incomes, but the relatively well off looking for a weekly “crash pad”. The New York experience illustrates that rent controls are a crude way of helping those on low income as there is no control over who benefits and so the main beneficiaries may be the relatively well off looking for a “cheap” home in the centre. Social housing in the UK is at least person-specific and largely occupied by those in need.

If not market rent, then what?

3.7 We have illustrated in appendix 2 some of the flaws with other methods of rent review, probably the worst being indexation. It is worth reiterating that in nearly two-thirds of local authorities indexation would have left tenants worse off last year.

Rents and housing benefit

3.8 There is not scope to cover the reforms in detail here. We have focused on four specific issues, which are covered in appendix 3.

Regulation of landlords, and steps that can be taken to deal with rogue landlords; regulation of letting agents, including agents’ fees and charges.

4.1 The Federation treats every regulatory proposal on its merits. We are not anti-regulation, in the “less” rather than “more” camp, but most of all want effective regulation.

4.2 Effective regulation requires three aspects: well-drafted legislation, which is promoted well and enforced rigorously. Our experience is that the first of these is generally done well.

4.3 However, the second is generally done very badly. In the last financial year of the previous Government, DCLG spent less than 3 pence per household in the PRS on communicating their rights and responsibilities. We expect under the current Government, with its marketing moratorium, that figure will be less. For context, £126.5 million has been spent on communicating digital switchover, over £4 per household in the UK. Nearly every household (23 million) will have been communicated with. Through inadequate promotion budgets Government condemns much regulation to fail.

4.4 The final aspect—enforcement is also under-resourced, and contributes to a feeling amongst landlords that the compliant comply, whilst the non-compliant get away with it.

4.5 The Federation was willing to support a simple registration scheme, as part of the Rugg Review package. It seemed to offer some prospect of improved communication with landlords and tenants, rationalisation of local schemes (important for larger landlords), and effective enforcement. This was to be achieved by landlords and tenants having to quote the landlord’s registration number in all their transactions with the state—access to the courts, tax returns, benefit claims, tenancy deposit lodgement, etc. It required the support of several departments, which did not seem forthcoming.

4.6 We also remain supportive of the Rugg recommendation that agents should be licensed within a framework that builds on existing self-regulation. We would like to see all agents offering independent redress and client money protection, which the members of RICS, ARLA and NALS do.

4.7 We do not believe in caps on fees, but are very supportive of full disclosure of all fees and charges up front. Some of our exemplar landlords are very vigilant at monitoring what fees are passed on to tenants via their agents, but more landlords could do this.

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

5.1 With benefit changes now only offering 25–34 year olds support for shared accommodation, the importance of HMOs in housing a part of our community cannot be overstated. Single people are rarely a priority for social housing, and a room in an HMO may be their only housing option. In a world of constrained housing supply HMOs are also an extremely efficient way of using limited housing stock.

5.2 We are therefore concerned about the extent to which some local authorities are seeking to restrict the number of HMOs in their locality, often in the name of preventing the growth in student housing. The Rugg Review showed that only 59 out of 8,000 council wards in England had student densities of ten% or more of all households.

5.3 Decisions to constrain the growth of HMOs are often taken without an evaluation of the need for such accommodation in a local area. Shared houses do not form a part of authorities’ strategic housing market assessments. A more evidence-based approach is desperately needed.

5.4 The licensing of larger HMOs is mandatory, and for other types of PRS accommodation local authorities have a discretionary power enshrined in the Housing Act 2004. There has been little evaluation of the effectiveness of such powers, and whether they are helping local authorities identify the worst properties and landlords.

5.5 Local authorities’ ability to introduce discretionary licensing schemes has been made easier with the introduction of a general consent in 2010. Local authorities, however, still have to abide by the qualifying criteria/processes set out in the Act. If this is not done properly the only way to challenge it is via judicial review. That does not seem a particularly productive use of High Court time. As a deregulatory measure appeals against a licensing designation should be taken in the first instance to the Residential Property Tribunal Service.

Tenancy agreements and length and security of tenure.

