Build or regret
Institutional fund managers have resisted the temptations of housing, and left it for the enthusiastic amateurs to live their buy-to-let dreams. But would the big investors be so dismissive if there were something of scale, stability and high returns called ‘build to let’?
A recent research by the British Property Federation and the Greater London Authority claims that a new build-to-let sector fostered by a benign tax regime and a radical change to the planning system would spark renewed institutional interest in housing.
The research, undertaken by Savills, concludes that, because the mainstream fund managers are largely driven by income returns, they have been put off by the relatively low rental yield from residential property. The lack of large blocks of investments which would need to be £100m or more to make it worthwhile is another barrier to entry.
Fund attraction
However, fund managers would surely come running if conventional housing were developed for renting only and its income stream structured to make it more akin to commercial investments. The report makes the analogy with student housing, which in recent years has become packaged up for investors.
Investor demand for student flats has risen dramatically, and not just because the UK’s student population has risen over the last decade. This sector’s investment performance is based on the size and potential of the income stream generated by the asset and the strength of the covenant, just like commercial property.
The housing is purpose-built for today’s student market. Consequently, it does not have the same level of affordable housing requirements as general residential schemes, which improves its financial viability.
To achieve something similar with conventional housing, backed by institutional money, would help ease the UK’s overall housing supply blockage – the central premise upon which the research is based and a familiar refrain from both Savills and the BPF.
But it would also require a leap of faith on the part of fund managers, which have stayed away from the sector since the 1960s, when the last of the big insurance group and pension fund-owned residential portfolios were broken up.
The new report – Overcoming Barriers to Institutional Investment in Residential – implies that, if some technical hurdles are dealt with, the hard-line sentiment would soften. It points out that total returns from residential compare favourably with other asset classes (see graphs).
The proposed planning and tax-friendly package says that bespoke rented housing should not require the same level of section 106 requirements. The theory is that investors in new rental accommodation will be required to invest far higher sums of capital than under traditional development models since their money will be tied up in the long term, whereas traditional housebuilders sell immediately upon completion.
Such a model could prove helpful on large urban sites, where the presale of homes would help developers raise the capital they need for development. The pace of development would also improve as it would not be hampered by the speed at which owner-occupied units can be absorbed into the market.
Alternatively, rented housing that is designed and built for the rental market under a build-to-let model could be delivered through a designated planning use class. This would lower the land value, the report claims.
At present, residential housing is developed solely for owner occupiers and its value is determined solely by this market. If housing were developed so that it could only be rented, and not sold to the owner-occupied market, this would impact on the land values, as it changes the nature of the product to being an income-driven asset.
To support build to let, central government should consider fiscal measures. These might include a tax allowance against rental costs for landlords that rent out property. There could be a Stamp Duty concession for properties purchased for rent so long as they were held for rent for a set period. If they were sold within that period, full Stamp Duty would apply. This would provide an incentive to provide long-term rental property.
Professional managers of rented stock should become accredited landlords, adhering to a set of standards that covers both private sector organisations and registered social landlords. An agreed set of standards for management of rented housing would have to be developed.
The notion of large-scale build to let is not new. Columnist Mira Bar-Hillel has floated the idea for years, most recently last October in Property Week. However, the detail evident in this latest proposal as well as such heavyweight contributors to the research as Morley, ING Real Estate and Grosvenor point to a gathering momentum for build to let.
The research coincides with the latest government figures on housing, which show prime minister Gordon Brown slipping away rather than edging closer to his stated target of 3 million new homes. In England, during the quarter to December 2007, there were 37,900 starts, down 10% on the equivalent quarter in 2006 and continuing a decline that began last summer.
‘The continuation of this downward trend is proof positive that solving the housing crisis by purely setting building targets will fail,’ says Ian Fletcher, the BPF’s director for residential policy.
‘Ownership is not the only way of housing people, and if we are to improve the quality and quantity of housing supply, we must look at how to encourage investment from pension funds and other institutions. The government needs to consider how the professional rented sector can complement an effective policy on ownership, giving us a well-rounded housing sector, rather than one where millions are at risk of being left homeless.’
The BPF has banged this drum for more than a year, although initially it was lobbying government to encourage institutional investors by tweaking the tax rules for REITs. There have been no tax changes forthcoming and neither have there been any residential REITs.
London’s challenge
But what of London, where housing affordability is at its worst? The report’s key recommendations for the capital will be hard for government to ignore. Planning guidance and housing policies in London should promote the development of housing that is designed and built for the rental market in areas where there is demand for private rented accommodation.
Housing policy in London should encourage the delivery of intermediate rented housing by a wider group of providers. There is over-reliance on registered social landlords as developers when there is evidence that the private sector would provide rented housing, let at discounted market rents for a restricted period, such as five years. A reversion to market rents afterwards is a prerequisite for investors.
The short nature of assured shorthold tenancies have been identified as a barrier to families seeking to reside in the private rented sector for an indefinite period. There need to be incentives to provide longer-term tenancies in the sector, so that the sector appeals to the broadest spectrum of potential occupiers.
Perhaps the government is ready to listen
At the BPF’s annual residential conference in London earlier this month, Dr Tim Williams, director of Navigant Housing and a government adviser on housing policy, summed up the mood in the room when he urged the industry to help clean up the private rented sector’s image as ‘the ugly sister of the housing market’.
Williams added: ‘We need professional management companies backed by big-bucks residential investors.’
Leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Sorry, the comment form is closed at this time.