update PRS Private Rented Sector
Inside... Mark Prisk MP Housing Minister Jack Dromey MP Shadow Housing Minister Richard Blakeway London Deputy Mayor And Many More...
10 Year Anniversary Edition
2003 - 2013: A Decade of Shaping the Private Rented Sector Housing Policy, Affordable Housing and the Private Rented Sector
SHAPING the PRIVATE RENTED SECTOR
Private Rented Sector Consulting & Advice Young Group works with: DEVELOPERS INSTITUTIONAL INVESTORS HOUSING ASSOCIATIONS CORPORATES PRIVATE INDIVIDUALS
Our Private Rented Sector consulting advice spans all aspects of the PRS from strategic and operational considerations through to the day-to-day asset management of PRS holdings
younggroup.co.uk Contact: Lesley Roberts Director of Consultancy Phone: 020 7593 3300 Email: firstname.lastname@example.org
Contact: David Mackenzie Director of Asset Management Phone: 020 7593 3300 Email: email@example.com
Welcome Welcome to Young Group’s latest biannual PRSupdate publication. It’s particularly fitting that as we enter our 10th year, this anniversary edition of PRSupdate celebrates the best of the Private Rented Sector (PRS) and its vital role in providing the homes to meet the UK’s growing housing need. It’s also fitting that, as the sector comes under ever increasing scrutiny and debate, the Housing Minister and Shadow Housing Minister have both written articles for us within our Housing Policy Focus pages (p.21-35). When I set up our PRS business in 2003, I was clear in my vision and determination that Young Group would not merely adopt the existing ‘norm’ found in the sector. Our approach has always been rooted in thinking of residential property as a consumer product. We consider the customer and client experience to be vital in underpinning the success, not only of our business, but also the PRS as a whole. Ten years on, it’s gratifying to see within these pages that others within the PRS, as well as those looking to make a success of transitioning in from the affordable sector, recognise the importance of putting service at the heart of their business. It’s something that we’ve been doing successfully for the past ten years; we recruit from the retail and hospitality sectors, remunerate based on our customer and client feedback, rather than commission, and have made the delivery of ‘Amazing Service’ our mantra (p.38). The PRS is coming of age and as we enter our second decade, Young Group’s consultancy service is proud to be sharing our proven approach to asset management and service delivery with institutional investors, corporate and private clients, Housing Associations, local councils and Government. As ever, we’re grateful to all of our guest contributors for sharing their insight, not only here, but also through our PRSupdate monthly bulletins and PRSupdate.co.uk online information site, which features regular news, sector updates and opinion. I hope you enjoy this anniversary issue and also have the chance to regularly take a look at PRSupdate.co.uk. Neil Young ACMA CGMA MARLA Chief Executive Officer Young Group and Young London firstname.lastname@example.org
Property Management Expertise
6 Entering the Private Rented Sector: How do we know what we don’t know? Lesley Roberts Young Group 8 Return on residential property in the UK Alan Patterson AXA Real Estate 12 Are Housing Associations ready to tackle the Private Rented Sector? Gavin Smart Chartered Institute of Housing 14 Designing a ‘new model’ Private Rented Sector Brian Ham Dolphin Square Foundation 16 Housing Associations are ready for the challenge of the Private Rented Sector Joe Chambers Soho Housing Association 18 Are social housing providers ready to enter the Private Rented Sector? Alan Williams One Housing Group 22 The Government is unlocking growth in the Private Rented Sector Mark Prisk MP Conservative Party 24 Meeting housing need through the Private Rented Sector Jack Dromey MP Labour Party 26 Where are new homes needed to unlock economic growth? Andrew Carter Centre for Cities 28 The Mayor’s London Rental Standard puts landlords and tenants in the driving seat Richard Blakeway Greater London Authority 30 Build-to-Rent and the Private Rented Sector in London Jonathan Seager London First 32 Private Rented Sector supply and welfare reform in London Dominic Curran London Councils 34 Regulation and the Private Rented Sector Professor Christine Whitehead London School of Economics 37 Young Index - Private Rented Sector Sentiment David Mackenzie Young Group
“Demystifying Renting” Young London’s experts will arm your employees with the right knowledge to help them find or let a property!
Let Young London host a free 30 minute Demystifying Renting seminar at your company’s office to help you empower your employees.
Contact: Michael Oakes - 128 Webber Street, London, SE1 0QL Phone: 020 7593 3300 Email: email@example.com
Property Management Expertise As part of the full managed service that Young London provides, we regularly help residents in their obligations to keep their home in good order and encourage them to stay on top of the property’s general upkeep. Our Property Management team has identified some of the most frequently asked general maintenance and goodhousekeeping questions. We’ve written a number of articles for our prsupdate blog to provide information on how to answer them. By heeding this information residents can keep their homes in tip-top condition. If you would like to read the articles then just scan the relevant QR code with your smartphone. Alternatively you can visit www.PRSupdate.co.uk and browse the articles at your leisure to uncover a world of helpful property management tips! Basic fault finding We provide some hints and pointers to help assist residents in identifying potential faults. Effective fault finding can help a resident remedy issues.
Spring clean 2013 At some point this year the majority of people will partake in the annual ritual known as the “spring clean”. This post provides a helpful guide to tackling this daunting task.
Proactive home care Sometimes it is the simplest things that residents forget to do that can lead to larger issues later on and so we put together this proactive home care guide.
How to clean an oven Oven cleaning is possibly the most thankless task ever! Our Property Management team is here to try and make the job that little bit easier with this handy guide...
You can read all of these, and more, property maintenance hints and tips at: prsupdate.co.uk/tag/property-maintenance 5
Director of Consultancy Young Group
Entering the Private Rented Sector: How do we know what we don’t know? It is encouraging to hear from our distinguished contributors that there is strong positive sentiment for the Private Rented Sector (PRS), and more specifically, the desire for institutional involvement, as well as their respective motivations.
growth, and nowhere more so than in London. Dominic Curran of London Councils p.32 suggests “The PRS is likely to be the only tenure in London that ends 2013 larger than it started.”
...caution is warned to those who oversimplify the transition into new markets In this issue of PRSupdate we also hear from Housing Providers, many who are looking to capitalise on and expand their offering (generally to bolster income); from government representatives, the desire to engage the PRS to assist in relieving the housing crisis; and from developers and funders, the opportunity to invest into what is (in the UK) a relatively immature asset class, namely the long term hold, large scale PRS Build-to-Rent product. Regardless of the motivation and level of direct involvement, the point is that key players are not just talking; they are involved and desire to be a part of the PRS. It is a diverse, stimulating, challenging and rewarding sector that is on the cusp of significant change and unprecedented UK 6
By virtue of the fact that you are reading our publication and interested in how Young Group is Shaping the Private Rented Sector, you might agree. Increased demand for our specialist PRS consultancy services reflects murmurings that significant institutional investment is afoot. Clients are seeking our advice in helping to create their PRS offering, to take their vision forward and carve out their own market share by defining and developing their USPs; establishing brand and service offerings, enhancing reputation, acquiring assets, setting up or managing PRS operations, training, mapping customer service journeys, providing market research and advising on long term asset management and investment returns. Talk is translating into action.
I am an advocate of the PRS and take any opportunity to encourage involvement, especially where it will lead to a more professional industry; where best practice becomes the norm, investment returns are solid and the consumer’s experience is valued. However caution is warned to those who oversimplify the transition into new markets, and this is especially true of the PRS. Yes, the provision of rented accommodation is a basic function of residential property companies, irrespective of whether their focus is on private, social or affordable homes. The devil really is in the detail and I can’t overstate enough the subtleties and nuances that make a world of difference when moving between them. In much the same way that you wouldn’t see a dermatologist for back pain, it’s having the right specialist knowledge that creates success. All rented accommodation providers have a base skill set, but specialisation is what makes them good at what they do. I have seen many simplistic views of the operational provision of housing, sometimes from clients and sometimes
from outsiders – the ‘one size fits all’ approach for tenure, property management, marketing, lettings, operations, asset management and above all, for service. This is where it becomes most apparent that clients aren’t aware of what they don’t know and run the very real risk of benchmarking against examples that are well below industry best practice. During the build up to this Spring/Summer edition of PRSupdate in our February edition of the PRSupdate Newsletter - the former Chief Executive, of the Tenant Participation Advisory Service, Phil Morgan, rightly suggests that there is increasing fluidity between social and private providers. This raises further debate on industry best practice and regulation, again highlighting the need for specialism. The PRS, just like the social housing sector, has such disparity of service and standards that there is a danger of this being further exacerbated as operators move into the sector anew. Gavin Smart, of the Chartered Institute of Housing p.12, further
elaborates on the infinite challenges faced within specialist areas for both social and PRS operators. However, the property industry is broad and full of talented individuals, many of whom are experts in their fields, and is one reason why the PRS is competitive and fast paced. The challenge for those entering the fray is to carefully assess their offering before jumping in. If you want to be a market leader, you need an edge over your competitors, an understanding of your own knowledge deficit and a strategy to overcome it. The most challenging part of working with the majority of clients is bringing them to the point where they grasp that they may not know what they don’t know – a basic conundrum of life! On the flipside, it is incredibly rewarding to be able to fill that knowledge deficit, tailor advice for their specific purposes and assist clients in achieving their desired outcomes. Social housing providers are well positioned to tap into the PRS and Joe Chambers, CEO of Soho Housing Association p.16 provides insight into the differences between the PRS & affordable housing. One Housing Group p.18, along with many social landlords, have now established a PRS offering and are attempting to find ways to cater for a mix of tenures to make the most of limited funding and capital values to provide much needed housing, as Brian Ham,
CEO of Dolphin Square Foundation explains on p.14 . This in turn raises an interesting debate from Andrew Carter at Centre for Cities who argues on p.26 that the devolution of centralised policies and increasing responsibility of cities is vital in adequately meeting the housing needs of our swelling population. Within the PRS we are on the cusp of major change. With more operators entering the sector it is inevitable that competition will increase, permeating all facets of the industry, from preferred bidders for land acquisitions, contractors and developers, investment partners, registered providers, letting and management operators and ultimately consumers. The real challenge for those in, or entering, the market is to understand your offering and perfect it; aiming to be the benchmark for industry best practice. This brings into focus comments from Richard Blakeway, Deputy Mayor for Housing, Land and Property on the Mayor’s London Rental Standard on p.28. Jack Dromey, Shadow Housing Minister makes a similar contribution on p.24 saying that something needs to be done about PRS standards, and we couldn’t agree more. Regulation of the PRS is another factor and raises different concerns to that of standards. Professor Christine Whitehead, a leading housing and planning expert from the London
School of Economics, looks at the impact of regulation using cross cultural comparisons and the effects on investor sentiment. Meanwhile, Jonathan Seager, Programme Director, Policy for London First p.30 believes the Mayor can play a more significant role in facilitating and stimulating increased institutional investment for Build-to-Rent to assist in addressing London’s housing shortage. It stands to reason that an increase in institutional PRS investment will result in a rise of professionalism and operating standards within the sector, further enhancing the reputation of the PRS as an attractive and independent asset class, rather than a sideline comparison for commercial property investment, bringing it to the fore where it belongs. Alan Patterson, Global Head of Research and Strategy at AXA Real Estate, provides insight on the merits of institutional investment in the sector p.8. While Mark Prisk, Housing Minister, p.22 reiterates the government’s intention to reform the planning system, channel new investment into house building and his ongoing support of institutional investment in the sector by way of the £200m Build-to-Rent Fund and £10bn Debt Guarantee Scheme.