6.1 When this issue was looked at as part of the Rugg Review it was concluded there was not a significant problem;4 that although most tenants in the sector were on assured shorthold tenancies, there was a variety of lengths of stay and for example, for the lowest‐quartile income group, 36% had stayed at their current address for five years or more. Rugg concluded:

Attention paid to the legalities of tenancy agreements has distracted attention from exploring the issue of why tenancies end against the wishes of the tenant, because it is assumed that—in the PRS—tenancies generally do. In actuality, tenancies fail for specific reasons, such as rent arrears, poor quality property making a tenancy unsustainable and issues relating to anti‐social behaviour. It is perhaps more appropriate to focus policy intervention on these reasons for tenancy failure, rather than on a tenancy framework that appears—for the most part—adequate for purpose.

6.2 English Housing Survey data shows that the length of stay of private rented sector tenants broadly splits into thirds: one third staying less than a year, a further third staying between one year and less than three years, and the final third staying for three years plus. This supports the evidence of our membership that the vast majority of tenants stay for as long as they want and are welcome to. Indeed there will also be wide regional differences, with one of our larger landlords in the Midlands, having an average dwell time of 4 years.

Length of Residence of Private Renters—English Housing Survey 2010/11
less than 1 year	35.0%
1 year, under 3 years	32.3%
3 years, under 5 years	14.0%
5 years, under 10 years	9.2%
10 years, under 20 years	4.9%
20 years or more	4.7%

6.3 Data would therefore suggest that variety in tenure length is being delivered. We can understand, however, that some tenants want the permanence of knowing their tenancy is for “x” years. We therefore want to be helpful to Shelter and others seeking to encourage longer offers. This chimes with some of our work on institutional investment, which is about creating a more sophisticated range of rental accommodation offerings from a professional cadre of landlords who have built or acquired properties purely for the purpose of renting.

6.4 However, the only way to make major progress in the wider adoption of long-term tenancies is to tackle the barriers and incentives to their use, and failure to attract landlords to use them will not be down to any failure on landlords’ part, but a failure to address the barriers and incentives.

6.5 There are several reasons why longer tenancies are not used more by private sector providers:

Valuation—We live in an uncertain world. There will always be occasions when investors want, or need to sell investments relatively quickly. A property with a tenant will be valued at less than the same property with vacant possession. The valuation impact of a tenanted property when a landlord needs to refinance is a similar issue.

Competing assets—Market rented housing competes for capital with other investment assets. For the smaller investor, one buy-to-let investment property will often be their only source of major saving or investment. Greater security of tenure tends to mean having to have some sort of rent review mechanism and court sanction for disposals. There are not many other investment assets where you have to go court to sanction a disposal.

Debt clauses—There is a very specific issue, which is the restrictions lenders place on tenancy type and length. This is a manifestation of the valuation issue again, and lenders’ fears of having a property on their books that has to be sold at less than full vacant value.

Lack of stability—Unlike the commercial property sector, stability tends to be lop-sided. The tenant gets a longer tenancy, but unless there is a stipulation that they are liable for the rent to the end of the tenancy the landlord is not getting the security of income that would make it more compatible with say investment in a commercial property lease.

Going to court—“Bad-tenants” exist and long-term fixed contracts create another hurdle that a landlord must overcome to get an investment generating a viable return. Landlords often defer action and rely on the tenancy coming to an end to save costs associated with potentially more complicated litigation.

6.6 The private rented sector needs to continue to grow and to attract a breadth of capital if it is to meet the pressures it faces. Current investors in the market rented sector invest in it for its market rented characteristics. The use of tenancies offering a different form of return, such as index-linked rents tied to a longer tenancy, would be a leap of faith, perhaps attracting new investors, but jeopardising investment from what has proved a reliable source over the past twenty years. There is a fear amongst landlords based on past experience that once governments interfere in the terms of a tenancy it tends to snowball. Stipulating length of tenancy tends to lead to some stipulations on how rents are reviewed and set, and in turn how tenancies can be ended.

6.7 There is also a careful consideration that affects tenants if the market was forced on to index-linked rents. As shown elsewhere in our evidence, rents are undershooting inflation in two thirds of local authorities, in some by significant margins. So not only would such a policy be a gamble on investment, but would leave constituencies up and down the country with tenants paying more rent. Taking a couple of examples, in Brighton and Hove last year the average rent fell from £999pcm to £947pcm. If it had been linked to RPI (3%) it would have risen to £1029. In Durham, the average rent fell from £459pcm to £454pcm, but would have risen to £473pcm if index-linked.

6.8 There are simple things that could be done to promote longer tenancies.

Better and more readily available information for landlords and tenants about the performance of different rental terms—market, RPI, CPI, etc.

