Communities and Local Government CommitteeWritten evidence submitted by the Investment Property Forum
The Investment Property Forum (IPF) is pleased to have the opportunity to respond to the Committee’s inquiry regarding the quality and regulation of private rented housing, and levels of rent within the sector.
The IPF is a membership organisation of senior professionals, all active in the UK commercial property investment and finance market. The organisation has a diverse membership of 2,000, which includes fund managers, investors, bankers, lawyers, investment agents, researchers, academics, actuaries and other related professionals.
The IPF’s mission is to enhance the understanding and efficiency of property as an investment, including public, private, debt, equity and synthetic exposure, for its members and other interested parties, including government, by:
undertaking research and special projects and ensuring effective communication of this work;
providing education; and
providing a forum for fellowship, discussion and debate amongst our members and the wider investment community.
The IPF is not a lobby organisation. The IPF’s primary interest in responding to this inquiry concerns the current and future level of engagement by institutional investors in the private rented residential sector.
We confirm that the contents of this letter are not confidential.
1. General Comments
There is a need to increase the supply of rented accommodation to meet increasing demand as a result of people becoming owner occupiers at an older age and a cultural change in the way that renting is perceived—increasingly it is a life-style choice, rather than just a short-term interlude before becoming an owner-occupier.
Greater institutional investment could make a significant contribution to increasing housing supply and growth in the UK. Such investment would help address the funding issues that exist for new development and also provide longer-term leases for those wanting to rent a home long term rather than becoming owner occupiers. This is in contrast to many buy-to-let investors who are often subject to mortgage restrictions on longer-term leases.
However, at present, institutional investors hold a relatively small amount of residential property. In March 2012, the IPF conducted a survey of 42 institutions (pension funds, fund managers, quoted property companies and REITs), with total property assets of £180 billion, and found that holdings in residential accounted for just 4% of the total. Of this 4%, over 50% was invested in student housing, ground rents, development land and dwellings for sale, rather than market rented/assured shorthold tenancy stock. By way of comparison, it is estimated (Source: Hometrack) that private “buy-to-let” investors have committed over £200 billion to the sector since 2000 and this currently accounts for nearly 75% of the market.
The survey also found that institutions now perceive that the private rented residential sector could be a robust market while mature commercial markets, where the majority of their property investment is allocated, go through a difficult economic period. However, these investors are deterred currently from investing in the sector by:
insufficient income returns;
the inability to buy sizeable portfolios;
the higher management costs and resources required compared with the commercial property sector; and
perceived reputational risk.
Two other key considerations for institutional investors are stability in the policy environment and confidence in it. Proposals to control rental levels, in particular, would significantly deter new entrants to this sector and cause at least some existing investors to disinvest.
2. Quality of private rented housing
The traditional image of uniformly low-grade accommodation within the private rented sector is outdated. The private rented sector now achieves good satisfaction ratings—in the latest English Housing Survey 2010–11 (published July 2012), 84% of private tenants were content with their accommodation, compared with 80% of social tenants and 95% of owner-occupiers. The Survey also found that 72% of private tenants were satisfied with the service provided in maintaining and repairing their home, compared with 66% of local authority tenants, 73% of housing association tenants and 66% of owner occupiers.
The challenge is not so much the quality of the existing rented housing stock as the quantity. This is currently insufficient for existing and anticipated future demand creating supply shortages and in certain locations upward pressure on prices.
In order to encourage more investment in housing (not just the private rented sector), the way forward is to focus on incentives, rather than penalties. This is particularly so now when house prices are virtually flat, and in some instances falling, and landlords are already being asked to increase the quality of the housing stock through a number of measures, including the “Green Deal”, and more local authority enforcement. Possible incentives to landlords could include:
reduced or no VAT on repairs and improvements for landlords who sign up to a responsible management standard; and
capital allowances on expenditure.
3. Rental levels in the private rented sector
Data relating to rental levels should be treated with caution, given that in many instances the information relates to asking rents, rather than those actually achieved. Furthermore there is a distinction between rents achieved for new letting and those for renewals of existing tenancies—the latter tend to be lower.
Rental levels in the private rented sector are market driven. In locations where there is a shortage of accommodation to rent, eg Central London, rental levels have been rising above the level of inflation. However, this is not the same on a national basis, as shown in the graph below.
Residential rents per month—2-bed property
The pattern shown on the graph is supported by figures produced by the Valuation Office Agency (VOA), showing that growth in market rents is undershooting CPI in over 60% of local authorities across England. Even in London, rents have undershot RPI for most of the past decade.
Further analysis of the VOA data is included in the submission to this inquiry by the British Property Federation (BPF) and we concur with the BPF’s comments regarding the current level of private sector market rents.
Average house prices have risen faster than rents over the last decade and, as a result, net income returns from residential rents are already low compared with investments in commercial property or student housing. This is perhaps less of an issue for many smaller investors as their decision to invest in the private rented sector is more likely to take into account the potential level of capital growth achievable when they sell with vacant possession. For institutional and other investors that want to lease their property holdings for a longer duration, the low rental yields are a barrier to investment—in the IPF survey, mentioned above, nearly two-thirds of non-investors interviewed cited this as a reason not to invest in the sector.