of the market, the site specific benefits / limitations and knowing what you can and can’t do within the laws of the land. No two offerings are the same and each one has to be individually evaluated to make the most of the proposition, the land use and ultimately the end product to generate the greatest value. To be a leading PRS business a high calibre of expertise is required; it is a specialist field requiring vast amounts of experience and breadth of knowledge. If you don’t know what you don’t know, you can easily miss opportunity or worse still, put the business at risk by falling foul of compliance, regulation or poor performance. Just as every acquisition is different; so too is every PRS operation. PRS is a growing sector where expertise is relative to experience and success is measured by performance. Be sure to choose your PRS consultant wisely; one who knows that the PRS is a sector based on relationships - both within the industry and with your customer, and one who will ensure that you do know what you don’t know… Lesley Roberts younggroup.co.uk
Successful performance in the PRS is like land acquisition, it requires specialist understanding 7
Alan Patterson Global Head of Research and Strategy AXA Real Estate
Return on residential property in the UK Every now and then, the subject of institutions investing in UK residential property becomes a talking point. Mainly, that is where it ends, with little resultant investment activity in the sector. There are exceptions, the most notable of which is Wellcome Trust, successfully investing in the sector over a number of years but, in general, institutions have some difficulty in persuading themselves that the investment rationale is strong enough.
to young people. Clearly, by virtue of the fact that they are not, banks do not appear too concerned about the corresponding risk to their reputation in the event of a foreclosure. Another, and much more sensible, reason sometimes provided is that the costs of management are too high. Institutions would rather invest in a £100m shopping centre or office building than, say, 500 residential units of £200,000 each. Unlike most commercial property, residential assets require the landlordinvestor to take the financial and management responsibility for maintenance.
The facile and well-worn excuse that ‘we would not want to be involved, with the ensuing bad publicity in putting an elderly grandmother on the street’ is sometimes used, although if that was a real concern to the financial industry, the availability of bank mortgages would presumably be restricted
In addition, the turnover of residential tenants is higher than those of institutional-quality commercial tenants, with the latter being
Figure 1 Real house price indices Index
Era of 'cheap debt' 100
Source: Nationwide, ONS, AXA Real Estate Research Note: Q4 1973 = 100, RPI adjusted
on multi-year leases, so that the former typically experience higher average vacancy rates. Asset management costs are also much higher, whether as an internal cost or outsourced (with agency risk) to a third party. Of course, just because costs are involved – and those costs are high – does not mean that the investment is not attractive or suitable. The emergence of ‘Buy-toLet’ as an alternative or supplement to a pension plan for individuals or even, in some cases, as a small business is empirical evidence that it works for many people. These are investors who will, unlike pension funds, have a substantial capital gains tax liability when the assets are eventually liquidated. But, on the other hand, their mere existence does not provide evidence that investment in such assets provides an appropriate return commensurate with the risk. Many such investors are attracted to the sector because it is one with which they are familiar (being owner occupiers) and in which they can easily gear their assets, rather than because their research and analysis leads them to conclude that it
represents the ‘best’ of the alternatives available to them. The rapid growth in the number of these investors has coincided with one of the best periods of real capital value growth of residential units since records began. Some readers may take issue with that, recalling periods in previous cycles when growth appeared equally good, if not better. The reality is that much of the historic growth was in periods when inflation was high, so the growth in real terms was positive, but much less positive than the nominal figures would suggest. The 2000’s decade, prior to the recession, may well be regarded as an exceptional period. Figure 1 illustrates that by showing house price increases in real terms, and also indicates how London significantly outperformed over the period. Not only was inflation low (primarily because of imported goods from cheap labour countries) but, to stimulate the growth achieved over the period, interest rates were maintained at exceptionally low levels. The combination of factors favoured asset
values to an extent possibly not seen before and one which may not be repeated for a long time. The future looks different There is a formula with which most investors in commercial property should be familiar:
(Where P is price, R is rental income, and i is the discount rate or yield) Of course, that is, in its simplest form, the capitalised value of a rental income in perpetuity. You can build in costs, reversions, etc, but the basic principle holds good. It is a fairly universal formula from which Discounted Cash Flows (DCFs) and Internal Rate of Returns (IRRs) can be derived. While it suffers from the problem that it requires estimations of R and i, its greatest merit is that it provides a quantification of value that is theoretically objective and can be used to compare a value of one asset with the valuation of other assets. When it comes to calculating the total return on the asset at the end of a year, this can be produced by adding the change in price or value to the income return in the year. Now, let’s turn away from the theory to examine the returns on residential property. Figure 2 shows the gross rental income that might be achievable from residential properties
in different parts of the UK. Residential yields are notoriously difficult to estimate, and the ones shown will be easily contradicted by those from a different source. Nevertheless, they illustrate the relationship between capital values and income. These are, as indicated, gross yields, and an adjustment needs to be applied to reach a net income figure to cover the costs of management, maintenance, etc; this would be in the region of 20% of the income, or typically 1 to 2 percentage points. Figure 2 also shows (net) yields for commercial property. These are, on average, higher than those of residential. If we were to separate the commercial yields into regions, the dispersion would certainly not be as high as at that for residential. The differences between the residential locations are clearly indicative of the expectations of rises or falls in capital value, as well as the relative demand for lettings. For commercial property, such expectations would be primarily derived from changes in rental values as the formula above would suggest, together with changes in the yield or discount rate. But, and this is a big but, it is unlikely that residential capital values and rental value changes are correlated, for the simple reason that the investment values are not derived from the formula above, but from the prices being paid in the owner-
occupier market. There are two main reasons for that: First, owner-occupation is the dominant tenure in the UK and virtually all units let in the private sector could function as owner-occupied; in other words, they are transposable. Second, partly because of the management costs described above and partly because of the utility that owneroccupiers derive from their own property (status, investment, etc), the owner-occupiers outbid what an investor might derive from using the formula above and capitalising the income. The result of this is that one component of the returns (the income) is derived from letting, while the other (the change in capital values) is derived from a different market. This may not concern the ‘Buy-to-Let’ investor very
much – indeed, he may be pleased about that – but it causes problems for the institutional investor. The latter, in forecasting returns, will need to consider what factors will drive owneroccupier demand. That is notoriously difficult because there is a noninvestment sentiment issue involved and, indeed, the sector is subject to morethan-average political interference. The main factors determining price – earnings growth and interest rates – can, of course, be estimated but, setting that aside, the UK residential sector is unique in having its capital growth dependent on that of a different sector. Alan Patterson axa-realestate.com
GROSS INITIAL YIELD 2012
Birmingham Essex Leeds Manchester Bristol Edinburgh Kent
6.8 6.5 6.0 5.8 5.3 5.2 5.0
Central London Flats Central London Houses
All Property Commercial Central London Offices All Offices All Retail
7.4 4.4 7.6 6.9
Source: Zoopla, AXA Real Estate Research*, February 2013
Source: Cluttons, December 2012
Source: IPD Monthly, December 2012 *Note: Indicative yields for 2 bedroom flats
Londonâ€™s Award Winning Residential Letting and Management in association with
201 -500 properties
Housing Associations and the Private Rented Sector
The landscape is changing beneath the feet of providers within the affordable housing sector. In the face of reduced grant funding, a number of Housing Associations have already set their sights on growing their presence in the Private Rented Sector. In this section, PRSupdateâ€™s guest contributors discuss the challenges and opportunities associated with making the transition into the Private Rented Sector.
ÂŠDolphin Square Foundation
Gavin Smart, Director of Policy and Practice Chartered Institute of Housing
Are Housing Associations ready to tackle the Private Rented Sector? One of the most striking trends in the British housing market over the last decade has been the growth of the Private Rented Sector (PRS). The sector accounts for around 4.8 million (17%) of the 21.5 million households in England, having risen from 3.4 million in 2005. It’s a trend that shows no sign of slowing down with some in the sector estimating that the country will need an additional 1.1 million rented homes by 2016. Rising house prices are, of course, a key driving force behind this. While many people are choosing to rent there are others that will have no choice in the matter as the dream of home ownership becomes increasingly unrealistic, especially in London and the South East. The PRS came under the political spotlight at the end of January, when it was the subject of a lengthy Commons debate, and earlier this year Housing Minister Mark Prisk (p.22) told the Spectator that he wants to make the sector “bigger and better”. Social housing organisations could have an important role to play in this plan as they are 12
increasingly, and have been doing so for some time, diversifying into the Private Rented Sector. Why? The short answer is that it creates a virtuous circle. Housing Associations have always engaged in a degree of commercial, or nearcommercial, activity to provide a return that can be reinvested in to social housing. Providing private rented housing has always been part of this work, given the similarities with the Associations’ core functions as managers of sub-market rented housing. The degree to which they’ve done this has always been partly dependant on or influenced by the financial framework set by the government. The 2010 spending review saw a 67% cut in the government grant for new affordable homes – the average grant rate is now very low, which means Housing Associations need to fund the vast majority of every home they build. They do that through a combination of private borrowing and committing their own resources generated from commercial activities. There is another element at play here though.
Providing properties for private rent is about also catering for the wider housing need, and many Housing Associations would interpret that as being part of their core purpose. This is especially true in an environment where many households find themselves squeezed between an inability to access rationed affordable and social housing, yet locked out of any prospect of being able to enter owner occupation. In many respects these organisations are absolutely ready to tackle the PRS. They are, after all, experts in managing rented property; housing management, maintenance, repair and long-term investment is their bread and butter and they have become highly sophisticated in the way they deliver it. In many cases these are big operations that manage tens of thousands of homes while others, small scale Associations, are deeply embedded in their local area. But that’s not to say there aren’t challenges. A private rented property is a market product in a way that social housing is not, and it is also highly localised. Housing Associations need to make sure they really
understand the local market and what kind of properties that area wants. As any property analyst will tell you, it’s the little things that can have a big impact on value and rent, and there are a lot of them. Housing Associations will have to consider a huge number of factors – not just the area the property is in but things like; what side of the street it is on, what floor the flat is on and how it has been furnished etc. All these little variables can make a difference, and Housing Associations need to make sure they have a sophisticated understanding of the PRS market complexities. Private rented property is, arguably, much more sensitive to some of these factors than the equivalent affordable and social rented homes, which tend to make up the majority of Associations’ day to day business. Another key challenge is the speed at which the local market can change. Rents are both highly localised and hugely sensitive to activity in the local economy.