Dealing with anti-social tenants in a long-term tenancy can be daunting prospect for landlords. One of our larger landlords that offer longer-term tenancies employs a welfare officer, but that is not realistic for smaller investors. Local authorities providing such a service might help.

Possible tax reform—it is counterintuitive that short holiday lets currently attract a better tax treatment than longer-term tenancies.

6.9 Beyond these relatively simple measures, if a longer-term offer is to become more commonplace the perceived drawbacks we have set out in 6.5. must be tackled. The following might help:

The ability to terminate tenancies swiftly on landlord sale or redevelopment, and rent arrears or anti-social behaviour, without having to go through full Court sanction.

Gaining the support of debt providers for longer-term tenancies.

Providing mechanisms that also give landlords a genuine stable tenancy, for example through a trusted intermediary.

Providing some incentives. Landlords could elect to provide longer tenancies in return for tax preferences, eg access to lower VAT on their repairs, maintenance and management.

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

7.1 This only took effect in November 2012 and it is too early to say what is happening.

Conclusions

8.1 The Rugg Review in 2008 was generally well received by all for its coherent and sensible package:

(a)To improve data on the PRS, and hence our understanding of it.

(b)To introduce a very simple registration scheme for landlords, but one that was enforceable as set out elsewhere in our evidence.

(c)To license agents, but building on existing self-regulation.

(d)To treat landlords in a business-like fashion for tax purposes. (Changes to SDLT recommended by the Review have since been implemented by the present Government).

(e)That there was little evidence of landlords evicting tenants on a whim. Most tenancies ended because of changes to tenants’ circumstances.

(f)That significant concentrations of HMOs were limited to very few wards and planning powers on HMOs were likely to be misused and constrain a needed form of housing.

8.2 Unfortunately, Rugg was published in October 2008 as attentions on housing policy were diverted elsewhere by the developing economic crisis.

8.3 Governments ask very learned people to conduct reviews. It would be sensible if future policy at least started from the basis of looking at “what the last person had said and recommended”.

8.4 As we have highlighted, a challenge that Rugg faced was getting buy-in across Government. The PRS is rightly mainly a DCLG issue, but the Review recommendations required the co-operation of HM Treasury, BIS and DWP. That didn’t seem forthcoming.

8.5 On rent controls, we can’t stress enough how ill-informed some commentary is on what is happening to market rents at present and the damage that careless talk and policymaking could do to investor confidence, the sector and ultimately housing provision. There is unprecedented institutional interest in the sector, which is translating into action. Careless talk on rent controls will throttle this.

8.6 On longer-term tenancy offers, we remain willing to be helpful, but the only way to achieve more long-term offers is via addressing the barriers and incentives to their use. Compulsion would pose a huge risk to a reliable source of housing investment, constrain supply, and alongside probable policy failure indexation would result in lots of tenants paying a lot more rent.

8.7 On standards, we share a deep desire to see all tenants enjoying a standard of accommodation and service that is received by the majority of those who live comfortably in the sector. We remain very willing to work with anyone seeking to tackle “rogue landlords, or agents”, but if pursuing regulation, only if well-advertised and widely enforced and sufficient resource is made available.

January 2013

APPENDIX 1

STANDARDS IN THE PRS

A1. The sector is extremely polarised between new property (16% is post-1990) and very old (40% is pre-1919). The old stock in the PRS can fail modern standards and there are further policies in the pipeline, which seek to offer a “carrot and stick” to the owners of such property, offering them and their occupiers access to Green Deal finance for energy efficiency improvements, but a ban on property being let out with an F or G energy performance rating from 2018. Dialogue on the detailed regulations that implement this will start shortly. It is worth stressing, however, that the growth of new property in the sector has already made a significant difference. The average SAP rating of PRS stock is now 53.5, compared to 52.8 for owner-occupied property. The sector’s SAP rating has also seen the greatest change over the past 15 years, up from 37.9.

A2. On management, evidence5 suggests that tenants are generally satisfied with the management of their properties. For example, 71% of tenants are either very satisfied or satisfied with the way in which their landlord carries out repairs and maintenance, a higher proportion than for social tenants, with less dissatisfaction expressed in the PRS than amongst housing association tenants. Recent statistics published by the GLA, however, show that 60% of landlords have no property management qualification. Seeking to bridge that gap over the past decade has been the voluntary accreditation movement. It was burgeoning with local authority support, but is now challenged by local authority budget cuts, and needs some rationalisation, which London’s Mayor is pursuing.

