The Government’s Housing Green Paper makes encouraging noises about private renting. It devotes a whole chapter to it and states that the objective is “to secure a larger, better quality, better managed private rented sector”. According to most observers, ministers have avoided the mistake of interfering through rent controls and the other restrictions that have bedevilled attempts to revive the sector.
Richard Donnell, associate director of property consultant FPD Savills, says there is already great interest from institutions in investing in residential property. “There is a possible £2 billion a year earmarked for investment - the problem is finding suitable stock,” he says. “Even if you had £50m to spend, you wouldn’t find anything ready to buy.”
Big portfolios are few and far between. As a result, property funds are developing their own stock, though it usually takes at least a year to complete. Donnell believes this is the route institutions will take. The downside is that they will face strong competition from homebuilders for land.
The social housing sector has also been making moves for about four or five years, led by housing associations Nottingham Community, and Derwent in the Midlands. And the Joseph Rowntree Foundation has just completed 100 apartments in Birmingham and Leeds under its City-centre Apartments for Single People at Affordable Rents initiative (see pages 26 and 30) to provide a demonstration that good returns can be made in the private rented sector. The two largest associations - North British (now known as Places for People Group) and Home - have both started substantial development programmes under their Blueroom and Paramount subsidiaries.
Active in funding this part of the market is Norwich Union, working with fund manager CHACO. In just two and a half years, £50m has been committed for about 750 homes. This scheme works through sale and leaseback, which has the advantage of taking the property off the balance sheet, thus reducing gearing.
CHACO adviser Ian Blelloch believes associations represent, “a huge untapped reservoir of management potential,” and an opportunity when Government funding is drying up. Blelloch says there are plenty of problems to be overcome, the major being that no-one has developed market-rented housing for more than 40 years.
Perhaps there are lessons from elsewhere in Europe - market renting is a highly respectable activity in Germany and the Netherlands. It is significant that another company already active in the UK is Dutch-based bank ING. Through its ING Real Estate subsidiary, it has invested about £50m and developed more than 450 homes.
Then there is Schroders, which is due to launch a Jersey-based residential property unit trust, and aims to build up to £100m annual investment in the short term.
“We believe there is an irrefutable case to include residential property as part of a balanced portfolio,” says Bill Hughes, director of Schroders property investment arm.
He claims the key issue is to achieve “the right quality stock, using the right managers, and choose the right occupants, in the right market”. It will work throughout the UK, providing one or two-bed apartments, generally new build.
Hughes says Schroders will use its contacts to buy existing stock, but says a substantial proportion of its investment will be forward funding new development.
Hughes believes there are substantial barriers to entry to the market, but this also provides comfort - it means that it is not something everyone can rush into when times are particularly good.
Given its declared support, could the Government do anything to boost the sector by pump priming? Some observers suggest a tax transparent vehicle similar to the Real Estate Investment Trusts in the US would help, and the Green Paper acknowledges this. It says the Government is looking at measures that might make investment more attractive.
But don’t hold your breath. In the next paragraph, the paper says “we don’t want artificial tax breaks that distort investment choices”. And the Treasury has apparently poured cold water on RICS and British Property Federation lobbying.
But current rules have required the off-shore approach adopted by Schroders to achieve tax transparency. As a result, investment only works for the tax exempt. Others are using the limited partnership route, though this also has disadvantages - it is not easy to set up a secondary market. Hughes would like to see changes to enhance tax efficiency, which would mean more investors could be attracted.
Overall, the future looks bright. Richard Best, director of the Joseph Rowntree Foundation points out that an estimated 20 000 new private rented homes are needed each year. Hughes says it could be as high as 40 000. That should get developers and contractors sitting up and taking notice.
Small landlords are growing fast
While the jury is still out on how long it will be before the corporate private rented sector achieves critical mass, things are moving ahead strongly in the new small investor market. Old style ‘small’ landlords are being replaced by new people taking advantage of ‘buy to let’ mortgage schemes set up by the Association of Residential Letting Agents, backed by seven mortgage lenders including Halifax and Woolwich. The scheme does away with the surcharges normally applied to mortgages where owners rent out their properties. Although set up only four years ago, some 60 000 homes have been provided already. This has been achieved on the back of a sea change in attitudes and professionalism. For more than a decade, ARLA has been raising standards among its members with a rigorous code of practice. Every office has to have a qualified person on the staff, and tenants are covered by an ARLA ‘Bond of First Resort’ through which they can reclaim deposits without having to take landlords to court. Another aspect is designated customer accounts that have to be signed off each year by an independent chartered accountant. ARLA believes this system is more rigorous than the DETR-supported National Approved Lettings Scheme. Ironically, the downturn in the housing market with prices off the boil is good for the sector: agents report that they are busier than ever. ARLA stresses the business is about long-term investment: anecdotal evidence suggests some people are in the business to boost their pensions. The new sector is not about impulse buying or selling. Overall, investors can expect a gross return of about 8%, plus capital appreciation.Housing associations are profiting for a purpose
A number of housing associations have been actively building up market rent portfolios over the past five years under the watchful eye of the Housing Corporation. As the social housing regulator, it is concerned with ensuring that diversification does not deflect associations from their core business, and that public funds are not put at risk. In other words, associations have to ensure that such operations cover their costs. In fact, all are aiming to make a surplus to use to further their social aims. That having been said, their approaches differ significantly. North British subsidiary Blueroom is geared to making as much profit as possible as it spends the £100m it has initially committed to the sector. In contrast, Nottingham Community, while achieving surpluses, is letting homes at sub-market rents for the ‘intermediate market’, which associations used to cover in the 1970s and early 1980s. “By definition, ours is not market rent,” says chief executive Andrew Malone. Cherwell HA has taken legal advice to ensure it remains on side. “Although we are charging rents close to the market, we are meeting the housing needs of junior doctors and others who do not qualify for social housing but cannot afford to buy,” says chief executive Edie Szep. “Our opinion says the test is whether the beneficiaries could afford anything else nearby. As it is, our rents are comparable with shared ownership which is a charitable activity.” Key workers are also the target for Bedfordshire Pilgrims - it has adopted rents about 15-20% below market levels. Derwent charges what the market will bear, but says a lot of tenants fall into the ‘key worker’ category. It has also done deals for some of its market rent stock with employers such as Toyota and Rolls Royce. Other approaches include Community’s Priory Heights development in King’s Cross where 26 out of 88 homes will be let as social housing provided without grant, while Peabody is developing market rent to provide surpluses which will be used to improve its older stock. While most associations take on the management themselves, agents have been used for marketing by some. Associations are getting keener to ‘brand’ market-rented homes.Source
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