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Government housing review signals rental revival

A government review of rented housing launched tomorrow at York University will recognise the British public’s increasing need for rented housing with recommendations that could encourage build to let.

With house building at a standstill, the mortgage market on its knees and buy-to-let expansion hindered, the British Property Federation (BPF) believes a professionally managed private rented sector, with large-scale rented housing developed and managed in the long term by brands, could be the answer.

The Communities and Local Government report, written by Dr Julie Rugg and David Rhodes, will feed a host of recommendations into the forthcoming housing reform green paper that could ease the way for large developers and big investors to enter the market.

Despite repeated calls by the BPF, there are not expected to be any planning recommendations. However, the review is also likely to raise the spectre of more regulation.

It is hoped that the review will recommend stamp duty reforms to help big investors buy up portfolios of residential property more efficiently. The BPF has called for reform of the rules that impose a higher rate of stamp duty on the purchase of a group of properties than that which would be borne by separate individual purchasers of each property. Under current rules, where five separate investors each buy a flat for £130,000 , no stamp duty would be payable (as the unit price falls within the current nil rate band), whereas if a single investor were to buy all five properties from the same seller, stamp duty of £26,000 would be payable (being 4% of the total price of £650,000). For investors wishing to buy large portfolios of unsold stock from beleaguered house builders, this is a major disincentive.

Historically, institutions such as pension or life funds have preferred the more lucrative property markets of offices and shopping centres. They have also been cautious about being involved with residential investments, because of the possible damage to their reputation of tenant disputes.

However, with rental yields rising and property prices falling, there is a massive opportunity to incentivise cash-rich investors into creating a market similar to the branded residential rental sectors that consumers enjoy across Europe and the USA.

With the government destined to fall well short of delivering its promised 3 million new homes by 2020, largely because of the current focus on ownership, the report’s focus on improving the rental market will be broadly welcomed by the BPF.

While moves to promote rental are welcome, recommendations around tougher regulation could send investors scurrying at a time when greater investment is absolutely vital. There is already a complex web of regulatory red tape for councils and landlords to cut through, but without properly resourced promotion and enforcement it simply burdens the good, while the bad escape.

The thinking behind build to let is simple: rental has delivered half-a-million new homes over the past seven years because it has been far more affordable than home ownership. The BPF wants the government to make necessary changes that would allow institutions – such as pension funds – to pump their cash into build to let. The industry believes that if the figures are made to work, we could have thousands of quality and most of all, affordable homes built.

Ian Fletcher, BPF residential director, said: “With the average age of first time buyers now 34, it’s no wonder that more households have found a new home in the private rented market since 2000 than all other tenures put together. Government needs to recognise that and develop a strategy for this increasingly important part of our housing market. We welcome Rugg’s moves to encourage more professional landlords and investors into the market and have long said that a branded rental sector delivering quality and long-term investment is just what Britain needs.

“There is significant demand for renting, both now and for the foreseeable future. If the forthcoming housing reform green paper focuses too much on killing off supply from a few bad landlords, and not enough on how it is going to incentivise investment to meet future demand for rented homes, it will be judged as a missed opportunity.”

Rupert Dickinson, chief executive of Grainger Plc and chairman of the BPF’s residential committee, said: “As the UK’s largest quoted residential landlord we are pleased that government is acknowledging the importance of the private rented sector and its contribution to meeting housing need. While regulation is a concern at the bottom end of the market, the real impetus for growth and improvement will come from institutional investment. This report should be seen as the first step to change”

Speaking at the Labour conference, junior housing minister Iain Wright backed the BPF’s push for a professionally managed rental sector, saying: “Why is it considered solely acceptable to rent as a student but not in your forties? We need to increase the professionalism of the sector. Many areas were decimated by Margaret Thatcher’s ‘Right to Buy’. We need to incentivise good landlords and penalise bad ones. Local authorities have a key role to play in terms of what housing is needed, rather than have an adversarial contest, a long term trusting relationship is vital.”

The BPF is calling for:

Planning reform

The most fundamental barrier to greater institutional investment is being able to acquire or build stock at an attractive yield. To buy stock on a scale and price attractive to institutions is challenging,
partly because most housing is valued for owner occupation rather than long-term rental.

The solution is to build-to-let, encouraging it through legal planning agreement which restricts the use of the property for a period of time to rental and therefore prices it accordingly. To make it financially viable would require lower affordable housing obligations than developments sold for owner occupation. Such a model to some extent already exists, with large scale student accommodation often provided on this basis.

2. Fiscal changes

Where a number of properties are bought by the same buyer from the same seller, stamp duty land tax (SDLT) is charged at the rate applicable to the aggregate price paid for all of those properties, rather than at the marginal rate applicable to the price paid for each of the individual units separately. The effect is that an institutional investor will invariably pay 4% SDLT compared to individual smaller scale investors who may pay 0%, 1% or 3% on their property purchases. This creates an unlevel playing field as institutional investors will naturally have to bid a lower price to derive the same return, or give up the efficiencies of scale that should be available to them if they buy numerous properties together.
3. Modifications to the Real Estate Investment Trust (REIT) legislation

As yet, there has not been a single residential REIT, which reflects that the legislation works for commercial property, but not for residential. A number of changes would be required to make the emergence of residential REITs possible, ranging from reducing the high entry cost of becoming a REIT for businesses that are not already listed property companies, to technical changes to the REIT legislation to accommodate the residential business model.

Notes for editors

Findings from the long-awaited Review of the Private Rented Sector (PRS) will be unveiled at the University of York on Thursday 23 October 2008.

The Review, conducted by academics in the University’s Centre for Housing Policy, draws conclusions on key issues including landlord licensing, institutional investment in renting, retaliatory eviction, poor property condition, and the use of the sector to meet responsibilities to house homeless people.

The Review will bring forward a fresh agenda for the PRS which includes growing the ‘business’ of renting, developing new procurement relationships between local authorities and landlords and devising intelligent tax incentives.

The Review will be launched in the Alcuin Research Resource Centre (ARRC) at the University of York at 2pm on 23 October. Parliamentary Under Secretary of State for Communities and Local Government, Iain Wright MP, will attend the launch.

The demand for rented homes continued its upward trend in September, totalling more than a 50% jump in demand in the last year.

To coincide with the launch, the Review will be available online at http://www.york.ac.uk/chp/Projects/PRSreview.htm

For more information please contact Andrew Teacher on 07968 124545 / ateacher@bpf.org.uk or Maddie Williams on 020 7802 0364 / mwilliams@bpf.org.uk