For some people living in the PRS, they’ll be able to afford a property in a certain area one year but not the next. So Housing Associations need to be flexible and fleet of foot to make sure they are able to reflect the way in which a local market has changed. Effective asset management is as important as getting the property management correct. Flexibility and agility are also crucial to ensure organisations can rework their business plans quickly and efficiently if the economy shifts and home ownership begins to rise again. There’s no reason that Housing Associations can’t be successful in the PRS, but the challenge is to make sure that they truly understand the market they are entering. By doing this they can achieve a return which can be reinvested in social housing. Housing Associations are using a mixture of different strategies to ensure they achieve this outcome. Some are recruiting specialist staff, with experience of the PRS, while some are relying on their existing housing management staff to provide the service required. In both cases there will often have been extensive research and analysis into the benefits and pitfalls. There really isn’t a single, fit all, model. I believe Housing Associations have a lot to offer to the PRS as they are experienced in the management of largescale housing stock and
delivering a very high quality service. Housing Associations are very different to most operators in the PRS where the vast majority of properties are owned by individual, small-scale landlords who typically own a small number of properties and simply can’t offer the same scale of investment or planned maintenance as a Housing Association or institutional investor. So what does the future hold? I think we can expect to see more Housing Associations moving into the PRS where there is a strategic and commercial incentive to do so. I believe social housing organisations are already making a valuable contribution to the PRS and, when more Associations embark on private rented schemes, they are as likely to build new homes as they are to seek to acquire properties, which would help to boost overall supply. Getting to grips with the market will be a challenge but, for me, the bottom line is that the more operators there are involved in the PRS the better. This is because, in many markets, there is simply not enough housing stock to meet the demand. The supply of homes available for people to live in needs to increase and Housing Associations that start to provide private rented homes will play a valuable role in satiating demand. Also, greater competition
should incentivise landlords to improve the quality of their service, both in terms of the condition of their housing stock and the quality of their property management. There is much to gain from Housing Associations entering the PRS; an increased housing supply, market pressures helping to drive up standards of housing and property management, and the potential for the Housing Associations to generate returns that they can reinvest into social and affordable housing. The challenge for the Associations is to carefully assess the potential for private renting in their areas of operation, and to decide whether they should enter the market. They will need to make sure that they can provide a quality product that is competitive and economically successful. If they are successful then the returns from their private rented properties can be reinvested for social purpose, and provide the much needed high quality and well managed social housing that will meet the needs of people who might otherwise struggle to access housing in the market.
Chartered Institute of Housing Our goal is simple – we want to transform lives. We want everyone to have a decent, affordable home in a thriving, safe community. We passionately believe that our contribution as housing professionals is vital to making communities great places to live. Therefore, our purpose is to provide everyone involved in housing with the advice, support and knowledge they need to be brilliant. Our work is rooted in three main objectives – learn, improve and influence. We provide opportunities for learning and improving and we champion housing to influence the direction of policy. CIH was granted a Royal Charter in 1984. We are a registered charity and the professional body for the housing sector.
Gavin Smart cih.co.uk
Brian Ham CEO Dolphin Square Foundation
Designing a ‘new model’ Private Rented Sector The old distinctions between private sector house builders and Housing Associations are becoming increasingly blurred. The larger Associations are selling and renting on the open market while some house builders are now renting - some even at ‘affordable’ levels. The Private Rented Sector (PRS) sits somewhere in the middle with both sides entering the market. But whilst there’s an encroachment into each other’s territory, and growing competition over the new middle-ground, there doesn’t appear to be much thought being given to the design of a new product for this new market. Housing Associations and house builders appear to be locked-in to design and service parameters that reflect their core businesses. But there is an increasing amount of evidence that innovation is needed if the PRS is to really take-off. Dolphin Square Foundation is trying to take a fresh approach. Our core business is precisely in the new middle-ground, where we aim to provide ‘Intermediate Rent’ 14
housing for working Londoners on modest incomes. But we do so without any state grant support and we’re not a Housing Association, so we don’t have to constantly look over our shoulder at the regulator. So how are we thinking afresh about the communities we’re creating, the homes we’re building and the services we’re offering to our tenants? What is there about the ‘new model’ PRS that’s different?
policy compliant’ tenure mix of say 65% private, 25% ‘social’ and 10% intermediate, with say 100%, 40% and 80% of open-market rents being charged in each tenure – the development earns, in aggregate, 83% of the potential open market rent. If instead, we charged 80% of the open market rent over the whole development we would earn 80% of its full open market potential, only 3% points behind.
Let’s start with the design of the tenure-mix, and think about how the blocks fit into the existing market place. Given the huge ‘legacy’ of both owner-occupied and social rented homes, it seems to us that a creative interpretation of planning policy would help to really give the sector a push, akin to that seen in the student housing sector over the last 15 years, by allowing the PRS to develop without any affordable housing obligations. The ‘quid pro quo’ might be for us to charge lower than open market rents, and that might also be in our own interest.
But we then have a building which is monotenure, providing a more efficient layout. The building should have a lower ‘churn’, as residents will stay longer due to it being cheaper than the open market, and we should have a quicker turnaround whenever we get a void, as we have waiting lists, not marketing periods. Lower churn rates mean less ‘refresher’ expenditure and management costs, and shorter voids mean less lost income. The 3% income differential should be easy to overcome. Also, we would hope to have buildings in which residents live harmoniously, reducing management costs.
Let me illustrate with some simple arithmetic. Take a typical ‘planning
So the first innovation is at the level of policy design – a new local planning
policy for the new model PRS. It’s perfectly feasible for a local authority to interpret current national policy in this way; we don’t need to wait for the government, local councils should just get on with it. Let’s now think about the design of the units and the ways we can give tenants great value for their money. Private house builders tend to build to a size formula, not least because they have to pass the valuation test when buyers are borrowing, often based on size in any given location. Housing Associations generally build to Homes and Communities Agency (HCA) space standards, because it’s what they have come to expect to do. The ‘new model’ PRS doesn’t have these restrictions and one of the design issues we’ve been looking at is the space vs storage tradeoff. We know that one of the grumbles about properties in the PRS is that people don’t have enough space for their things. But scratch beneath the surface and you find that it’s not the floor area that they’re grumbling about
but the lack of space to store their belongings. So we’re designing our apartments smaller than the London Design Guide space standard but we are investing the money we save in additional fitted furniture. People love it! We’ve also done away with the claustrophobic internal lobby, which is mainly there for fire protection, and are instead putting sprinkler systems in. We’ve also thought about how to overcome the limited space in small apartments for socialising and are learning from the large American multi-family buildings where hospitality and social areas are common place. But our approach has an eye on what we can do that is costeffective and fits within our smaller scale developments. Our answer has been to start creating communal roof terraces and then supporting residents to self-manage the space, as a first step. So our second innovation is in product design; freed from the design shackles of the house builders and the Housing Associations we’re building smaller but beautifully fitted apartments, and incorporating amenity areas - a new product for the new model PRS. Finally, what about the services our tenants might want? What scope is there to be innovative in service delivery to keep management costs affordable and even to sell additional services? We are starting by building-in the latest technology, which will provide high quality entertainment solutions, and are then using the same
infrastructure to manage the relationship with our tenants. We can use the system to sell additional services to our tenants, everything from contents insurance to pizzas to dry cleaning. Because we’re the long-term owners of the buildings we can justify the up-front cost by taking a long term view of the payback. So the third innovation is in service design, looking at our tenants as long-term customers - providing new service standards for the new model PRS. We haven’t fully crackedit yet, there’s still a long way to go and there’s plenty of scope for further innovation, but the more we analyse and understand what the customer base in the PRS wants, the more we’ve realised that it’s not the standard products of those who are entering the sector, either private house builders or Housing Associations. We need new designs for the new model PRS. At Dolphin Square Foundation we like to think we’re trying to lead the way. Brian Ham
In Conversation with Brian Ham Can you tell us a little about your background? I originally trained as a Town Planner and spent a large part of my career working at the ‘pro-active’ end of the planning spectrum, pushing for regeneration. I joined Dolphin Square Foundation as Chief Executive 3½ years ago. What affect did the financial crisis have on affordable housing? Probably the biggest affect we’ve seen is the huge increase in demand. We work without any kind of public sector grant, as we’re not a Housing Association or Registered Provider, and our tenants are workers on a modest wage. What do you predict for the future of the housing sector? It’s pretty clear that the major house builders do not want to rapidly expand their businesses so there will need to be some significant new entrants to the market if we are to build at the rate that our population needs. I think we’re going to see some interesting new players developing affordable housing. What steps do you believe could be taken to improve the housing situation? Planning, planning and planning. Planners have got to be a lot more pro-active and try to make things happen. What has been the most challenging aspect of your role? Getting planning consents for developments. Policies are written on the assumption that you’re either a greedy developer trying to do the bare minimum of affordable housing, or a social housing provider with bucket-loads of grant. Finally, do you have a favourite London landmark? The BT tower. Still the best ‘modern’ building on the London skyline. Brian’s full ‘In Conversation’ can be found at PRSupdate.co.uk
Joe Chambers Chief Executive Soho Housing Association
Housing Associations are ready for the challenge of the Private Rented Sector What is the difference between a tenant in the Private Rented Sector (PRS) and a tenant in the “affordable” sector? In the vast majority of cases only money. In many Housing Associations up to 60% of residents have less than the full housing benefit, which indicates that they have worked or do work, and does not mean that they are unwilling to find work now. I am not joining the throng who are demeaning affordable housing tenants by making ill-conceived, uninformed comments about those who find it hard to afford to live in an increasingly expensive housing market.
As we researched the service levels required we began to realise that the private tenants would expect less from their landlord than our affordable tenants. This made me think.
are all reprehensible crimes, the police and the justice system is there to prosecute the perpetrators, however if you are poor you can expect to also have your home taken away.
The affordable housing sector, encouraged by government and the regulator, over the last 20 years has created a paternalistic environment for affordable housing tenants. Affordable Housing Providers have been made to strive to provide a better and better service for, what is essentially, a budget product. More than that, Housing Associations are encouraged to resolve resident issues.
This approach of treating people who live in affordable housing differently leads us to a greater malaise. If you treat people like children they will behave like children. Affordable Housing Providers - even the language “Providers” gives you a clue - have been encouraging tenants to use their landlords to address all their ills.
...treat people like children they will behave like children What I am saying is, if the only difference between “them” and “us” is the size of the bank balance then why do we treat them so differently? These thoughts came to me as Soho Housing was establishing the service levels for our new PRS stock in the West End of London, where private sector rents are about £450 - £750 per week, compared with £120 per week for our affordable tenants. 16
Housing Associations are encouraged to tackle anti-social behaviour, interfere in neighbour disputes, involve residents in how the company is run, paint the faces of tenants’ children at “fun-days” and generally patronise people who live in their properties. Not to mention the injustice that affordable tenants face, through the double jeopardy, when they break the law. For drug use, violence and harassment, which
This has reached the point where I have received complaints from residents because their neighbours will not say good morning to them or a phone call from a tenant telling me that their neighbour is looking at them in a funny way. There is an expectation that I, as the landlord, should address these issues in some way. There is no reason why affordable tenants cannot engage with the statutory services the same as any other member of the public. If they experience noise nuisance they should approach environmental health and if they
experience harassment then they should approach the police. These issues are outside of a landlord’s remit and serve to differentiate affordable housing tenants from the rest of us. This is not healthy for them and can lead to others thinking less of affordable tenants due to the impression that they cannot manage. In terms of customer service, this relationship dynamic leads even the very best of those who work in the affordable housing sector to patronise those who live in their properties. The affordable tenants feel like the supplicant and obtain an unrealistic expectation of what can, and should be, delivered, which could lead to resentment and disappointment. Housing Associations are well placed to provide really top class landlord services. In many cases the office and team is local to the residents they look after and even with larger Associations they usually have sophisticated delivery systems that would knock the spots off of most private sector service industries, e.g. banks.
