A report commissioned by the government and published last month, has called for local authorities to relinquish the requirement for building affordable social housing, to make way for new build buy to let rental properties.
The report says:
“Whilst desirability of affordable housing should not be ruled out, it should be weighed against the benefits already built into market rent developments, in the context of an accurate assessment of the economics of building homes to rent. In many cases, it will be appropriate for authorities to waive affordable housing requirements in relation to schemes for private rental, or to the private rental component of larger schemes also including an owner occupier component.”
The review was commissioned as a response to the government’s recognition of the increasing importance the privately rented sector has on the economy. The government, at the time of commissioning the report, was interested in the potential expansion of large-scale institutional investment into newly-built rental properties. This is an investment model that is much more widespread in other countries where home ownership is less important for economic growth.
The report says:
“We [Department for Communities and Local Government] believe it is essential that the government clearly signals the importance it attaches to the expansion of the “build to let” market. We believe the government should give tangible form to this by encouraging local authorities to make more positive use of existing opportunities under the planning system to promote private rented schemes, by reaffirming its commitment to release public land for build to let projects and through providing carefully targeted financial support to the sector with a view to levering in additional private capital.”
The report recognises the importance of the private rented sector, not only to help meet the housing needs of many, but also the economic benefit this sector brings to the country. 3.6 million households in the UK are currently living in rented accommodation. Around a third of these households are families with children under 18, and 20% of households in the whole sector have lived in their current home for 5 years or more. This shows that a significant number of people are choosing to make a family home out of their rented property.
Energy efficiency in privately rented homes has got better too, with the average rented property being as energy efficient as owner occupied homes, though of course the sector is widely varied.
These improvements in quality and the growth of this sector has largely been propelled by landlords with small portfolios. Only 1% of landlords own more than 10 properties.
The growth of the private rented sector does not currently represent a significant contribution to the supply of newly built housing. Consider that in the last 10 years, housebuilding has represented an average of 3% of GDP and that for every £1m of new housing output 12 jobs are created. An estimate published in last month’s report says that for every £1 invested in the construction industry a further £2.60 is produced through the supply chain.
In 2009/10 there were 115,000 new build completions in England, but the most recent projections imply that the number of households will grow by 232,000 every year until 2033 creating a massive shortfall in supply for housing. Add to the mix the fact that mortgage lending has roughly halved since 2006-2007, common-sense dictates that the private rented sector is set to expand even further.
Even if the constraints on mortgage lending is a short term problem, the imbalances between the supply and demand for housing makes it critically important to develop new models which do not rely on owner-occupiers. Housing benefit claimants would also be advantaged by an increase in high quality rental accommodation in areas of high demand.
The report says that the evidence they heard
“made a strong case that large-scale developments specifically designed for private rent (or with a substantial private rented element) could deliver real benefits for communities and for tenants, and could also be an attractive investment proposition.”
Local authorities, registered providers, investors and developers all presented examples of schemes designed to meet the needs of local communities. Overall, these schemes were specifically designed to meet local needs and so varied from area to area, but did have common features. The most common of these was the potential to offer longer-term rented homes to families. Financial institutions (the potential owners of completed developments) stressed the importance they put on the development of high quality purpose built accommodation.
Investors will find the potential yields attractive when compared to other sectors. Average returns of residential property has reached 9.6% compared to all other commercial property at 6.8%. Interestingly, for the buy to let investor, capital growth for residential property averages at 5.9%, and average income return is a healthy 3.5%.