APPENDIX 2

IF NOT MARKET RENT, THEN WHAT?

A3. The Federation represents a variety of property sectors and there is no “perfect way” of setting rents. It is often presumed that a better way is to link to an inflation index—RPI or CPI. The last 20 years has illustrated however, that RPI and CPI, even although they are targeted by the Bank of England, have not been stable or predictable. It is why the business community has complained about their business rate increases, which are linked to RPI. A couple of years ago there was also a furore in the social rented sector, first in 2010 when September’s RPI was negative and therefore rents in the social sector would have fallen, with consequences for social landlords’ investment plans; or in 2011, when September’s RPI was 5.4% and impact on tenants’ already stretched budgets. Recent history therefore shows that index linking is neither stable or predictable, flitting between -1.6% and 5.6% over the past three years, and with what might appear to be quite small annual increments compounding into a far larger increase than people might anticipate.

A4. A very stable and predictable way of setting rents is simply to set a fixed uplift in an occupiers’ tenancy or lease agreement, for example the rent will increase by 2% per annum. This is sometimes used in both sectors but represents a gamble for landlords or tenants about what is going to happen in the wider economy.

A5. Rent inflation tends to correlate very strongly with average earnings (with some lag), and therefore linking rents to average earnings might be a good way of setting rents and would mean that rents would have the same “affordability” at some date in the future as they do now, but only for the “average” person.

A6. To reiterate, it is not a case that every tenant sees their rent rise every year. It is very common practice in the market for private landlords only to rebase their rent when a tenant moves out.

APPENDIX 3

RENTS AND HOUSING BENEFIT

A7. We conducted analysis with the CIH earlier in the recession to seek to understand what was causing the increase in the nation’s PRS housing benefit spend. Our analysis between November 2008 and February 2010 is dated now, but found that almost all of the increase in that period was attributable to the increase in caseload, and the relative shift in caseload to more expensive housing areas of the country. The Government in its portrayal of benefit claimants tends to give the impression that claimants are long-term, and that there is a structural issue of getting these people back to work. Whilst that may be true for some, the growth in housing benefit over the recession is mainly attributable to the cyclical impact of the recession. For those affected by recession housing benefit is doing what it is supposed to do—keeping people in their homes, and by doing so, providing them with the stability to improve their chances in the job market. There was no evidence of landlords “cashing in”. The cyclical increase in claimants does not generally increase demand, which might drive up rents—claimants are already in the housing market and simply replacing one means of payment from their “own pockets” with partial or full state support.

A8. The table shows outside some very specific areas there is little evidence of mass withdrawal of landlords from the housing benefit market thus far. Outside these areas the monitoring exercise by DWP suggests that at this stage there is little evidence of the package of reforms leading to landlords cutting rents, or tenants moving to cheaper accommodation. The Government is undoubtedly achieving its objective of cutting benefit expenditure, but thus far the impact is mainly being felt in claimant shortfalls.

HOUSING BENEFIT CLAIMANT NUMBERS IN THE PRIVATE RENTED SECTOR

	March 2011	December 2011	August 2012	Mar 2011 to May 2012 % change
England	1,376,440	1,424,300	1,470,390	6.8%
London	267,040	278,460	280,750	5.1%
Inner London	102,200	104,980	102,070	-0.1%
Kensington & Ch.	4,180	3,930	3,150	-16%
Westminster	8,580	8,570	7,430	-13.4%

A9. Particularly in London the impact of the overall cap on benefit is having a severe impact on tenants’ ability to access housing. In boroughs like Brent, for example, the cap is limiting smaller households to approximately the bottom 10% of the market and not paying sufficient benefit to realistically help larger households find accommodation in the PRS.

A10. From April 2013 the uprating of local housing allowance payments will no longer be linked to rents but capped at CPI for 201314 and at 1% for the two years after that. As the VOA figures show in some areas that will not create a problem, as rental growth will be subdued. In rental hotspots, however, only allowing growth of CPI, or 1% will leave claimants with significant shortfalls. In its Autumn Statement the Government announced it will use 30% of the savings to cushion the impact in those areas where rent increases are highest. This will be crucial for people being able to afford their homes. As yet there is a lack of detail, however, on how those funds will be allocated.