CSC PRS – Institutional Investment & Longer Contracts
The Commons Select Committee’s investigation into the Private Rental Sector has progressed further with another meeting on 8th May. In this meeting the Committee discussed the introduction of large scale institutionalised investment into the PRS, longer tenures, the German PRS model and registration vs licensing.
Witness Hearing – Grimond Room Wednesday 8 May
- Neil Hadden, Chief Executive, Genesis Housing Association
- Stuart Corbyn, Chairman, Qatari Diar Delancey Real Estate Management
- Richard Blakeway, Deputy Mayor for Housing, Land and Policy, Greater London Authority
Institution investment with large companies using various way of getting involved in the Private Rented Sector has been discussed in the past but historically little has happened. What encouraged you to become involved at this time?
NH: Earlier this year we sold 401 flats to M&G a property fund on a 160 year lease with a management lease of 35 years
- 400 units in one place, managed by a housing association at a particular yield
- Sales market has not been fantastic , PRS is a bigger feature of tenure of this country which will last for some time to come
SC: QDD was established for the acquisition of the 1439 flats of east village of the former athlete’s village
- Large scale property in close proximity
- Long term investment in PRS
Do you anticipate that developments of this kind are going to play a greater role in the housing need of London in the next 10 years?
RB: Yes they will feature more
- These developments need to be aimed towards the rental sector in design of scheme and offer
- Owner-occupiers and buy-to-let lenders will still be the predominant force rather that institutional investment
The Mayor is looking to introduce a pilot scheme. Could you give me some details with regard to flexibility and length of tenancies?
RB: First, we are very keen to explore whether you can do longer tenancies, but critically within existing ASTs because an assured shorthold tenancy is quite flexible, and we are very keen to explore the potential to do them within that rather than have additional legislation.
- Keen to work with major landlords to evaluate how their projects are working.
- Explore whether you could do a similar pilot with build-to-let landlords.
In Germany, tenancies are indefinite and rent increases are linked to a local index. Is that something that you could see working in this country?
NH: There is a downside to the German model.
- Tenants basically build up the right to stay and they also have a right to lower rent rises than might be the case if rents were linked to RPI;
- Landlords might not be able to get the income they need in order to maintain the property.
SC: According to the IPD analysis, approximately 25% of gross rent goes out, as far as the landlord is concerned, in maintenance charges.
- How you deal with that in a situation where somebody has a lease that goes on indefinitely?
Is this something that the Mayor would like to see introduced into this country?
RB: It would have to be nationwide. I don’t think the German model is appropriate here.
- It is structurally a very different housing market from this country’s; for example, in Germany they do not have a supply problem. It is a very, very different market.
- More broadly, there is a challenge to try to balance the flexibility that the PRS offers, which is critically important, particularly for labour mobility and for our economic competitiveness, with greater security, particularly for families.
The Mayor’s housing covenant says that you will work towards greater transparency about letting agent fees so that landlords and tenants have clarity about the services that are being provided. Could you comment on what success there has been in ensuring greater clarity?
- One of the things that we would be keen to explore with Government is whether you have something around transparency of fees.
- The second thing is working closely with the ombudsmen to make sure that fees are prioritised.
- The third area is working very closely with landlords to see that they get some leaders within the market.
Each of you touched on the German model of renting and pointed out some reasons why it might not work here. More than 54% of people rent there. There is a vast range of tenants. Do you think that we could ever achieve such a mature market here?
NH: I think that we will see a maturity of the private rented sector coming forward for pure economic reasons.
- The average age of somebody accessing owner-occupation is 37 and the average deposit that they need is something like £90,000, so more and more people are moving into the private rented sector and therefore there will be a maturity, naturally, within the sector.
SC: The Dutch are fascinated by the English obsession for owner-occupation. As far as they are concerned, renting is a perfectly reasonable way of living somewhere. It is all about choice at the end of the day. I think it will take quite some time before, culturally, we have moved from this obsession with owner-occupation.
RB: Structurally the German housing market is completely different from here. For example, there are higher rates of taxation on ownership there.
- The UK rental market and particularly London’s rental market has doubled during the last decade, so now roughly 25% of households live in the rented sector
- By the beginning of the next decade, in the early 2020s, about a third of households will be living in the rented sector.
- You have a very different market – clearly not an institutionally-backed market. You now have a big debate about what standard we should expect and how professional that market is.
- Paul Smee, Director General, Council of Mortgage Lenders
- Ian Fletcher, Director of Property (Real Estate), British Property Federation
- Nigel Terrington, Chief Executive, Paragon Group
The private rented sector has grown quite considerably over the last decade. Is this simply a result of the changed economic circumstances that we are now seeing: the rising cost of properties to buy, followed by the non-availability of mortgages? Or is it a delayed reaction to the deregulation in 1988 that has taken some time to work through?
