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Lenders, surveyors and landlords call for bold action to build professional rented sector

A group of trade bodies representing the country’s major landlords, property investors, mortgage lenders and surveyors is calling on the next government to alter the tax system to encourage large scale house building from institutions, such as pension funds and insurance companies.

In an unprecedented show of unity from the most influential bodies in business, the consortium wants to see government support for a large scale rented sector mirroring that of America or Europe. It wants a more efficient tax system for investors which could reap major rewards at very little cost to the Exchequer. Major development projects would create thousands of new homes and jobs, securing long term investment in many deprived areas of the country.

With a 10pc increase in house prices this year, the outlook for first time buyers remains gloomy. Access to mortgages is constrained and with the average deposit for home first-buyers now £33,000, a cut of 1pc stamp duty for cheaper homes is unlikely to make much difference to most people.

With public spending cuts a certainty, meaning less investment in social housing and regeneration, the private rented sector (PRS) is going to be a vital component of Britain’s future housing supply.

In their response to a Treasury consultation, the Property Industry Alliance (PIA) – a collective which includes the British Property Federation, Investment Property Forum, Royal Institute of Chartered Surveyors, British Council of Shopping Centres and British Council of Offices – as well as the Council of Mortgage Lenders (CML) and the Association of Real Estate Funds (AREF), want to see some of the significant barriers to investment overcome.

Liz Peace, chief executive of the BPF, said: “The public are bored of countless political promises to fix our housing crisis and while there is no silver bullet, it’s clear that we need to look at new avenues of finance.”

The response, drafted by a broad spectrum of industry expertise (see annex 2), stresses the importance of promoting equity investment from small and institutional landlords and the unparalleled opportunity for government to signal its support.

Specific barriers to institutional investment highlighted include:
• the large investment costs that occur in the sector, which are exacerbated by tax anomalies, such as the SDLT bulk-purchase rules, which mean SDLT is paid on the aggregate price of a portfolio purchase, rather than per unit; and VAT on management costs
• issues of scale in terms of accessing investment stock and achieving management efficiencies
• the absence of a suitable tax-efficient investment vehicle onshore, given the particular characteristics of the residential sector.

(See annex 1 for the full executive summary.)

The organisations admit that not all the tax changes would be neutral, but stress that they would be slight in comparison with other interventions to address housing need and would bring a range of benefits, in terms of:

• addressing housing need
• support for the development industry
• broadening investor choice
• service standards and innovation.

Andrew Stanford, head of residential at Cluttons, chair of the BPF PRS Working Party, said:

"It is clear that institutional investment in the PRS could be a key contributor to solving the UK housing crisis. We are sufficiently close to a tipping point which would see institutions invest more in the sector with just a little bit of support from government. The PIA response provides a clear vision of what that support should be and it deserves to be taken seriously by anyone in government who wants to see more homes being built."

Peter Pereira Gray, managing director of investment at the Wellcome Trust and chairman of the IPF, said:

“The PRS is potentially a significant institutional investment market and there are good reasons to believe that the asset class is attracting institutions today. It is therefore essential that a variety of tax-efficient investment structures are developed to allow differing investor requirements and the particular characteristics of the sector to be fully accommodated.”

Mark Goodwin, director of external affairs at the RICS, said:

“The private rented sector has a vital part to play in creating a vibrant and sustainable housing market across the UK. With housing completions at record low levels, it is essential that we consider all approaches to increase the number of homes being built. Encouraging both individual and institutional investors will attract new sources of finance into the residential sector and will help give developers the confidence to start building homes again.

“Increasing levels of investment is part of the challenge and must be accompanied by further work on regulation in the sector. Action must be focused on ensuring that renting becomes a tenure of choice rather than a poor substitute for owning a home. A combination of increased investment and effective regulation can help show that the private rented sector can offer a realistic alternative to owner occupation.”

