Press release

PRIVATE RENTAL REVIEW COULD BE HOUSING LIFELINE

Reference

PR(07)47

Date

12th December 2007

Description

Housing minister Yvette Cooper will today announce a review of the private rented sector by Julie Rugg, an academic at York University.

The review, likely to be similar to the recent Hills Review of social housing, could see the introduction of a large scale professional rented sector which many business leaders believe could solve the current housing crisis.

The property industry believes that a professional rented sector akin to that of Germany or the USA could solve supply issues and ensure stability in the market, as well as flexibility and choice for those seeking quality, professionally managed accommodation.

The news comes as the Citizens Advice Bureau reveals the scale of home owners saddled with mortgages they cannot afford, while the MoD admits spending £11m renting army homes from private landlords because of a lack of supply.

The industry wants the government to remove barriers to the growth of commercial investment in the professional rented sector, while increasing the flexibility of affordable housing policy and standardising regulation.

Ian Fletcher, director for residential policy, said: “We are very supportive of this welcome move by the government, which raises the profile of the professional rented sector and we hope reflects recognition of its important contribution to housing provision. A really helpful outcome would be a cross-departmental strategy for the sector, which promotes its professionalisation. Such a strategy must encompass planning, tax and, benefit policy and not just how the sector is regulated.

“It should not be forgotten that it is only 20 years ago that the modern private rented sector was born, with the deregulation measures in the 1988 Housing Act. Up until then, accessing private rented housing was nigh impossible because security of tenure meant property remained in the same hands for years. Over two decades, the sector has made huge strides and generally deregulation has been good for consumers and the government. Now, however, is probably a good juncture to be considering how we can build on this legacy and ensure the sector continues to deliver a quality product for a broadening set of clients. We look forward to making our contributions to this important project.”

Andrew Teacher, BPF media manager, 07968 12 4545 / 020 7802 0113 / ateacher@bpf.org.uk

Notes for editors

1. Renting serves a variety of peoples’ housing needs and aspirations:

• households unable to access social housing, and who may not be in a position to buy;
• students away from home for the first time;
• people on the move because of their job;
• migrants to this country;
• those who have divorced or separated;
• the elderly, perhaps on regulated tenancies;
• younger workers who through choice prefer to rent rather than buy.

2. Investors in the sector are almost as diverse as its occupiers and will have different needs themselves, seeking some mixture of income and capital gain in the short, medium or long-term. However, investment in the professional rented sector must compete with other asset classes, such as shares, bonds and commercial property.

In considering the sector, policy makers need to think about both occupiers’ and investors’ needs and what kind of professional rented sector society and the government want. We believe the country needs a professional rented sector that is:

• well-managed
• promotes long-term investment
• provides a quality product, and
• is flexible enough to continue to cater for a variety of occupiers’ needs.

3. To satisfy all these objectives the professional rented sector must also generate sufficient returns to make it an attractive and viable investment.

The BPF believes the sector benefits from its mix of small and large landlords. In recent years, however, institutional and corporate landlords’ share of rental has declined. In 1994 the make up of landlords was fairly evenly split between companies/organisations (50%), and individuals/couples (47%). By 2001 nearly two-thirds (65%) of landlords were individuals/couples. Part of this is explained by the growth in buy-to-let, but it also reflects other policy changes which have made the sector relatively disadvantageous to large corporate and institutional landlords.

We think this is regrettable, because a thriving corporate and institutional investment sector could help support many of the government’s housing policy objectives, specifically:

• delivering a high quality professional rented sector;
• contributing to housing supply;
• meeting intermediate market needs;
• driving innovation in the sector.

The government needs to remove the barriers to the growth of commercial investment in the private rented sector.

These include:

• changes to stamp duty and VAT;
• expanding the REIT regime to include AIM and unlisted companies;
• the targeting of regulations on the sections of the sector that need to be regulated, instead of on all the sector;
• continued promotion of self-regulation and the consumer-focused approach promoted by the Law Commission. Time must be found for its Bill;
• a standardised approach to regulation, with clearer rules on subsidiarity between central and local government, and more co-ordination between local authorities themselves;
• the Government to guarantee unpaid rent, where housing benefit tenants are paid directly.

Barriers to institutional growth

Various adverse tax treatments impact disproportionately on larger landlords, putting them at a disadvantage relative to other forms of investment and other investors in the PRS.

The large PRS investor who trades portfolios of property suffers stamp duty on the aggregate value of their transaction, rather than a charge related to the housing unit value. This means that in nearly every transaction the large investor will be paying the highest rate of stamp duty, 4%, compared to the unit-by-unit buyer who is either exempt or incurs a far lower rate of tax.

Large investors in the PRS tend to invest in property on average rents, which are easier to let and should incur lower duty. It is also far better from a service and management efficiency perspective to have blocks of units. The perverse impact of this tax situation is that it encourages large investors to trade in individual units.

The BPF recommends the stamp duty rule should be amended to, at worst, a charge based on the average unit value of the transaction. This should be easier to calculate than a unit-by unit basis, where individual values may not have been agreed.

In an ideal world, stamp duty on large investment transactions would be waived altogether, providing a strong fiscal incentive for investors to choose residential over commercial property.

This could be worth around 1% per cent per annum in performance over the investment time-horizon of the investor – a significant margin in a low-return world. Current spending limitations, however, may constrain this.
We recommend that Government considers exempting stamp duty on blocks bought for the specific purpose of letting out on intermediate rents.

The residential property investor is at a comparative disadvantage to the commercial property investor as VAT is not recoverable on refurbishment costs; causing a drag on returns. The small investor is often able to mitigate this through self-management.

We recommend the government should reduce the rate of VAT on residential refurbishment costs.