Press release

BUILD-TO-LET COULD SOLVE HOUSING CRISIS

Date

3rd May 2008

Description

The BPF is calling for the creation of a brand-driven home rental market to solve the housing crisis.

Speaking on SKy News today, Andrew Teacher previewed a report from the BPF due out next week on the future of renting. For more information call 07968 124545.

It recommends that affordable home levies on developments built specifically for rent to should be cut, to make development more viable for large institutions such as pension funds. Currently, residential letting is less attractive to investors because it means tying up money for longer and getting less returns than with offices or retail.

The BPF has stressed that it is not suggesting that smaller landlordsshould be usurped or wiped out, simply that we need more homes and that this is a great way to do this. The BPF is not slamming buy to let or individual investors, but believes people should have the right to choose where they source housing.

A report in February by the GLA, researched by Savills, outlines how new planning guidance for rental-only developments could lower house prices, increase housing investment and deliver new homes from branded rental providers.

The aim is to encourage funding to develop a professional rented sector offering branded rented accommodation including decent family homes and long-term tenancies, all professional managed like an office block.

The professional rented sector would, in essence, be like having Google or Virgin style brands delivering rented housing. It would give Britons the brand certainty for housing they enjoy when using internet, car rental, television or any other service and it is how homes are provided in countries where there is no stigma about not owning a house.

‘Build to let’ could potentially create a separate residential market for rental, and works on the premise that, at present, housing is developed solely for ownership.

So while homes may be rented out, their value and that of the land they are on, is determined by how much they would fetch in the ownership market. A planning definition only allowing development for rent would change all this. It would mean such properties would be valued more for their rental income and would thus be as attractive to institutional investors as offices or retail outlets.

To make overall returns competitive with shops and offices, like them, there would have to be some prospect of accessing capital gains from selling the property, but the property would be valued predominantly for its income stream. It is possible that the restriction to ‘rental-only’ could last for 10 years.

The other benefit of treating large-scale rented developments differently, is that they could benefit from lower development levies that require developers to build a certain amount of affordable housing with each development. Because the returns from rental are lower and the investor is tying up capital for a period of time, the affordable housing requirements are currently a major barrier to a build-to-let sector.

Reducing the requirements could ultimately increase the overall level of affordable housing built. Combined with the added supply of rented housing (itself an ‘affordable’ solution), this would be a major benefit for Londoners and could be applied across the whole country.

Changing the planning definition of rented housing is one of several key recommendations in this research (see notes) which investigates ways of increasing private institutional investment to improve London’s housing supply. Greater investment is needed to help alleviate London’s housing shortage, so an understanding of the steps required to encourage it is vital.

Ian Fletcher, BPF residential director, said: “Statistics bear out why there is such tremendous demand for rental property to occupy. Nationally, the cost of private renting is typically at least 30 per cent cheaper than buying an equivalent property. The private rented sector is therefore delivering 'affordable' housing for those unable to access owner occupation or social renting, with 70 per cent of private tenants unable to buy their own home. It is therefore perhaps not surprising that more households have been housed in the private rented sector this millennium than in social renting or owner-occupation.”

Bridget Rosewell, consultant chief economist, GLA Economics said: ”The UK market has become very restricted, limiting access to housing to only a few ways. Encouraging new forms of investment is important to increasing supply and choice in the marketplace. This research helps identify how greater diversity of supply and faster building can be encouraged to meet the needs of London residents.”

Rupert Dickinson, chief executive of Grainger, the UK’s only listed residential landlord and chairman of the BPF’s residential committee, said: “The housing crisis is a social and political problem that can potentially be solved if the government wakes up to the fact that home ownership is not the only private sector answer. There is now a very wide gap between the affordability of social housing and owner occupation, which cannot solely be filled by shared ownership and buy to let. The professional rented sector can become a serious solution to a growing problem. While house prices may no longer be growing, affordability will not improve and demand for quality managed accommodation will continue to grow. If we can encourage build to let, and mirror the success of similar developments across the USA and Europe, we could provide an important additional source of housing supply and at the same time fill a very big hole in the market for those who do not wish to or who are unable to buy.”

Jacqui Daly, director at Savills, who conducted the research, said: “A build to let model would allow more operators to grow and become branded providers of rented housing. The build to let product would increase their scale and market dominance, which would have the added advantage of increasing competition between small and large landlords, which would ultimately forcing bad ones out of the sector. It would also increase the supply of long term rented housing and offer a customer focused service to occupiers. As they grow in size, there will be more scope for branded landlords to attract further investment and launch on the stock market.”

