Communities and Local Government CommitteeWritten evidence submitted by Essential Living

About Essential Living

Essential Living is a new platform created through a partnership between the owners of Essential Land LLP and London based M3 Capital Partners. The business strategy is to deliver 5,000 units of private rental stock over the next decade across London and the South East.

Essential Living aims to build a fully integrated development and operating company which is funded via an initial muliti-million equity commitment provided by Evergreen Real Estate Partners LLC. M3 co-invests in and manages Evergreen which has total equity commitments of $3.0 billion.

This is the first structure of scale in the UK specifically created to invest institutional funds into the UK residential development sector from a pre-planning through to a post-construction and ongoing, leasing, management and operating stage.

The Essential Living platform has the benefit of being well capitalised with long term institutional money that is seeking to build a portfolio of a scale that reflects the growing importance of the private rented sector in the UK. Essential Living will utilise its experience of investment in the multifamily sector in the US (UK equivalent of PRS), the student sector in London and Australia and the Senior Housing sector in the US and UK. M3 has a substantial track record of large scale investment in long term for rent accommodation. Coupled with the experience of the Essential Land partners who have developed over 5,000 residential units in London over their collective careers, Essential Living has the ability to provide a fully integrated development solution for the private rented sector.

Essential Living was incorporated in 2012 and has invested $50 million in development sites that will be brought forward for PRS in the “pre-development” phase in 2013. The Essential Living management team combines a wealth of expertise in finance, land acquisition, residential marketing, town planning and community engagement. It is these skill sets, combined with a long-term equity commitment that make Essential Living one of the market leaders in the emerging private rented sector.

Executive Summary

1. Market fundamentals mean that greater numbers than ever are turning to the private rented sector to meet their housing needs (see next section). Essential Living therefore welcomes the opportunity to respond to the Committee’s inquiry.

2. We focus our comments in this submission mainly on how the standard of rental housing can be improved. We are concerned that the fragmented, largely unprofessional nature of the private rented sector as currently structured means that poor quality stock, unresponsive management and low levels of maintenance will continue to be a common feature of the market.

3. It is our view that an increase in long-term institutional investment in the private rented sector should increase choice and quality by offering innovative purpose-built accommodation that will meet the needs of residents both now and in the years to come.

4. As a corollary, we believe it will also drive professionalisation of the market, with higher levels of service and consistency, contrasting favourably to the outdated landlord/tenant relationship that characterises the fragmented buy-to-let market.

5. In our view the following steps would help increase both the supply and quality of housing for rent:

(a)Ensure that there continues to be impetus behind the sale of surplus central government, local government and executive agency land suitable for development into housing;

(b)A prioritisation of new private rented sector developments by local authorities;

(c)Remove unnecessary planning barriers to the development of new stock for the private rented sector. The relaxation of S.106 requirements, reflecting the significantly different economic model for develop to rent vs sale, would help unlock a considerable number of developments;

(d)Ensure the Private Rented Sector Task Force set up in response to the Montague Review is sufficiently resourced and has the political backing to make meaningful improvements to the structure of the market. We believe that broad consultation with a range of stakeholders will help the Task Force achieve this;

(e)Facilitation of open book discussions about viability. Local Authorities currently review planning applications based on traditional Three Dragons Toolkits or Argos developer appraisals. These simply do not consider the costs involved with a sophisticated institutionally backed PRS model. For example, a professionally managed PRS does lead to higher “up front costs” on a project. Materials need to be robust and of a higher external design quality to reduce maintenance costs. Sustainability also needs to be of a higher standard to manage utility costs. After development and stabilisation, PRS will require higher “onsite” costs than a traditional build to sell block as it will provide a constant management and maintenance presence. We call on the Committee to consider how changes can be made to the viability process to support future PRS development;

(f)Traditional affordable housing models need to change to reflect the type of funding used for PRS. An institutionally backed PRS development sector should not be required to deliver lifetime or fixed-termed tenancies which impact on valuations and long term financial position. A far better way to deliver affordable units is through discounted market rental units. This can achieve social policy objectives whilst not hindering institutional appetite to invest in the sector; and

(g)Licensing of landlords and penalties for non-compliance.

Essential Living’s View on the Private Rented Market

Private rental is an increasingly important form of tenure

6. The private rented sector has long been in the shadow of owner occupation in the minds of the public and policymakers in the UK. However, a number of social and economic trends will continue to make the sector increasingly important in meeting the demand for housing.

7. The first trend is that London—the largest urban zone in the EU—has a rapidly increasing population and an insufficient supply of new housing.1 This supply/demand mismatch puts pressure on affordability across the market.

8. The second trend is that affordability for first time buyers (FTBs) has deteriorated. This is because lenders are demanding much larger deposits following the financial crisis.2

9. Third, there is evidence that social attitudes are changing. A recent survey of 2,220 participants found that the public believe that long-term renting will become the tenure of choice in the UK. Of the respondents, 67% see long-term renting becoming the tenure of choice in UK, whilst 54% expect there will be more people renting than home owners in 15 years time.3

10. Fourth, the international nature of London’s economy means that there is a substantial flow of foreign capital and labour through the city. On the demand side, workers from outside the UK may choose to rent, particularly if their stay is relatively short-term. On the supply side, there is evidence that offshore investors are replacing buy-to-let (BTL) purchases, which have fallen sharply in recent years.4

11. The growing size and importance of this market makes it of critical important that policies are in place to ensure that to ensure that private renters have access to high quality, affordable housing.