Housing Associations are transparent, too much so in my view, and they tend to have clear processes which are not overly bureaucratic. They maintain their assets very much in the interests of their customers even, I would say, at the expense of commerciality in some cases. Where I believe the Private Rented Sector has the edge is the relationship between customer and landlord is more honest and clearly defined. This makes the service sharper, more cost effective and expectations on both sides are clearer allowing for, but not necessarily delivering, a happier customer. If Housing Associations re-calibrated their relationship with customers then they would waste less time, money and resources on intangible outcomes like community leadership and resident empowerment. This could potentially create a high quality PRS quite significant in its scale. The other side of that re-calibration could be the positive impact Associations should be able to have on the 5 million affordable households in the country, such as leading them to become less dependent. This would mean truly viewing our customers as equals and treating them as adults through a transactional relationship defined by the rental of a home for cash. This is the way to empower the majority of our residents, if they need empowering, and not disempowering
and setting them apart because they have less money. There are some tenants who find themselves in affordable housing, not only due to the fact that they have less money, but also because they have other issues which may make them less able to engage with statutory and landlord services. There is a strong case for the landlord having a service which assists these more vulnerable tenants. Housing Associations are generally there to support those less able to support themselves and, in most cases, that is purely financial. But in a significant minority of cases, tenants may also need more tangible support in maintaining their tenancy. If they are only provided with a good landlord service, as received by other residents, then they would be more likely to fail and to lose their home. Housing Associations are well placed to identify the need and deliver the regular and tailored support to fulfil the needs of those tenants. Joe Chambers sohoha.org.uk
Soho Housing Association Soho Housing was set up in 1973 by people living in Soho to improve local housing conditions and to ensure that its existing homes were not destroyed by redevelopment. They hoped that by providing homes in the area at prices local residents could afford, the existing community could be retained and strengthened. The first properties were purchased in 1977, consisting of the terrace of listed houses in Great Pulteney Street, together with the site at the rear in Bridle Lane, now called John Broadwood House. Since then we have purchased and improved several other blocks of flats to provide family homes, with some open space for the residents wherever possible, in Soho, Covent Garden, Bloomsbury, Farringdon, Queenâ€™s Park and Victoria. Our largest property is Sandringham Flats in Charing Cross Road with 125 homes and 14 shops. We also have a sheltered housing scheme, Pargiter Court, for the elderly in Soho with 19 flats. Nearly 40 years later, we are still a financially robust organisation, with plans to continue developing new homes.
Corporate Strategy Purpose Providing homes and supporting communities in the heart of London Vision Soho Housing supports the village communities in central London. We provide a range of affordable housing but also fully engage with the people who live there through supporting the local economy and working with residents in those villages to improve the quality of life and life chances. Objectives Being the landlord our customers want Meeting housing demand Strengthening local economy & quality of life Developing our skills Value for money Values Creative Open Responsive Efficient / Effective
Alan Williams Group Development Director One Housing Group
Are social housing providers ready to enter the Private Rented Sector? I don’t think anyone would argue that there is an urgent need for homes of all tenures in the UK, and not just affordable homes – though they are so desperately needed. The need is most acute in the capital, where over 1.8 million people are on the housing waiting list and countless others are seeking other solutions to their housing needs.
to deliver homes for a growing population who need somewhere to live. Growing household numbers, rising house prices, increasing unemployment rates and the welfare reform bill all have serious implications and increase the need for us to redefine our purpose to meet the demand. After all, if we are not trying to meet housing need, then what are we doing?
Boris Johnson, Mayor of London, launched a new drive to increase owneroccupation through a more flexible approach to shared equity and shared ownership. The government also recognises the thriving role that the Private Rented Sector (PRS) plays in the market, with Mark Prisk recently emphasising growth and quality as priorities. Both the owner-occupier and private rented markets are continuing to change rapidly and so are the people that rely on them.
The current climate presents many challenges for Housing Associations, but there are also plenty of opportunities too. The answer for us is long term sustainability and modernisation. We are becoming more entrepreneurial in our approach. We are experienced in providing high quality affordable homes and that makes diversifying into the private rental and sales markets a logical and easy step - especially at a time when the expanding PRS is in need of greater stability.
...other providers need to come on board One Housing Group is like all other London-based developing Housing Associations and faces, not only the reduction in government capital funding, but also an increasing pressure 18
We have, over the past five years, recognised our own need to become more innovative. For example; we recognised the need for a new financing model if we were to be able to continue developing new
homes in a climate where government grants were being reduced. Our move to tackle both sectors at once is working for us. We are now developing a large number of private sale homes to generate both revenue and capital cross-subsidy and we are expanding our private rented portfolio through both new build and changing of the tenure of some existing properties. The conclusion that social housing providers must do their best to fit into modern times is actually a more widespread view, and has been discussed and argued by policy makers and researchers alike. Most recently, in February 2013, academics from the Centre for Housing Research at St Andrews University concluded that a ‘radical rethink’ of the role of social housing providers was needed. Researchers have particularly focused on London, where the need for all forms of affordable housing is critical. Sadly, in an era of austerity, funding for affordable homes in some of London’s most expensive boroughs has become almost unachievable.
This led think tank Policy Exchange to recommend, in their Ending Expensive Social Tenancies report (published August 2012), that social landlords sell their homes in high values areas and use the capital released in order to finance the development of new homes in outer areas of London. Whilst selling our high value homes in central London locations would create substantial cash receipts to fund the building of new homes in the short term, what happens in the long term once that funding has been used? How would social landlords then look to generate funding? Of course, social landlords are in it for the long haul to provide homes for those who need them most and it’s unlikely that that need will go away or reduce any time soon. Rather than selling homes in high valued areas, the approach we are taking is to change the tenure of some homes in high value central London areas to market rent. This approach will allow us to retain these homes and generate significantly increased revenue, rather than selling the homes and only benefitting
from a one off capital receipt. The on-going funds we generate from the private rented homes – revenue and capital – can be used to both build new homes and to invest in refurbishing and improving older properties.
Citystyle Living, our PRS arm, is growing quickly and it sits alongside Citystyle Homes, our new build sales arm, and Citystyle Residential, our aftersales and homeownership service for people who have bought a home with us.
We have been using this model for the past three years and have applied it to some of our homes in Covent Garden, Regents Park and Holborn. It is working well with £1.3m extra rental income per year being generated from 100 units, and an increased capital finance stream, of some £5.5m, has been created for investment in new developments. This is just the start and more is to come.
So are we ready? The call to stabilise and improve the PRS exists; a significant proportion of the UK’s population rely on the PRS and need a trustworthy service. As an experienced, focussed and able provider we believe we can deliver this improvement – but on our own this can only be for a small proportion of the population. To have a greater impact this approach needs to become more widespread and other providers need to come on board.
Changing the tenure of some of our high value properties allows us to build up revenue, but the need to continue building means we still need to generate more funds. By purchasing and developing new homes for private rental, as part of larger mixedtenure developments, we can continue to meet our affordable purpose and deliver for our tenants that rely on our homeownership services. We have built up a rented portfolio and are continuing to add to it. It is important to not only create long term revenue but to also increase the capital values to secure the organisation and support future business. We are well established in the sector and we pride ourselves on the example we are setting.
It is for other social landlords to decide whether they will take the same lead as us in both leveraging their assets for the long term gain and developing a new private rent portfolio to benefit their residents. We feel we have successfully made the transition into the PRS and will continue to offer support to any social landlords looking to make the transition into the sector. Alan Williams onehousinggroup.co.uk
In Conversation with Alan Williams Can you tell us a little about your background? I am a Building Surveyor by training and have more than 30 years’ experience in housing... I joined Community HA in 1997, became Development Director in 2004, and then Group Development Director at the formation of One Housing Group. What affect did the financial crisis have on the affordable housing sector? Pretty catastrophic for some and challenging for all. Development activity was certainly placed under great strain and those who had perhaps taken too many risks on rising values had to seriously retrench. What do you predict for the future of the affordable housing sector? For the medium term it will be challenging as we adapt to a life beyond development grants. Those who are flexible and creative enough to embrace the new agenda stand to gain the most in terms of financial stability and increased development activity. Housing, and social housing, are hot political topics at the moment. What steps do you believe could be taken to improve the situation? This is a seminal moment for Housing Associations and we have the chance to regain our proper role as developers and landlords free from constant intervention from government as well as being agents for change. We should grab it with both hands. What has been the most challenging aspect of your role? I don’t see any real game-changing challenges – simply more opportunities. And we at One Housing Group embrace opportunities! What would you say is your most memorable moment or proudest achievement? Enabling the growth in our development activity at this time by changing from facility financing arrangements to project funding. Finally, do you have a favourite London landmark? Despite all the shiny glass towers now being built across London, my favourite landmark is St Pauls Cathedral. A mix of form and function that never ceases to amaze. Alan’s full ‘In Conversation’ is online at PRSupdate.co.uk 19
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Housing Policy Focus There’s no doubt that the Private Rented Sector has taken centre stage in Housing Policy debate. As the UK’s demand for housing continues to grow, policymakers are turning to the sector to deliver not only an increased number of homes, but also increased levels of service and professionalism. In this Policy Focus, the Housing Minister & Shadow Housing Minister present their goals and aspirations for the Private Rented Sector and its important role in meeting the UK’s housing need.
© DAVID ILIFF
Mark Prisk MP Housing Minister Conservative Party
The Government is unlocking growth in the Private Rented Sector For at least fifteen years this country has been building roughly half the homes it needs – whether for sale or rent. The situation got so bad under the previous administration that we saw the rate of housebuilding drop to its lowest peacetime level since the 1920’s. It’s why this Government is prioritising reform of the planning system and channelling new investment into housebuilding. That means £19.5bn of public and private investment to deliver 170,000 new affordable homes by 2015, and spending over £1.5bn to unlock housing delivery on sites across the country. But demand for rented housing is growing. The facts speak for themselves: 3.7 million households in England now live in private rented homes, equivalent to 17% of the total housing stock. The sector has seized the initiative in responding to the extra demand, with 1.5 million homes added in the eight years before the last election, a 55% increase.
However, much of this growth has been driven by individual landlords with small portfolios, and a lack of large scale investment has constrained further market expansion. At the same time the huge growth of the sector has not resulted in a significant increase in the overall supply of new housing. In the past there have been debates within Government and the housing industry about whether to focus investment on owner occupied homes, affordable housing, or the Private Rented Sector (PRS), and often these debates have concluded with the private sector losing out. It means that building homes specifically for private rent has remained a relatively immature market in the UK, and investors and lenders continue to be cautious about supporting new build projects. We want this to change so the sector expands and tenants are given more choice and quality. It’s why, as part of our Housing Strategy, we asked Sir Adrian Montague to carry out an independent review into the sector.