Michael Coogan, director general of the CML, said:

“To meet the growing demand for privately rented accommodation, considerable new investment will be needed in the sector with a contribution required from both individual and institutional landlords. The Treasury’s decision to reconsider its proposal to regulate buy-to-let lending suggests that it has listened to our concerns that buy-to-let mortgages have not been a source of consumer detriment and wants to avoid unnecessary over regulation.”

John Cartwright, chief executive of AREF, said:

“A number of the investment houses who represent current AREF member funds are seriously interested in the private rented sector if the current barriers to entry can be eliminated and investment at the scale they are used to in the commercial sector achieved. With first time buyers now having to save for longer to raise larger deposits, the opportunity for the industry to create rented accommodation now, plus the potential to create savings and investment products closely correlated to the residential market to assist that accumulation, is a double benefit.”

Media coverage

BPF television clips on housing viewable here

Notes to editors

Government statistics on house building:

http://www.communities.gov.uk/housing/housingresearch/housingstatistics/housingstatisticsby/housebuilding/livetables/

Government statistics showing home ownership at lowest level for 20 years:

www.communities.gov.uk/documents/housing/xls/139262.xls

Complete English Housing Survey report:

http://www.communities.gov.uk/publications/corporate/statistics/ehs200809headlinereport

Background

1. The HM treasury consultation was issued on 3rd February 2010 and closed on 28th April. Copies of the consultation document can be found at:

http://www.hm-treasury.gov.uk/consult_investment_private_rented_sector.htm

2. Copies of the PIA, CML and AREF response, can be found at:

http://www.bpf.org.uk/topics/document/23917/response-to-the-treasury-consultation-on-investment-in-the-uk-private-rented-sector

3. For more details please contact:
Andrew Teacher at the British Property Federation, email: ateacher@bpf.org.uk,
tel: 020 7802 0113, mob: 07841 732194

Annex 1
EXECUTIVE SUMMARY
THE CURRENT INVESTOR AND HOUSE BUILDER SITUATIONS
Inadequate new building, constrained buy-to-let investment, and a window of opportunity to promote residential investment to institutional investors.
a. Need for housing – There is increasing need for housing of all tenures as a result of population growth and new household formation, but new supply is falling well short of requirements.
b. Private investors – Buy-to-let (BtL) investors have been responsible for substantial growth in PRS housing since 2000, but access to debt is likely to constrain growth in BtL for the foreseeable future. If need is to be met new sources of equity finance need to be found.
c. Institutional investors – Of the few funds that began investing from 1999 onwards, many are now approaching the end of their investment lives. Despite interest, few have converted to more tax efficient vehicles; instead many of these funds are selling their assets into the owner occupier market. New funds are slowly being created in response to the HCA’s PRSI, but material and psychological barriers exist and are the subject of this Consultation Paper.
d. House builders – revisions in planning policy in 1998 drove a move towards higher density development on brownfield land. The next decade saw house builders become highly dependent on off-plan sales of high density apartment schemes to investors. There are currently few off-plan sales being made and house builders will need to find sustainable business models that can attract off-plan investors as a means of reducing their risks; some are already returning to building medium density housing and others are investigating building blocks of flats for rent that may attract long term institutional investors.
THE OBSTACLES TO GREATER INSTITUTIONAL INVESTMENT
Scale, higher investment costs and high tax barriers to investing are the most critical obstacles.
The top 10 investment managers have some £62bn of property under management, of which only 1% is invested in residential property. All funds in the IPD universe account for £119bn of investment, of which residential accounts for 0.9%. Table 1 illustrates the breakdown by type of investor.