Comments on 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

Buy-to-let dominates, leading to inconsistency and fragmentation

12. The BTL sector is at the heart of the supply of rented accommodation, particularly in London. According to a report by Berwin Leighton Paisner, 90% of the PRS is dominated by individual BTL landlords, with fewer than 10 properties in their portfolios.5 This means the BTL sector is highly fragmented, and controlled by non-institutional and largely unprofessional private landlords focussed on asset appreciation rather than a steady stream of rental income to secure a return.

13. Whilst there are many good BTL landlords, the experience of tenants is patchy. In a fragmented market it is difficult for prospective renters to find out anything about the reputation of their landlord or indeed much about the underlying quality of the property they wish to rent.

14. In addition, a large number of rented properties are dated Victorian conversions that offer inferior amenities and poor environmental sustainability standards compared to new build residential properties. This also leads to an erosion of family housing stock. The complexity inherent in the patchwork of freeholders, leaseholders, management agents and management companies within one flat conversion often found in London, means that maintenance problems can take a long time to address and tenants are left in the middle.

15. Finally, the relationship is characterised as a dated tenant/landlord divide. This means the concept of customer service is non-existent in this market, a particular issue when it comes to the remediation of problems.

Growth of a professional rental sector can help increase supply of quality new stock and drive higher standards

16. We can learn from the experience of other countries. In the United States, for example, there is a well-developed professional rental sector. Dedicated companies own large portfolios of “multifamily” apartment buildings. They are professionally managed and occupied solely by renters who contract directly with the building owner/manager. This can bring advantages. The buildings are purpose-built and equipped to meet the needs of renters. A clear ownership and management structure means that there is investment in rolling programmes of preventative maintenance. Standardisation of interiors and appliances mean that problems can usually be fixed rapidly. This is not to say that the US is an ideal, but it may hold some lessons for the private rented sector in the UK—particularly in London, where half of the population live in flats.6

17. Essential Living’s model draws on elements of this experience. We believe that purpose-built new stock, backed by long-term investment which relies on satisfied tenants to provide sustainable rental income rather than relying solely on asset appreciation will better serve both us as owners and renters.

18. In addition, a professionalisation of the rented sector should see an increased emphasis on high quality building design and construction. Larger scale new build allows this to be “baked-in” in a way that is not possible in the BTL sector:

(a)Sustainability—Building not just to satisfy current building codes but also future ones, increasing the safety and economy of our buildings as well as maximising resale value;

(b)Adaptability—Units that can be refitted rapidly to add amenities for elderly or disabled persons. This is increasingly important as the population ages;

(c)Quality and standardisation—Using high quality fixtures, fittings and appliances that will stand the test of time and can easily be repaired and replaced; and

(d)Service—with scale and standardisation comes the ability to offer higher and more consistent levels of service, recasting the relationship more as one between customer and service provider than landlord/tenant.

Conclusion

Steps to unlock institutional investment will help increase standards in the sector by offering greater choice for renters and an increase in purpose-built new stock

19. We believe that increased institutional investment and greater professionalism in the sector will increase the quality of rented accommodation. The BTL sector has, and continues to have, an important role in providing supply of rental accommodation. However, there is room for new and innovative models and we welcome the opportunity to share our views with the Committee.

20. In particular the following steps would help increase both the supply and quality of housing for rent:

(a)Ensure that there continues to be impetus behind the sale of surplus central government, local government and executive agency land suitable for development into housing;

(b)Prioritisation of new private rented sector developments by local authorities;

(c)Remove unnecessary planning barriers to the development of new stock for the private rented sector. The relaxation of S.106 requirements, reflecting the significantly different economic model for develop to rent vs sale, would help unlock a considerable number of developments;

(d)Ensure the Private Rented Sector Task Force set up in response to the Montague Review is sufficiently resourced and has the political backing to make meaningful improvements to the structure of the market. We believe that broad consultation with a range of stakeholders will help the Task Force achieve this;

(e)Facilitation of open book discussions about viability. Local Authorities currently review planning applications based on traditional Three Dragons Toolkits or Argos developer appraisals. These simply do not consider the costs involved with a sophisticated institutionally backed PRS model. For example, a professionally managed PRS does lead to higher “up front costs” on a project. Materials need to be robust and of a higher external design quality to reduce maintenance costs. Sustainability also needs to be of a higher standard to manage utility costs. After development and stabilisation, PRS will require higher “onsite” costs than a traditional build to sell block as it will provide a constant management and maintenance presence. We call on the Committee to consider how changes can be made to the viability process to support future PRS development;

(f)Traditional affordable housing models need to change to reflect the type of funding used for PRS. An institutionally backed PRS development sector should not be required to deliver lifetime or fixed-termed tenancies which impact on valuations and long term financial position. A far better way to deliver affordable units is through discounted market rental units. This can achieve social policy objectives whilst not hindering institutional appetite to invest in the sector; and

(g)Licensing of landlords and penalties for non-compliance.

January 2013