Our response to his excellent report has been swift: a commitment to provide a £10bn debt guarantee and a £200m Build-to-Rent fund to deliver more new homes for private rent.
the event of default from borrowers. This should enable housing providers to borrow at well below current rates, and encourage more investment in the private rented market.
We published the latest details of our ambitious guarantee programme on February 1st. It’s designed to address the underlying problem that investors and lenders can be cautious about supporting large scale investment in the sector.
At the same time our new £200m Build-toRent fund will also boost the construction of new homes specifically for private rent. The fund will cut the risk for developers more traditionally used to building homes for sale by financing the construction of rental homes until they are built, let out and managed.
So the guarantees will support a variety of options to invest in new homes for private rent, from new build to converting existing commercial spaces into rental properties. The scheme will make finance available for projects that have a minimum value of £10m, with new homes remaining in the PRS until the money is paid back. Under this new approach the Government will reduce risk for lenders by guaranteeing to repay the money in
Like the guarantees, Build-to-Rent will enable developers to build homes specifically for the rental market with confidence. Management companies will have the chance to invest in these new rental developments, and developers will then repay the investment from the government.
So what are the next steps? The eligibility requirements for the guarantees and details about how they will be structured have been published by the Home & Communities Agency (HCA). An invitation to tender for the running of the schemes was also published and, at the time of writing, we are starting to assess the responses. The £200m Build-to-Rent Fund was open for bids from December 2012 to early February 2013. Submissions are currently undergoing a due diligence process before shortlisted schemes are announced. Underpinning both these programmes will be an expert taskforce. They will boost investor awareness of both schemes, and offer practical support to those interested in this new market. There is vast untapped potential for growth in the PRS and our ground breaking measures have the potential to bring thousands of new homes into the market. These schemes will help to get spades in the ground, create jobs and establish new business models. So I would encourage investors to investigate how they can get involved and benefit from the growth in this vital sector. Mark Prisk MP markprisk.com
Mark Prisk’s vision for improving the Private Rented Sector The Private Rented Sector is a vital part of the housing sector, providing a ready supply of homes for people who want or need the flexibility to move at relatively short notice. But for many years, the sector has been considered something of a cottage industry. When you look at the numbers, it’s hard to believe. More than 3.5 million people in England live in rented accommodation; that’s more than one in six households across the country. And in London, people who rent their homes count for a quarter of the city’s population. But when you look at investment into the sector, especially compared to the large investments made in new social and owner-occupied housing, it’s easy to see the difference. The majority of landlords are small investors, managing less than five properties each. Large rental investments are rare and, as Sir Adrian Montague set out in his report last year, quality varies widely across the sector as a result. Realising the potential of rented homes I believe that there is real untapped potential to expand and improve the private rented sector, without adding yet another layer of regulation and red tape. By bringing in large-scale investment and building more new homes specifically to rent, we can not only offer a broader choice to tenants, but set a new bar in quality for landlords, large and small, to match. But building homes specifically for rent is a relatively untested market, and that’s why I’m bringing in a range of new measures to kick-start investment and show what largescale investments in the sector could look like. A Build-to-Rent blueprint In December 2012 I launched a new £200m Build-to-Rent fund, designed to boost builders’ confidence to build new homes specifically for private rent. The fund will finance the construction of homes until they are built, let out and managed, and create new ‘demonstration’ projects to showcase larger scale rental developments in action. On top of this, the Chief Secretary to the Treasury and I published the next steps toward a £10bn Private Rented Sector Guarantee, which will help investors get the affordable finance they need to build new rented homes. And to help them on their way, I’m also setting up an expert Private Rented Sector taskforce to support investors and boost awareness of what’s on offer. By expanding the Build-to-Rent market in this way, we can create a blueprint for building new rental homes, reduce the risk of lending to investors and bring down the cost of borrowing for similar projects in the future. Originally posted (06.02.2013) by Mr Prisk on his blog: markprisk.communities.gov.uk
Jack Dromey MP Shadow Housing Minister Labour Party
Meeting housing need through the Private Rented Sector Labour believes that the Private Rented Sector (PRS) has an important role to play in meeting housing need. There are now 8.5 million people, including more than 1 million families with children, renting privately. As a result of the biggest housing crisis in a generation it has been predicted that more and more people will be locked out of home ownership and, either through circumstance or choice, live in the PRS; potentially up to 1 in 5 households by 2016. Labour wants to see a strong and thriving PRS that works for everyone. That means creating the right conditions to attract greater and longer term investment in the sector. It also means ensuring that the sector provides homes that are sufficiently stable, secure, affordable and of a decent standard. But the evidence shows that all too often the sector does not provide the kind of homes the country needs.
That is why, as part of our housing policy review, we have set out to identify measures that will ensure that we have a strong and thriving PRS. This will help to meet current housing needs and tackle the
biggest housing crisis in a generation. We need a PRS that suits the needs of those living in the sector, both now and in the future. Let me start with the letting agents. A good example is the landlord, from Yorkshire, who wrote to me about the letting agent he uses. He told me that the agent planned to charge his tenants, a young couple, £400 to renew their tenancy agreement and to charge him £100 as well. He said the tenants could not afford to renew and therefore he was in danger of losing the tenancy. As he put it “...this is an example of the rip off charges that these agencies charge and the further pressure that this then puts on the housing market in these tough economic times.” But it’s not just the opaque fees they charge, many letting agents are entirely unregulated and provide no protection to their customers whether they are tenants or landlords. Next, the PRS fails to provide the 1 million families with children, and other tenants living in the sector, with the stability and certainty they need. We recognise that there are tenants who value the flexibility
offered by assured short hold tenancies and we believe that this flexibility should remain for those who want it. But, with a greater number of families with children finding themselves in the PRS, either through choice or circumstance, they must have the option to be able to enjoy longerterm tenancies so that they can plan a future for themselves within their community. The current system is also failing landlords as well. A report by Jones Lang LaSalle, has shown that landlords’ returns and business models are enhanced by longer term tenancies that are linked to indexed rents. If it is true that the majority of private landlords are responsible and treat their tenants well, it is also true that there are too many rogue landlords who undermine the responsible by preying on vulnerable tenants. This small, but dangerous, minority of rogue landlords can make people’s lives a misery and, despite the increase in the number of prosecutions against these landlords, the problem is getting worse. In a survey carried out by Shelter, it was found that complaints against
landlords have increased by 27% in the last three years, rising to over 85,000 in 2011/12. Reports have shown that standards in the PRS are worse than other tenures. In 2010, a full 37% of all privately rented homes were estimated to be non-decent. Nearly 15% of private rented homes lacked minimal heating in the winter. These poor housing standards have wider cost implications, for the taxpayer as it is estimated that the annual cost of poor housing, to our National Health Service, could be up to £2.5bn. What Labour wants to see is a strong PRS that is vibrant, diverse and meeting the nation’s housing needs. But if the sector is going to be one of choice, it must change. That’s why Labour would regulate letting and management agents to ensure that tenants, landlords and reputable agents are protected.
We would bring an end to the confusing, inconsistent and opaque fees and charges of certain lettings agents by ensuring transparency and comparability. We also want to see a light-touch, national register of landlords alongside greater powers for Local Authorities to root out, and strike off, rogue landlords that have been found to have broken the rules. We want to see increased access to longer-term tenancies allied with predictable rents. Families need stability to enable them to plan where they send their kids to school and a certainty in costs to help them manage their household budgets. We would take action to ensure that tenants who want to have a longer term tenancy agreement would be able to enjoy them. We would make sure that there is flexibility for those that want it and a security of tenure for those that need it. Finally, we want to encourage greater investment in the sector, both public and private. We want to see increased private institutional investment, including through the build-tolet scheme and believe that this can happen in partnership with Local Authorities and Housing Associations. Some Housing Associations are already moving into the PRS and we welcome their presence in helping to boost the sector. The Housing Associations, alongside the Local
Authorities, will not only boost the PRS stock but also help to raise standards and provide greater stability. There is no contradiction between greater protection for tenants and landlords and wanting greater investment in the sector. In fact, we would argue that an improved sector is a necessary condition of increased investment. If the PRS is to thrive and become a desirable alternative to home ownership then it must provide tenants with the homes they want, alongside the stability, security of tenure, affordability and decent standards that tenants need. Jack Dromey MP jackdromey.org
Labourâ€™s Policy Review: Private Rented Housing Providing stability and affordability for renters and families Labourâ€™s Policy Review is developing new thinking to create a housing market that works for all. Our first step has been to consider the role of the Private Rented Sector (PRS) and how we support the growing numbers of renters and families living in privately rented accommodation. Labour is determined that everyone should have a home at a price they can afford. A one nation housing policy means helping current and aspiring homeowners while also supporting renters. It also means that the majority who are responsible landlords are not undercut by the minority of rogues who damage the reputation of the entire sector. Most people want to own their own home and Labour aims to help people to achieve their aspirations. However, Britain faces the biggest housing crisis in a generation and therefore many people will take longer to buy and will be renting for much longer periods than in the past. As a consequence, the PRS will continue to grow and play an important role in meeting housing need. But all too often, private renting is unaffordable, unstable and subject to poor conditions and bad management. That is why our first Policy Review paper on housing set out steps to tackle unscrupulous letting agents and to end rip-off charges. But more can and must be done. Labour wants to see a sector based on long-termism and responsibility so that families can have the stability and security they deserve. That is why we have set out to identify and tackle the barriers that stand in the way of such a market developing. The PRS allows a considerable amount of flexibility which some of the 8.5 million people who rent privately value. But nearly a third of private renting house holds are families with children, and almost half are aged over 35, and for many of them, the sector does not provide the stability that they need. This way of operating is not only failing families, it is failing landlords. There is compelling evidence that landlords can make a better return through a model that encourages long-termism rather than the short-term market that currently operates. Labour believes we should take steps to give renters and families in particular private rented homes that are affordable and stable, providing the predictability and security they need to plan ahead. This kind of market will not just benefit renters but will benefit responsible landlords who invest for the long term and want to earn a decent return. Labourâ€™s Policy Review will continue to develop proposals to create a housing market that works for working people. Read the full document at: bit.ly/labourpolicyreview
Andrew Carter Deputy Chief Executive Centre for Cities
Where are new homes needed to unlock economic growth? After decades of failed housing policy, the UK is now facing a housing crisis. Currently, it is estimated that the UK is building around 100,000 fewer homes a year than is required to keep up with the increases in demand - one of the reasons attributed to high house prices. There has been much coverage of the need for new houses in recent months. But while the case for new homes is clear, there has been much less dialogue over where these new homes are required. As we show in Cities Outlook 2013, our economic index of the 64 largest cities and towns in the UK, some cities need them more than others. The UK needs more houses. Firstly the average price of a home now stands at just under nine times the average yearly salary. Given that government estimates suggest that we are currently building around 90,000 fewer homes per year than required, the affordability issue around housing is likely only to get worse. Secondly, building houses would likely act as a â€˜pick me upâ€™ for the national economy â€“ the building 26
of 100,000 homes is estimated to add an extra 1% to GDP. Whilst these arguments have been rehearsed before, much less attention has been given to the different housing challenges that different cities face. Figure 1 illustrates the variation across UK housing markets, and the relationship between rental and price affordability ratios and vacancy rates (as Figure 1
represented by the size of the bubble) in each city. It clearly shows that not every city is facing a housing shortage challenge. The much discussed housing affordability problems are most acute in cities such as Oxford, Cambridge, London and Brighton. For example, in Oxford, the average house price is 15 times higher than average earnings, while the average yearly rent would account for
50% of the average yearly earnings. By comparison the affordability issue is much less acute in some cities such as Hull, Burnley and Wigan. The average house costs around five times more than the average yearly pay packet in Burnley. Indeed, building more houses in a city such as Burnley would only serve to push down prices further, hurting current home owners and doing
Highest affordability ratios City
Affordability Vacancy rate Stalled Sites ratio (2012) (% of stock)
little to contribute to the city’s long term economic performance. Instead issues around the quality of its existing stock are more pressing – at 7.5 per cent, it has the highest vacancy rate of any English city. With more than one in five houses classed as ‘Category 1’, which are the most serious hazards within dwellings rated by the Housing Health and Safety Hazard Rating System. A constraint on the supply of housing in high performing cities is likely to have adverse effects on the local economy; current residents are unable to afford to buy or rent and may look to move elsewhere; new people are unable to afford to move and live in the area; and employers may struggle to recruit the individuals they need to help grow their business. All of this hurts economic performance and growth at the local and national levels.