Ian Marcus, BPF president and chairman of European Real Estate Investment at Credit Suisse, said: "A 'build to let' model enables us all to take the longer term view that everyone from ministers to investors and tenants are crying out for. It would allow investors/developers to run the accommodation as a business rather than a series of leases, to develop ancillary income streams, from IT/Telecoms to cleaning to support returns, to develop and apply professional management standards, to take a longer term view on sustainability issues, to develop and create a respected and trusted 'brand' through the professional rented sector."

Nick Jopling, executive director for residential at CBRE, said: “It is clear that joined up effort is required across the government and private sector if we are to milk the full benefits of the professional rented sector. We have to initiate a form of reliable tenure that will act as an important stepping stone to those looking to enter the first time buyers' market in the future. The professional rented sector is provided better in countries such as the USA and Netherlands, but these proposals, if adopted, could usher in numerous improvements to the provision of housing in the UK.”

Liam Bailey, head of residential research at Knight Frank, said: "The goal of a professional rented sector has been a long time coming, and despite some success stories over recent years the reality is that the rented sector in the UK is dominated by the small private landlord. The benefits of a branded professional rented sector should be improved repair and maintenance and hopefully improved services to tenants. There is no doubt that the ‘build to let’ concept should help in a shift to greater corporate involvement in this sector."

Simon Scott, head of residential investment at Savills, said: “No one seems to have recognised the value that institutional investment would have for developers and their financiers. We know that to stimulate development and urban renewal both parties require an element to be pre-sold. Build to let that is pre-sold to investors would satisfy this and allow a developer to focus much more on bespoke design. This would be preferable to a ‘one size fits all approach’, which is more common in the current market despite the demand from renters and buy to let investors.”

Jagdeep Bhogal, regional design and planning director in London for UNITE, said: "This report advocates a new planning definition which would clearly define the professional rented sector and make it a more attractive investment opportunity. Parallels exist within the student accommodation market, such as UNITE, where investors have acknowledged the resilience of the market, the professional management structures in place and the growth in long-term rental returns."

Key report recommendations

Local councils’ planning and housing policies should demand bespoke rented housing where there is a need for it. There is no national planning policy on rented housing, but provision for it could be agreed through a legal agreement such as a section 106 agreement or through local development orders.

Where local needs assessments show that rented accommodation is necessary, local authorities should reduce affordable housing requirements on new developments to make them more economically feasible. Because investors will be required to invest far higher sums of capital than under a traditional residential development model (because all they will make back is the rental income) current demands for developers to build affordable housing alongside their developments would make projects unfeasible.

Bespoke rented housing (build to let) should not require the same level of affordable housing to generate sufficient levels of returns for investors.

There should be financial incentives to encourage build to let. These might include a tax allowance against rental costs for landlord that rent out property to remove the double taxation that they incur on management. There could be a stamp duty concession for properties purchased for rent so long as they were held for rent for a set period. If they were sold within that period, full stamp duty applies. On this basis, the rental units would remain a tradeable product (investors could sell the property and incur stamp duty) but there would be an incentive to provide long term rental property.

Housing policy in London should encourage the delivery of intermediate rented housing by a wider group of providers. There is over-reliance on Registered Social Landlords as developers who are increasingly subsidising intermediate rented housing even where grant has been provided. There is evidence to suggest that the private sector will provide intermediate rented housing which is let at discounted market rents for a restricted period, such as five years. A reversion to market rents after a limited period is a pre-requisite for investors.

The short nature of Assured Shorthold Tenancy contracts were identified as a barrier to families seeking to reside in the private rented sector for an indefinite period. Private sector landlords and Registered Social Landlords in London identified a willingness to offer longer tenancy contracts. There needs to be greater incentives to provide longer-term tenancies in the sector, so that the sector appeals to the broadest spectrum of potential occupiers and serves their needs.

Providers of build to let rented housing should become accredited landlords; any accreditation scheme should be open to long term residential management organisations, including both private sector organisations and registered social landlords.

The RSL sector is developing its skills base and capacity to manage rental property. However, until sufficient scale is assembled by RSLs, the management of their private rented accommodation is not undertaken by a dedicated team. They could potentially play an important role in providing branded management in the future backed by institutional capital as they are doing in the student sector. However, RSLs included in this research do not feel confident of drawing in private sector capital until they have established a track record in providing private rented accommodation and a greater understanding of how it differs from the management of their core business.