Table 1
Investor Type % of total IPD universe % in resi. of investor type
Development Agency & Other Public Sector Funds 0.1 0.0
General Insurance Funds 0.4 0.2
Life Funds 14.8 1.7
Other Unitised Funds 11.4 0.5
Pooled Corporate Pension Funds (Managed) 4.0 0.2
Property Companies 18.9 0.2
Segregated Pension Funds 18.7 0.0
Shareholder Investment Funds 0.9 0.4
Traditional Institutions 2.6 7.6
Unit Linked Life or Pension Funds 12.1 0.1
Unregulated Property Unit Trusts 16.1 1.9


a. Scale – The residential sector may be the largest asset class in the UK, but for most institutional investors it remains effectively a new asset class; investors will only be attracted to a new asset class if they can make a material investment in the sector, and that it offers an attractive balance of risk and returns relative to other asset classes. Institutional investors need any new asset class to be scalable, as this will allow them to make sizeable investments, whilst scale is also critical to asset management efficiencies.
b. Investment costs – Institutions investing in housing have a number of higher costs than others investing in the sector, such as owner occupiers and individual investors; this reduces the investment attraction of a new asset class, reduces investment returns and has led to limited investment by only a small number of major institutions in the PRS and new housing.
c. Tax efficient vehicles – Residential investments are highly management intensive and therefore collective investment funds are generally the preferred institutional route to investment in the sector. Investors need tax efficient investment options that offer comparable tax transparency to commercial property vehicles in order to attract the widest range of long term investors. Existing unlisted fund structures would be suitable (subject to the ‘solutions’ section below). REITs are of considerable benefit to commercial property companies but have had no success in the residential sector, for the reasons discussed in the attached paper.

THE SOLUTIONS THAT WILL ATTRACT GREATER INSTITUTIONAL INVESTMENT
A level tax playing field (at minimal cost to Exchequer).
The Government has a unique opportunity to translate the recent institutional interest in the PRS into real, large scale investment in the UK’s housing supply. Political commitment supported by a modest investment in tax terms could help to deliver transformational change to the PRS and the markets for both new and existing housing.

a. Scale issues – At present it is difficult for institutional investors to invest in the sector on a significant scale as many existing units are in fragmented ownership and there is a lack of new build properties to buy off-plan from house builders. Increasing the supply of new housing should provide scale, asset management efficiencies and geographic concentrations within PRS markets. The UK house building sector remains a casualty of the “credit crunch” and this has led to a material reduction in supply and a failure to meet demand for housing in some regional markets. Political parties have expressed an interest in making much better use of Government land holdings and the HCA’s recent market-facing initiatives have offered encouragement to institutional investment that this type of land release can make a real difference to achieving scale.

b. Tax efficient investing
• Level the playing field with private investors – The higher costs of SDLT paid by institutional investors on scale purchases needs to be reduced to the current SDLT rate payable on each individual property purchased and VAT can be a higher cost for institutions.
• Investment vehicles – The encouragement of tax efficient investment vehicles (e.g. REITs, private funds and PAIFs) will attract many liquidity driven institutional investors to invest in the sector; these vehicles may also allow current portfolios (owned by institutions) to remain in the sector. Some existing non-listed tax efficient investment vehicles will also attract new domestic and international investors, many of whom already have experience of similar residential sectors, if a level tax playing field exists between private and institutional investors.

c. Tax changes generally – A number of our recommendations are likely to carry at least a risk of net cost to the Exchequer, because reliefs from or reductions in taxes which currently hinder greater investment in residential are not certain to deliver sufficient indirect or longer term tax revenues to pay for themselves. However, it is important to keep the wider context in view: both as regards the importance of the policy objective for more and better housing delivery in the UK, and as regards the – probably significantly higher – cost of alternative ways of seeking to achieve that policy objective.