How does policy need to respond? To generate benefits for the economy, policy should focus on increasing the availability of housing in high demand areas and improving the quality of the stock in other areas. In the short term, there is the potential to provide rapid boosts to the housing market, which would also increase jobs and economic performance. There are around 400,000 units on stalled sites across England and over 118,000 of these units are found in the ten most unaffordable cities (Figure 2). Initially prioritising these cities, through policies such as Get Britain Building and ideas from the Montague Report, would provide short term economic benefits. Research shows that 100,000 new houses a year could provide around 150,000 jobs (of
which 90,000 would be in low skilled positions) and grow the economy by 1%. It would also generate long term economic returns, as these cities would be able to grow and offer more opportunities for people to live and work within them. In more affordable cities the provision of new homes is not the most pressing housing issue. Instead policy should focus on dealing with vacancies and improving the quality of the existing housing stock. This is likely to improve the quality of life for local residents, help make the area more attractive to businesses and, potentially, generate jobs through the retrofitting and refurbishment process.
respond to their particular circumstances. This will allow them to make the most of housing’s potential to deliver a much needed economic boost to the country. Houses are built in places, but there is huge variation in the housing challenges that different places face. For this reason an emphasis on place needs to be put back into housing policy and, only through doing this, will we be able to effectively deal with the UK’s housing problems. Andrew Carter centreforcities.org
In the long term there are a number of issues that need to be overcome, such as; the level and nature of competition in the house building industry, fiscal incentives for developers to use the land they currently have permission to build on and reforming the planning process. Ultimately cities should be able to devise and implement their own approaches to housing. In the Centre for Cities ‘Cities Outlook 2013’ we highlight the importance of housing to the local economy and how it varies from place to place. This means national housing policy needs to be much more flexible and cities need to be given greater freedom to 27
Richard Blakeway Deputy Mayor for Housing, Land and Property Greater London Authority
The Mayor’s London Rental Standard puts landlords and tenants in the driving seat There has been considerable comment on the phenomenal growth in private renting. Yet this isn’t news to Londoners. Ten years ago, when the housing market was more buoyant and banks were falling over each other to issue 100% mortgages, private renting doubled. Today a quarter of all Londoners are private renters. It is not just the overall number that has changed. London’s private renters now include over 200,000 families with children, the average age of renters is rising, and the level of mobility in to, out of and within the sector is declining rapidly. What we are witnessing is a fundamental shift in demographics in a tenure that was once dominated by young, single, mobile people.
One thing that hasn’t changed is Londoners’ overwhelming desire to own their own home. The Mayor’s recent reductions in red tape and a £100m boost for more innovative models of home ownership will help tens of thousands of them to do so – and a cut in stamp duty wouldn’t go amiss either. Ultimately, housing costs in London must be reduced so that the next generation can realise
their dream of home ownership. But we have to recognise that a large and growing Private Rented Sector (PRS) is here to stay and the vital role that private renting plays in London’s economy and housing market must be acknowledged. That is why, last December, we published the first ever blueprint for private renting in the capital. It takes a long hard look at the sector, with the aim of building on its success to date and recognising its potential for the future. The blueprint attempts to answer some very important questions about the role of private renting in London’s economy and society. How can we harness a buoyant PRS to increase the supply of new homes? What is needed to promote high standards and professionalism? How should the sector respond to the fact that more renters want greater security - especially families who represent a 20% growth in the sector? We don’t have all the answers, which is why we are in the middle of a public consultation about our proposals. But it is right for the Mayor to set out his vision for
how a future PRS should look. Central to this vision is our belief that only by moving towards a stronger system of self regulation for landlords and agents can we protect investment in the sector, while at the same time improve standards. The alternative - more red tape, regulation and rent controls - is unthinkable given the disastrous impact it would have for investment. Key to the Mayor’s proposals is the new London Rental Standard, with twelve core standards that should underpin London’s successful accreditation schemes – and an aim to accredit over 80,000 more landlords and agents by 2016. Covering everything from deposit protection, to transparency about letting agent fees, to repair response times, the London Rental Standard could underpin a massive marketing campaign about the benefits of accreditation. Our proposals won’t require more legislation. Local authorities have existing powers to stamp out the very worst landlords who blight the reputation of the sector, including those who rent out so-called ‘beds in sheds’. But we do
want to see more choice for tenants, and more consistency across the various accreditation schemes that operate across the capital. For example, one of our proposals is to launch a pilot scheme for landlords who want to offer longer tenancies. This can be done within the existing Assured Shorthold Tenancy (AST) framework but first we need landlords to come forward and volunteer to take part. The other big issue is housing supply. We want a successful PRS to help us unlock some of the 170,000 homes that have planning consent but which are not being built. We need to build more homes to buy and to rent. Most of the growth in the PRS has come from existing housing stock bought by ‘Buyto-Let’ investors. This often means converting older houses where reception rooms become bedrooms and bathrooms are shared. In future, more of this growth must come from purpose-designed ‘build-to-let’, where house builders use new private rental homes to accelerate delivery. That is why the Mayor
is launching a design competition for a new generation of purpose built private rental blocks, and he is working with pension funds and other investors to promote more investment into the sector. The Greater London Authority, alongside the government, launched a new £200m fund to promote ‘Build-to-Rent’, and we anticipate that there will be a great deal of demand for this in London. The success of all of these proposals ultimately depends on the industry itself. Landlords, letting agents and managing agents need to take the new London Rental Standard and implement it. Investors, developers and housing providers must work with us to provide the new homes that the capital so desperately needs. Tenants must be offered more choice and a more consistent level of service. It is clear that top-down regulation will only serve to deter investors at a time when more, not less, investment is needed. Instead, the Mayor’s proposals aim to work towards an improved PRS by putting Londoners and landlords in the driving seat. Richard Blakeway london.gov.uk
The Mayor’s Housing Covenant
Making the private rented sector work for Londoners Executive Summary London needs a new covenant on housing. Those who contribute to London’s success should benefit from that success. In the long tradition of the house building programmes of the London County Council and private sector entrepreneurs such as George Peabody, the Mayor is making a new offer to these households; a new covenant – in return for their hard work for London’s economy, he will improve their housing offer. This is the third in a new series of housing covenant papers. The first focused on improving the intermediate housing market, particularly helping Londoners on modest incomes access home ownership. The second focused on specialist housing for older and disabled Londoners. This paper considers how the Mayor will improve the Private Rented Sector (PRS). People come to London seeking opportunities – to find a job, to create a business, to be part of everything that a world city offers – and it is primarily the PRS that they live in first. And for many Londoners who are crucial to our economic success, renting is now a tenure of necessity as well as one of choice. Therefore, this document has two aims: firstly, to take stock, and enhance our understanding, of London’s PRS, and second, to set out the Mayor’s approach to improving the private renting offer, by empowering consumers and strengthening the role of landlords and agents. This approach will not only contribute to London’s continued economic success, it also gives the industry a unique opportunity to take ownership over its own development and improvement. Moving towards a stronger system of self-regulation is the best way to protect investment in the sector, with benefits for landlords to voluntarily accredit, while at the same time improving standards for tenants. The alternative – more red tape, regulation and rent controls – is unthinkable given the disastrous impact it would have for the economic contribution of the sector. The removal of rent controls in the late 1980’s was one of the key drivers behind the resurgence in investment in London’s PRS, and, as this document shows, their reintroduction would hinder rather than help our efforts to deal with London’s housing shortage and affordability issues. In the Mayor’s first term, the London Rents Map was launched to promote greater openness and transparency, and the number of accredited landlords and agents was more than doubled. In addition, the Mayor helped to secure significant investment in the Olympic Park East Village development, where up to 1,400 homes will be made available for private rent. The publication of this document marks the first time that any Mayor has taken a comprehensive look at the PRS in London. As a result of the Mayor’s new proposals, Londoners can look forward to a PRS that contributes fully to increasing new housing supply, provides a stronger voice for consumers and a more consistent level of service, and promotes a clearer understanding of the rights and responsibilities of tenants, landlords and letting agents. View the full Housing Covenant document at london.gov.uk/housingcovenant
Jonathan Seager Head of Housing and Olympic Legacy Policy London First
Build-to-Rent and the Private Rented Sector in London Despite a recession, Euro zone crisis and global economic uncertainty London’s population is increasing. Respective statistical authorities agree on this point although, as always seems to be the case with population statistics, there is no consensus about the exact level of growth. Take 2011 as an example, which is the most up to date year of evidence available. The London Plan placed London’s population at 7.8 million; the Office of National Statistics midyear estimate stated it was 7.825 million; the Greater London Authority’s (GLA) 2011 projection was 7.99 million and the Census said 8.17 million. The growth in London’s population can be seen as a sign of resilience, reflecting London’s status as a world class city – one of the few truly cosmopolitan cities in the world in which to live and work. However, an expanding population is placing increasing pressure on the ability of the city to adequately house its residents.