The introduction of rent controls will reduce the supply of private rented accommodation, not just because of the measure itself but also as an indication of possible further regulation of the sector. Rent controls imply that tenants will be granted security of tenure too. This combination is the surest way to kill off growth in the private rented sector, by both private and institutional investors, for the foreseeable future. This was the consequence of the 1974 Rent Act that caused many insurance companies to exit the sector and they have still not returned despite rent controls effectively ending in 1988, because the experience left deep scars in corporate memories.
The focus, therefore, should be on finding ways to increase the supply in the private rented sector, thereby moderating rental increases and increasing consumer choice.
4. Regulation of landlords
The IPF is not aware of any evidence that suggests there is a need to regulate the activities of vast majority of landlords active in the private rented sector. While rogue landlords do exist, they are a small minority and the adverse publicity they rightly attract gives an erroneous impression of overall landlord behaviour. In our opinion, the best protection for tenants against rogue landlords is not to create new regulations but to improve the enforcement of existing rules. The English Housing Survey 2010–11, for example, found that at least 24% of private tenants do not have their deposits protected despite it being a requirement for the landlord of all property let after 6 April 2007 on an assured shorthold tenancy to protect such deposits using a Tenancy Deposit Protection (TDP) scheme.
Furthermore, regulating all landlords would be challenging from an administrative perspective, requiring the collection of data from around 1.45 million landlords, with 78% of them owning just a single property. Only 2% let out 10 or more units. Conversely, if single unit landlords are exempt, 40% of the privately rented stock will be outside the system of regulation (see DCLG, Private Landlords Survey 2010).
If a system of landlord regulation is introduced, we would favour a national scheme, rather than each local authority setting up its own one. Institutions who do not participate currently in the private rented sector will be further discouraged if they need to register separately in every local authority area where they make an investment. We are aware that Liverpool City Council and the London Borough of Newham have separately introduced compulsory landlord registration under provisions not intended originally for this purpose. This piecemeal approach is unsatisfactory and we suspect may be open to legal challenge.
Overall, we believe the focus should be on incentives for landlords who ensure that their tenants are dealt with in a professional manner and their properties are put and maintained in good order. We would support a national system of regulation that provides benefits to landlords that join the scheme and adhere to minimum standards. Tenants would then know what to expect from their landlord dependent on their involvement with the scheme.
5. Regulation of letting agents
We support the regulation of letting agents. They handle third-party monies through TDP schemes and general experience of consumer issues in the financial services industry points to a requirement for regulation to ensure that such money is managed in accordance with special rules. An appropriate scheme should be drafted in consultation with the leading associations in this sector, ie the Association of Residential Lettings Agents (ARLA) and the Royal Institution of Chartered Surveyors (RICS).
The calculation of agents’ fees and costs should be understandable and transparent but we consider the actual level of these to be a matter of negotiation between the parties, as with the fees of other service providers.
6. The regulation of houses in multiple occupation (HMOs)
There are already regulations in place relating to HMOs and we do not consider that there is a need for further regulation. The need is for better enforcement of the existing regulations.
7. Tenancy agreements and length and security of tenure
The assured shorthold tenancy is the most widely-used tenancy agreement, not least because this is generally the format required by mortgage lenders to buy-to-let investors. The mortgage is based on an assessment of the rent achievable and also the capital value of the property for owner occupation.
From an investor’s perspective, assured shorthold tenancies provide certainty of obtaining vacant possession, if required, in a short and defined timescale. This is very important, given that most of the total investment return from residential property comes from the ability to realise the growth in capital value because rental yields are so low. Consequently, any provisions that give the tenant greater security of tenure in the private rented sector are likely to reduce the number of units available to let as landlords will be less certain of achieving vacant possession as, and when, they need it.
Where institutions and other larger investors hold residential property for long-term rental income (which is more likely to be the case where the property has been purchased at a price at below the current equivalent vacant possession value), they may well offer their tenants longer leases than are the norm under the assured shorthold tenancy regime in order to reduce voids, management resources and costs. In practice, most tenants prefer the flexibility of the standard assured shorthold tenancy term rather than committing themselves to, say, a five-year term in one property. This could be overcome, with landlords offering earlier break clauses and we think institutional investors would be willing to offer this feature (subject to any liability for SDLT), given the highly granular nature of cashflows and probability of retention of significant tenants each year.
Notwithstanding, the introduction of any regulation that provides for additional security of tenure, outside the provisions of the lease agreed between the parties, is likely to result in fewer private and institutional investors entering or remaining in the residential sector, with obvious consequences for overall supply.
8. Conclusion
The shortage of housing in the UK and particularly in London & the South East, where demand is greatest, is now widely accepted as a serious issue. The private rented sector has increased rapidly over the last 10 years and, at a time when public resources for social housing are highly constrained, it has the potential to deliver a significant new supply. This is particularly the case given the potential that definitely exists for institutional investors to be attracted to the sector, creating a valuable source for funding new housing supply to rent. The introduction of rent controls and additional security of tenure provisions at this time would destroy that potential rapidly.
I hope that you find the above comments of assistance. Should you need further clarification of any point raised, please do not hesitate to contact me. The IPF would also be delighted to enter into more detailed discussions with the Communities and Local Government Committee should this be appropriate.
January 2013