Incentivising Institutional Investment in the Private Rented Sector in England Christine Whitehead London School of Economics Cost effective Housing Policies in the European Union Final event of the PROGRESS program - June 20 th 2016, Brussels

Background Housebuilding not keeping up even with household formation – need maybe ,000 (net additions) to meet additional households - now around 170,000; Owner-occupation falling from 69% in 2005 (and at the turn of the century) to 62% in 2015; Massive growth in the private rented sector from 2.1 m (10%) in 2000; 2.7m (12%) in 2005 to 4.7m (20%) in 2015; Growth in PRS almost entirely from the existing housing stock - mainly owner-occupation; but significantly from ex-Right-to-Buy; Estimates suggest somewhere between 1 and 2 million households are landlords, mainly holding 1 – 4 units (Scanlon, Whitehead and Williams, 2016); Some 25% of tenants in receipt of Housing Benefit; Very small institutional landlord sub-sector - companies sold out from 1950s; leaseholder right/capacity to buy led to break-up of older portfolios and multi-tenure buildings; Although conditions have improved very considerably, terms and conditions in PRS very poor for many – assured shorthold tenancies (usually 6 months – 1 year) and market rents.

Issues Need to increase the supply of housing; In particular need to speed up the development of housing - owner-occupation business model results in slow throughput but speed of completions valuable for PRS; Need to bring in new resources and types of construction – different skills, business models and more finance; Buy to Let has little direct impact on new investment – so growth in investment slowed as PRS has grown – need to reverse this trend; Institutional investors want long term rental returns - so interested in low tenant turnover; index linking within tenancies; and professional management – reputational risks – better for tenants; Shedloads of money available?? Not all of these elements recognised before policy developed – But recognition that PRS policy had been deficient /non-existant.

Problems Institutions have no internal arrangements for investing in residential as compared to commercial property – so each firm needs a champion; No evidence of UK investors taking the lead; Lack of suitable accommodation that institutions wish to buy within the existing stock; Developers energies directed at owner-occupation; Building regulations often not appropriate; Longer term uncertainties re regulatory framework, welfare support etc; Fundamentally investors argued (argue) that cannot make a rental only return at current prices/land prices determined by owner-occupation

Starting Point: The Montague Report Inquiry set up in 2011, based on need for additional housing supply; meeting growing and changing housing needs; supporting mobility and economic growth. Report published in 2012 ‘Review of the barriers to institutional investment in private rented homes’ - the Montague Report. Stressing lack of yield; lack of experience and skills; incapacity to compete with owner-occupation. Provided examples of a small number of successful PRS projects. A DCLG sponsored inquiry - perhaps why it said little about taxation. General recommendations: use existing planning powers more flexibly; release public land; develop data, benchmarks and skills; develop a sector identity. Specific recommendations for government policy – develop instruments to support equity and debt financing; provide guarantees to reduce risk; seed suitable developments; set up a Task Force to make deals not just talk.

Government Initiatives Followed the Montague recommendations quite closely – unusual. The Task Force – which brought in experts/consultants to work with London (in particular), some local authorities and other stakeholders to identify potential sites and try to ensure conditions suitable for investors; Build to Rent Fund- now up to £1bn in continuous market engagement to support commercial investment –market deals that are realised at refinancing; Private Rented Sector Housing Guarantee available to de-risk long term debt involvement in ownership and management – many problems in set up and interest costs too high to make it worthwhile?; Use of public land: Treasury requires highest and best use sale but possible use of joint ventures so maintaining ownership and/or covenants requiring the land to be used for PRS into longer term or perpetuity. Usually investors want single ownership and affordable housing (where negotiated) in form of discounted market rent; Planning permission still lies with local authority and the affordable housing conditions in particular not always acceptable; In 2015, tax changes to reduce incentives to enter the Buy-to-Let market -both to support owner-occupation and to favour institutional investors.

Value for Money Issues Value for government money: - Task Force administrative costs; - Build for Rent commercial return so no direct subsidy; - Guarantee involves a subsidy (as recognised by EU), but very few costs so far; Alternative use of public land; Loss of affordable housing – building for the well-off; Costs overall quite hard to quantify and tied to changing approach to delivering higher density urban housing, new techniques etc.

Examples The Olympic village - direct commissioning of dwelling units – half private renting (with possibilities of some sales) sold to QDD; half social renting owned by East Thames Housing Association; Stratford Halo – Genesis HA multi-tenure /mixed communities development intended to be significantly shared and full ownership. After the financial crisis transferred mainly into private renting with offers of longer tenancies, index linked rent increases within tenancies; Clipper Quays - £100m, 600 unit acquisition of Build to Rent development in Salford by Grainger (the largest listed owner) announced earlier this year and still to be built– based on public ownership and covenants – and nearness to Manchester.

The Current Position Some 3,500 Build to Rent completed in London and 15,000 in the pipeline (twice that in the rest of the country). Many more in planning stages; No evidence yet on how sustainable in the face of market volatility; In Scotland institutional investors have left the market because of changes to regulations and the oil price; Rents too high for most local residents and little really known about service charges/quality of product and management; The stable starts/completions relationship has broken down in part because of different built form; Still the case that only a small number prepared to be in the market without implicit or explicit guarantees/subsidy; Some see potential for country-wide portfolios as yields better in lower demand areas – where still plenty of growth in PRS; Need for exit strategies?

Conclusions Too early to say whether there are real chances of long-term success; certainly the best chance for decades; Immediate strains re referendum and other economic shocks; Some other policy initiatives run against the institutional investment/ PRS objectives – re owner-occupation; stamp duty; welfare changes and regulatory uncertainties; Potentially positive impact on build-out rates and therefore housing supply, especially on large sites; But big tensions re private v affordable housing, especially at local authority level; Many of the potential benefits will take a long time to emerge – but direct costs small and appear to real benefits to engagement and lessons to be learned for other initatives; Whatever, small potential within the PRS in comparison to improving the operation of the individual landlord market; But more potential with respect to housing investment overall – including possibility of reducing volatility; Too much analysis; too little likely impact - OR a brave attempt to do things in line with social science principles? AND most of our policy initiatives are NOT like this – more back of the envelope and then sort out how to do it.