As London’s population has increased, so has its number of households, which currently stands at 3.27 million. There has
also been an increase in the average household size from 2.35 persons in 2001 to 2.47 persons in 2011. This, as the 2011 Census notes, is a result of the population growing at a greater rate than the available housing stock. A lack of new homes in London is a problem that has confronted the city for some time. The Mayor has a minimum target of 32,210 new homes a year. Research undertaken by Savills showed that even when London’s economy was growing, the minimum target for housing delivery was not being met. This historic and continuing under supply of new homes, combined with a growing population, suggests that London faces a significant challenge to solve its housing shortfall. This is where the Private Rented Sector (PRS) could make a difference to housing supply. Securing greater levels of institutional investment into housing, leading to the creation of a flourishing market for purpose-built private rented accommodation, would boost the construction of new homes in London. It is important not to overstate the potential of this opportunity – it is not the
‘silver bullet’ to solve the housing supply issue, but it could be part of the solution. The Greater London Authority (GLA) recently published new evidence about the PRS in London, “The Mayor’s Housing Covenant: making the Private Rented Sector work for Londoners”, (p.29) which demonstrates the increasing strength of the sector. It shows that a quarter of London’s households (over 800,000 people) are private renters, meaning that private renting has overtaken affordable housing as the main form of renting in the capital. This also makes London by far the largest location for renting in the UK. Estimates suggest that the rise in private renting is set to continue and the proportion of Londoners living in the PRS is projected to increase from 25% to 37% by 2025. It is likely that at some point in the 2020s private renting will become London’s largest housing tenure. It must be acknowledged that the rapid growth of private renting is not necessarily a reflection of Londoners proactively choosing the sector as their preferred tenure. London’s high property prices and the lack of
affordable mortgage finance (without a large deposit) have meant that buying a home, particularly for first time buyers, is a real challenge. But equally, over time, perceptions about renting have changed and for many, especially young professionals moving into London for the first time, renting is the logical choice to match their lifestyle. Previous attempts to stimulate institutional investment into the Build-to-Rent sector have not had much success so, if the sector is to help build more houses in London, it seems likely that some form of public policy support is required. The commissioning of the Montague Report and the Government’s response to date are steps in the right direction. However, how the Government’s work in this space fits in with the Mayor’s work is not entirely clear. The Government’s £200m Build-to-Rent Fund will be jointly administered by the Government and the Mayor where London applications are being considered. At the time of writing no decision has been taken about
the Mayor’s role in the Government’s £10bn debt guarantee scheme (which will also be used to support affordable housing). It is also unclear what will be the exact role of the Government’s Private Rented Sector Taskforce and how it might work (or not) with the Mayor. It is likely that these questions will be resolved sooner rather than later but in the meantime this uncertainty is a deterrent to investors. So perhaps the Mayor should plough his own furrow with regard to stimulating more investment; indeed there are signs that he is already doing so. The Mayor recently altered London planning guidance to state that the planning system at both a local and strategic level should provide positive support to private renting, especially ‘by recognising the distinct economics of the sector relative to mainstream market housing when undertaking viability assessments.’ The next step could be to strengthen London Plan policy itself, rather than accompanying guidance, on Build-toRent developments. The Mayor’s land holdings and assets, which have recently been expanded, could be used to support private rented developments. Some sites will be more suitable than others for this type of development and these should be brought to the market as soon as possible and, where appropriate, payment for
the land deferred or the land offered as an equity investment.
In Conversation with Jonathan Seager
Perhaps more than anything else the Mayor should issue a comprehensive ‘offer’ to the market. This would bring together, in one document, all the strands of work currently underway and explain to interested parties what London will do to support investment into the sector. Importantly, it should also state what is expected of Build-to-Rent developments in return for public policy support, particularly where scarce public resource may be invested.
I studied at Birmingham University (undergraduate) and Nottingham University (Postgraduate) before working as an intern in Parliament. I then got a job in a trade association before moving into a think tank and then moving to London First.
Build-to-Rent developments can offer significant public benefits, whether through building more homes or regenerating derelict sites. Perhaps it’s time that London started to see the sector fulfil its potential. Jonathan Seager londonfirst.co.uk
Can you tell us a little about your background?
What do you predict for the future of your sector? London continues to grow and has shown a lot of resilience during uncertain economic times. I would not seek to predict the future beyond that – every forecast seems to be revised downwards at the moment! Housing is a hot political topic at the moment. What steps could be taken to improve the situation? One of the biggest changes that could improve the situation is for Government to reassess the way that it views housing in terms of public investment. The housing sectors needs to convince Whitehall of the case for investing in housing and the wider economic benefits that the sector provides to the economy. What has been the most challenging aspect of your role? Trying to capture a demand side view from businesses in London about housing policy and convincing the wider business community that building more homes in London is as big a priority as, for example, keeping a stable and predictable tax environment. What would you say is your most memorable moment or proudest achievement? Working in a wide coalition of interests to convince the Government of the day not to introduce the proposed Planning Gain Supplement (a development land tax). Finally, do you have a favourite London landmark? St James’s Park (in the summer) and White Hart Lane (when Spurs are winning). Jonathan’s full ‘In Conversation’ is online at PRSupdate.co.uk
Dominic Curran Housing and Planning Policy London Councils
Private Rented Sector supply and welfare reform in London The Private Rented Sector (PRS) is likely to be the only tenure in London that ends 2013 larger than it started. In the face of a continuing squeeze on credit, an uncertain ‘Affordable Rent’ programme and foreign purchase of the majority of new homes in central London, the city’s growing population is being funnelled into the PRS at a greater rate than has been seen for decades. Changes to the benefit system and to housing policy are placing further pressure on this part of the market. Boroughs are now grappling with the implications that these changes will have on the supply of appropriate and affordable homes for both temporary accommodation and for the discharge of the boroughs’ duty to homeless households.
Since the early 1990’s, the PRS has grown from 8% to 16% of the market nationally while in London it now accounts for around 25% of households. The Resolution Foundation has suggested that nearly four in ten households will be in the PRS by 2025. This growth has come at the expense of other tenures as the proportion of Londoners in social
housing has fallen to around 18% and home ownership has become a minority tenure - 49.9% of households - for the first time in 30 years. Indeed, in some central London boroughs, home ownership represents barely a quarter of households. This rising demand is pushing rents up, with Shelter estimating that the average rent is now more than half of average earnings in 23 of London’s 32 boroughs, up from 19 in 2011. One result of this growing affordability crisis has been that higher income earners and newcomers are being pushed into parts of the rental market and the city where previously they may not have explored, thus adding to existing local pressures. This intense pressure on the PRS is exacerbated by the lack of new house building. The 2011 census put flesh on the bones of the argument that house building is woefully out of kilter with demand in the capital. Despite boroughs having approved planning permission for over 200,000, as of yet unbuilt homes, restrictive development and mortgage financing means that the number of housing completions are
only meeting half of the yearly housing demands. The 2011 census data shows that the situation is worse than even this terrible statistic suggests. The census found that there are 400,000 more Londoners than was previously believed - putting the city’s population in 2011 at the level the London Plan predicted for 2017- so once their needs are also accounted for, we are probably only building about one third of the homes needed each year. London Councils has estimated that by 2021, and even with optimistic assumptions about house building, including Buildto-Rent taking off, London will need over 220,000 new homes to meet this housing deficit. This represents an extra ten years’ supply in addition to expected construction. While demand and rents increase (and partly because of this) 2013 is likely to see notable shifts in the population due to the cap on household benefits. Caps have already been imposed on housing benefits and it has been pegged to the 30th percentile of rents. In response, boroughs have worked hard to negotiate with landlords to bring rents down as well as
providing assistance to people if they have to move. While, in a small number of cases, rents have come down a little, given the buoyancy of the London market and the uncertainty for landlords in determining what will happen to tenants who are on benefits, it is hard to persuade them to not only take less money but also to let to tenants who may not be able to pay their rent in the future. The change to direct payment of housing benefit into a tenants’ account, rather than that of their landlord, will add to landlords’ concerns over tenants entering rent arrears. Results from Southwark, where this scheme has been trialled with Family Mosaic, suggest that landlord arrears have gone up substantially. Due to this, it would not be a surprise if many private landlords withdraw from providing the housing ‘safety valve’ for local authorities that is so crucial to the boroughs’ delivery of these government policies. To this end, the government must give tenants and landlords, whether social or private, more flexibility to determine if rents should be paid directly to the tenant or the landlord.
Given the importance of certainty for sensible business planning, it was a surprise to hear the Department for Work and Pensions (DWP) announce before Christmas that, from April 1st, four boroughs (Croydon, Enfield, Haringey and Bromley) will be the first to have the £500 weekly cap applied to their residents. This is ahead of other boroughs and councils nationally who will have this cap phased in during the following six months. How this will play out in terms of supply of stock remains to be seen. Combined with government policy to cut Council Tax benefit for the least well-off and impose a ‘Bedroom Tax’ on housing benefit claimants, from April 1st, the PRS in London will probably see some significant churn this year. Equally, the decision to limit Local Housing Allowance increases to 1%, from April 2014, while allowing rents in the social sector to rise by a maximum of RPI + 0.5% + £2 per week and market rent most probably to rise by more will make even less London property available within the benefit cap, and will help to continue the churn through to next year. The cumulative effects of these welfare changes are already being seen. Anecdotal evidence suggests that many people are not moving, but are instead overcrowding their existing property, with all the attendant costs in poorer health, worse educational outcomes
and higher levels of antisocial behaviour that overcrowded housing brings with it. Boroughs are working hard to mitigate against the worst outcomes from these policies. They are using their new Housing Revenue Account (HRA) freedoms to not only build new social and affordable rent housing, but also to invest in Buildto-Rent vehicles alongside the institutional investors. Lifting the artificial, Treasury-imposed cap on HRAs would enable much more investment to be made whilst remaining within prudent limits. Boroughs are also working hard to ensure that their procurement of temporary accommodation doesn’t result in boroughs outbidding each other in the same locations. They are also trying to ensure that placements in of temporary outof-borough housing is minimised and conducted in the most sensitive manner possible by taking into account family circumstances and Government guidance on the issue. Fundamentally, what is needed is much more housing stock and more landlords willing to let to people on benefits. With development finance restricted, and institutional investment looking at higher income tenants and with the continuing uncertainty over rental income for smaller landlords, the PRS in London, especially for those in receipt of benefits, faces both
massive demand and little sign that there will be sufficient supply to meet it. 2013 will be a challenging year. Dominic Curran londoncouncils.gov.uk
London Councils Much of London Councils’ work consists of lobbying the government, and others, on behalf of their member councils, not just for a fair share of resources, but also to protect and enhance council powers to enable them to do the best possible job for their residents and local businesses.
2011 census at a glance •
In England & Wales the number households renting privately increased from 9% (1.9 million) of the population in 2001 to 15% (3.6 million) in 2011.
Home ownership (including outright ownership) fell five points from 69% to 64%, but is still the most common tenure in England and Wales.
Outright home ownership increased by two percentage points from 29% (6.4 million) to 31% (7.2 million).
The number of households renting their home from a local authority fell from 13% (2.9m) to 9% (2.2m), though this can be mainly attributed to the transfer of council housing stock to Housing Associations.
In inner London more households rented privately (29.2%) than had mortgages (19.4%).
In England & Wales, married and civilly partnered couples made up under half of all households (47%). This is the first time this has fallen below 50% in the history of the census.
The number of cohabiting couples increased from 8% of all households (1.8 million) to 10% (2.3 million).
Single-person households also increased by 500,000 but make up 30% of total household composition – the same percentage as in 2001.
The percentage of households living in flats, maisonettes, apartments and tenements increased from 14% (3.1 million) to 16% (4 million).