PS: There is a cocktail of reasons. Affordability concerns have prevented some people who would previously have got on the owner-occupier ladder earlier from moving into that form of ownership.
- We have evidence as well that people value the flexibility and choice that they get from the private rented sector.
- I also believe that the quality of rented accommodation on offer in many parts of the market has improved.
NT: I think we are in the middle of a long-term structural change in housing tenure within the UK. We have all the demographic changes, the most notable of which is the immigration flow where we have clearly seen a significant population shift.
- Our evidence shows that five years after economic migrants come to the UK, around 70% of them are in the private rented sector.
- The economic environment has not been helpful in that regard. First-time buyers have struggled with the after-effects of the financial crisis.
To go back to the longer-term shift, when the recession first hit it seemed that within the Private Rental Sector itself, the buy-to-let sector was going to be as badly hit as any; mortgages almost dried up as the first reaction was, “We can’t lend there.” That seems to have changed quite a bit over the past couple of years. Do you see continuing growth in the Private Rented Sector to be further growth in buy-to-let, or will it shift to institutional investors coming in, as we heard from previous witnesses?
NT: There was that immediate reaction after the credit crunch, and also a collapse in the level of supply of finance.
- In that aftermath the availability of new money to do new lending was in short supply, but it has come back quite significantly over the past few years.
- If you look at the credit performance of buy-to-let as a whole it is as good if not better than owner-occupied lending.
- The growth will come in the PRS and in the buy-to-let sector. In the past few years, the buy-to-let market has typically been growing at about 20% per annum, which is a much faster rate than owner-occupied lending in the UK.
Are you bothered about rented ghettoes?
PS: I would like to see supply increase, because that would solve some of the root problems in the housing market at the moment
- 79% of people want to own their own home within the next 10 years.
- What has happened is that people’s time scales have moved for satisfying their objective, and that is where the opportunity is for the PRS.
You are suggesting that people are in the PRS with some reluctance.
PS: Not necessarily immediate reluctance, but with a long-term aspiration to move somewhere else within 10 years.
You said you wanted to see more supply, and that your solution to that is tax breaks for landlords. Why should we give more tax breaks to an already privileged sector?
PS: We are keen to see supply increased and we have supported things such as the Government’s help-to-buy equity loan scheme and the original help-to-buy project that was introduced early last year.
Are you looking for capital appreciation, to justify the low yields on rental properties?
NT: No. Our customers take a very, very long-term view of their property investments, as you should. The average investment hold period that our customers have on property is 17 years, which is considerably longer than you would expect under normal investment criteria. In terms of our landlords’ return, there is currently a high expectation of return coming from yield, with rental yields averaging around 6%.
Is it really the case that investors will be put off by the prospect of more regulation, or is there simply a fear that regulation might mean rent control?
IF: From our perspective we would support certain kinds of regulation that help local authorities to do their job in setting standards. I would not support a registration scheme along the Scottish lines.
- The registration scheme that we supported was that set out by Julie Rugg. So when they went to court, they needed the registration number; when they entered a tenancy deposit scheme, they needed the registration number. It became self-reinforcing that way.
Could you just explain the difference between registration and licensing as you understand it?
IF: The simple registration scheme that Julie set out meant simply that you were identified as a landlord. That would help local authorities in terms of being able to know the landlords in their area and then use their existing enforcement powers
- Licensing is far more bureaucratic and heavy in terms of landlords having to go through various checks: fit and proper person tests, tests to see that they are abiding by various management standards that are set locally and that sort of thing.
You had quite a lot of evidence in support of the regulation of letting agents. The Government have obviously signalled their intention to bring in a redress scheme. Is that sufficient, and how should that be gone about? What are the key elements to the design of a scheme that would make it effective?
NT: The most important thing is that it needs to have teeth. There are plenty of examples of schemes that exist, including umpteen examples of the financial ombudsman scheme and how that is handled. There is an organisation that has teeth, and has the ability to fine and the ability to seek recovery to the aggrieved party.
Would a redress scheme go far enough?
PS: It is a very good first step. You might want to take a first step and see how behaviours change as a consequence before you follow up with the full apparatus of regulation, accreditation or whatever. It does not necessarily have to be the only step in the journey.
As I understand it, under the Scottish system, letting agents cannot charge a fee to the tenant, because they are regarded as acting on behalf of the landlord. Should we bring in that rule in England as well?
IF: I think the issue is that the first time the parties meet, the tenants should expect a tariff that is clear, not changeable in any respect and gives them peace of mind in terms of clarity and where they stand. I would not support the Scottish model.
On length of tenure, a lot of other countries have indefinite tenancies with index-linked rent increases. Why do you think that model would not work in England?
NT: You can get longer-term tenancies by mutual agreement today. The concept of indefinite tenancies – a permanent rolling contract – has never been tested, but clearly one of the things that has been emerging is a desire for longer-term tenancies.