THE FULL BENEFITS TO THE GOVERNMENT
Ensuring accessibility to housing through an increased supply of PRS homes.

a. Current housing needs – There is a growing housing crisis, as house builders and mortgage lenders struggle to meet current demand; encouraging institutional investment now will assist the house builders to open new sites, allow Government to make better use of its’ land holdings and help reduce the funding needs of mortgage lenders. The PRS is a low cost means of delivering flexible tenure to meet the needs of those unable/unwilling to become owners, but the sector needs encouragement.

b. Future housing need – There will be considerable future demand. The HBF figures show growth in house building would need to average 18% per year for the new build targets by 2020 to be met. Many of future first time buyers already have to wait until they are in their late thirties to own their first property, given the much higher deposit now required by mortgage lenders; this will bring additional demand, which is likely to will lead to an unhealthy and unsustainable supply / demand imbalance for PRS properties and for intermediate renters.

c. Investing for all – Long term investors are critical to the sustained growth of the PRS, whether they be individuals, or the many individual savers that contribute to life insurance products and pension funds. It is critical that investment managers can offer their savers attractive returns and tax efficient means of investing in the PRS sector, whilst helping to reduce the need for individuals to make illiquid investments in markets they may not be fully conversant with and where high levels of leverage are often utilised.

d. Costs –
• A change in the SDLT regime is low cost, as little or no investment in the sector is currently being made.
• A reduction in VAT would add value to the sector and lead to higher quality properties. The current problems with VAT recovery in the residential sector (both on development and on operating costs) present a disincentive to invest in residential property. Such a reduction could even result in increased revenue for HM Treasury through the greater use of contractors within the VAT regime.
• Creating a level tax playing field for institutional investing vehicles has a very marginal cost, as currently no new residential vehicle has been created.
• A change to the listed vehicle regime will attract a new investor base, SDRT from the trading in these vehicles could off-set the VAT costs.

e. Quality assurance and service innovations – institutional investors will help raise standards by offering tenants greater access to redress and a more co-ordinated approach to property maintenance and management.

Annex 2
INDUSTRY CONTRIBUTORS TO THE RESPONSE
Investors
• Tony Bowron – New Initiatives Director, Bromford Housing Association
• William Chetwood – Head of Tax, Aviva Investors
• Phil Clark – European Head of Property Investment, AEGON Asset Management
• Charles Fairhurst – Chief Executive, Fairbridge Residential Investment Management
• Neil Gardiner – Fund Manager, Aviva Investors
• Robin Goodchild – International Director & Head of European Strategy, LaSalle Investment Management
• Bill Hughes - Managing Director, Legal & General Property
• Daniel Kaye – Investment Director, Guinness Trust
• Peter Pereira Gray – Managing Director, Investment Division, The Wellcome Trust
• Andrew Pratt – Managing Director of Residential, Grainger Plc
• Khalil Rashid –Tax Director, Grainger Plc
• David Toplas – Chief Executive, Mill Group

Advisors
• John Cartwright – Chief Executive, The Association of Real Estate Funds (AREF)
• Alan Collett – Chairman, Allsop Residential Investment Management (ARIM)
• Peter Cosmetatos – Director of Policy (Finance), British Property Federation
• Richard Donnell – Director, Hometrack
• Ian Fletcher – Director of Policy (Real Estate), British Property Federation
• Sue Forster – Executive Director, IPF
• George Gourlay – Partner, GM Thomson
• Nick Jopling – Executive Director, CBRE
• Phil Nicklin – Senior Partner, Real Estate Tax Group, Deloitte
• Ros Rowe – Tax Partner, PricewaterhouseCoopers
• James Rowlands – Policy Projects Manager, RICS
• Amyn Sajan – Finance and Investment Officer, British Property Federation
• Andrew Stanford – Head of Residential Professional, Cluttons
• Gareth Targett – Director of Sales and Investment, Orchard and Shipman
• Rob Thomas – Senior Policy Adviser, Council of Mortgage Lenders
• Cathryn Vanderspar – Tax Partner, Berwin Leighton Paisner
• Nicola Westbrook – Tax Director, KPMG
• Elliot Weston – Counsel, Linklaters
• Susan Wright – AREF Policy Secretariat

See below for attached PRS response

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PRS Investment Response