The overall population of England and Wales has increased by 7% to 56.1 million. The full 2011 Census can be found at ons.gov.uk 33
Christine Whitehead Professor of Housing Economics London School of Economics
Regulation and the Private Rented Sector Since 1988 the rents for new tenancies in the Private Rented Sector (PRS) in England have been unregulated with the standard lease, in the form of an assured shorthold tenancy (AST), providing a minimum of 6 months security – with the vast majority of tenancies lasting for no more than a year. This makes England’s PRS one of the least regulated in the industrialised world – although, of course, there are still plenty of controls around quality and the landlord/ tenant relationship. Commentators such as Sir Adrian Montague, in his independent report for the coalition government, argue that this regime Figure 1
should not be modified. For instance paragraph 48 of his report states: ‘Investors have made it clear that their current interest in the sector would easily be undermined by proposals for rent controls or enhanced restrictions on gaining vacant possession’ and more generally ‘The premise underlying the recommendations is that the rented housing sector will continue to benefit from the stable legislative and regulatory framework it has enjoyed in recent times’. Yet the evidence from other countries is that large, stable PRS can, and do, co-exist with greater degrees of regulation. These regulations typically ensure that tenants
receive a longer and more secure tenancy than those offered in England. These tenancies allow for well defined rent increases based on an index rather than being based on market pressures and agency/landlord whims. Figure 1, taken from the London School of Economics’ latest research report, shows clearly that a medium level of regulation (fundamentally allowing initial market rents but limiting rent increases and providing indefinite security of tenure) is associated with larger sectors. Moreover countries that fit this pattern, notably Germany, Switzerland and Sweden, have had both stable regulatory systems
and stable sectors for decades. Countries with both low and high levels of regulation on the other hand have experienced significant declines in the scale of private renting. England stands out as being the country with low regulation which has also experienced a rapid growth in the sector. It should be noted, though, that deregulation took place in the 1980s but the growth only occurred from around the turn of the century. The main reasons for that growth have been; the introduction of Buy-toLet mortgages in the late 1990’s, the rapid increase in house prices - which only stopped in 2007 - that caused an increasing affordability problem in the owneroccupied market, as well as increased deposit demands and general credit constraints that have been initiated since the global financial crisis. Thus the very rapid growth in the PRS, especially in London, reflects on the market constraints as much as a positive wish on the part of either newer landlords or tenants to remain in the PRS for the longer term.
There are clear reasons to build a sustainable PRS which is able to meet the needs of mainstream households better than it has in the past. Many of those who are currently renting may wish to remain there for the long term – and there are growing numbers of households who want the flexibility renting affords and to not be tied into ownership too early. Is there a way to give tenants increased security of tenure without frightening off current or potential landlords? And how can investment in new housing, of all types, be increased in order to meet the requirements of the growing population? Sir Adrian Montague, in his evidence to the Communities and Local Government Select Committee on 11th February 2013, suggested that it would be possible to offer long term tenancy security and rent increases linked to an index without changing the current regulatory framework. It is certainly legal to do so, but up to now it has never been seen as a desirable option - for either landlords or tenants - because the rent levels necessary to provide a rate of return, acceptable to investors, have been higher than those available in the general market, which offers much less security. Has the environment changed enough to make the option of providing security and stability in rent increases viable for the future? The current view is that, in the short term, a number of
incentives will be needed, including kickstart funding and positive planning arrangements - which give greater certainty and privileged access to land. It is hoped that these incentives will not be necessary once demonstration projects are functioning. Even then there is concern that creeping increases in local regulatory regimes may generate additional uncertainties. Similar initiatives in the early 1980s and late 2000s proved to be unsuccessful – but the economic environment has undoubtedly become more favourable since then, not least because returns on other low-risk investments and savings have been generally so poor. Also, any additional new residential units would be valuable for both the housing market and broader economic growth. Therefore it is worth a try – although the details of the particular experiment may be all important in determining its success. Christine Whitehead lse.ac.uk
Young Group’s response to the call for evidence on the Private Rented Sector The Department of Communities and Local Government (DCLG) Select Committee called for evidence from interested parties covering the Private Rented Sector (PRS) quality, regulation, levels of rent and other topics. As an active proponent of the PRS, Young Group wanted to make sure that our voice was heard. Below is a snapshot of Young Group’s submission to the Select Committee. Our full response can be found on the PRSupdate.co.uk homepage. ---------------------------------------------------Quality - Home Standards & Safety There already exists a raft of legislation and regulation that landlords must comply with, spanning environmental health, fire, gas and electrical safety, deposit protection and obviously the Housing Act itself. Like much of the industry, Young Group believes that the issue is not one of a lack of regulation, more a lack of required monitoring and enforcement by the authorities and agencies responsible. Regulation Governance of Letting Agents There is wide-ranging support from within the lettings industry to bring governance of letting agents in line with that of estate agents through an amendment to the Estate Agents Act to include letting agents within the definition of ‘estate agency’. This would extend the remit of the Office of Fair Trading (OFT) providing regulation and redress through the existing framework and enabling the OFT to ban agencies that act improperly. Young Group fully supports this stance. Governing letting agents by the same law as estate agents brings consistency and the opportunity to lessen consumer confusion/misunderstanding over their rights and level of protection. Regulation of Letting Agents The current non-mandatory regulation of letting agents has created a two tier system. Only those who choose to join one of the sector’s professional membership bodies publicly commit to complying with agreed best practice including protecting client monies and offering a defined process for dispute resolution etc. To date, this has not led to the eradication of the less professional agents who either choose not to join or who flout agreed best practice. Young Group’s full response can be found at: bit.ly/YGDCLGsub
“Throughout the past ten years, Young Group has achieved great things in the PRS. We’re passionate about the sector and have earned a reputation for operational excellence and delivering trusted, robust asset management advice; all evidenced by the 22 awards that we’ve proudly received. Our consultancy services enable our clients to benefit from this insight and we’re pleased to be working with Institutional Investors, Developers, Housing Associations, Councils and Government. We are currently principal advisors on PRS property with a value in excess of £1bn, with a ten year development pipeline valued at c. £3bn. The PRS is certainly coming of age.” Neil Young ACMA CGMA MARLA Chief Executive Officer Young Group and Young London
Our Key Consulting Services Include: Operational Advice and Delivery Strategic Guidance Lettings & Property Management; Operational Set Up, Implementation and Delivery Brand Development and Marketing Resident Services and Engagement Customer Experience Modelling and Appraisal Staff Training & Development White Labelled Operations Strategic Asset Management Research and Measurement Portfolio Analysis and Appraisal Financial Modelling
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To discuss your Private Rented Sector objectives and aspirations, contact Neil Young, CEO, or our Director of Consultancy, Lesley Roberts, to find out how Young Group can assist Neil Young: firstname.lastname@example.org younggroup.co.uk 36
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David Mackenzie FCMA CGMA MARLA Director of Asset Management Young Group
Young Index Q4 2012 - Private Rented Sector Sentiment Each quarter, through Young Index, Young Group polls investor sentiment among 500 of its Private Rented Sector (PRS) investment clients who hold UK property assets. REGIONAL DISPARITY REIGNS The latest Young Index research reveals the starkest difference in sentiment between London and the rest of the UK since the sentiment survey began in 2007. 95% of active investors expect that capital values in London will rise or remain static throughout 2013. 50% of respondents believe that UK property outside London will experience positive capital growth. 41.5% of PRS investors indicate that they are considering adding further London property assets to their portfolios compared to 15% indicating they will be considering acquiring property elsewhere in the UK. RENTAL MARKET STRENGTH The positive sentiment towards the London PRS continues when looking at rental income expectations.
In 2013, 97.5% of investors expect to see an increase in the rental income generated from their London property portfolio, a 5% increase from last quarter. This compares to only 50% of respondents who expect rents outside of the Capital to increase.
anticipated future hold period decreased to 10.9 years. From those who responded 42.9% have held their investment property for more than 10 years.
The sentiment is that London is still considered a safe haven for money invested in property while areas outside of the Capital are more of a risk and will not see the level of continued demand witnessed within London.
ECONOMIC OUTLOOK The majority of respondents (71.4%) expect that the Bank of England base rate will remain at the current low of 0.5% throughout 2013. In our Q4 2011 Young Index, 26.4% of respondents thought that the base rate would have increased, this has fallen to 21.4%.
Anecdotally, landlords believe that prices in London will increase within a number of “hotspots”, such as SE1 and E1, as regeneration continues to positively impact certain districts in London.
Against the current economic backdrop, 12.2% of investors remortgaged an existing Private Rented Sector asset during 2012, while 17.1% have purchased additional investment property.
COMMITMENT TO THE PRIVATE RENTED SECTOR Investors appear to remain committed to the PRS; 96.4% of respondents have no intention of liquidating their PRS assets during 2013. Those that are planning to liquidate their assets will do so to transfer it to cash.
Mortgage availability remains the principal concern of the majority of investors (37.5%), unchanged from 2011, while 30% of respondents would like to see a stamp duty break for all purchasers. Only 12.5% of those polled considered stable house prices to be the most important thing for them in the coming months.
45.2% of investors are intending to hold their properties for between 10 to 20 years. The average
REGULATION OF THE PRS New to this quarter’s survey, we polled our respondents on their views of PRS regulation. 51.2% of those who responded believe that there is adequate regulation of the PRS already. 17.1% believed that lettings agencies should be compulsorily regulated by a Government body while 9.8% thought the compulsorily regulation should be handled by an industry body. 14.6% of those polled believed that landlords as well as letting agencies should have to sign up to be compulsorily regulated by an industry body, 7.3% who believe it should be handled by a Government body. The information we have collated paints a picture of there being high investor sentiment for the future of the PRS and that many within the industry believe the PRS, especially in the Capital, will continue go from strength to strength. David Mackenzie younggroup.co.uk
Young London’s Customer Service Commitment Young London Wants to be AMAZING Since our beginnings we’ve questioned everything about ‘traditional’ estate agency. We look at everything afresh. We build lasting relationships with landlords and residents by delivering ‘AMAZING’ customer service. We’ve broken the ‘traditional’ remuneration model; staff are rewarded on their customers’ feedback NOT on commission. We keep as many aspects of the business as possible in-house, to remain accountable to our clients. Our approach has been proven through business growth and acclaimed by numerous awards.
Young Group has been shaping the Private Rented Sector since 2003 through research, finance, investment and asset management. Our clients range from private individuals to corporates, institutional investors, developers and Housing Associations. Our Private Rented Sector consulting advice spans all aspects of the PRS from strategic, operational considerations through to the day-to-day asset management of PRS holdings. Day-to-day asset management of Private Rented Sector investment assets is delivered through Young London, our lettings and management business. Young London has won multiple awards from The Times, The Sunday Times, HSBC and Bloomberg for its quality of service. We provide consultancy and advisory services to those currently invested in the PRS and to those considering investing in the asset class. We would love to talk to you about what we can offer: Neil Young ACMA CGMA MARLA Chief Executive Officer firstname.lastname@example.org
David Mackenzie FCMA CGMA MARLA Director of Asset Management email@example.com
SHAPING the PRIVATE RENTED SECTOR
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