Ken Gibb's 'Brick by Brick'

Housing, academia, the economy, culture and public policy

Month: December, 2013

Private Renting and Institutional Investment: Possibility, Grail or Fable?

Ever since the original deregulation of private renting in 1988, there have been repeated calls for policies intended to promote private renting investment by means of our financial institutions. The pension funds and insurance companies need to earn a target rate of return across a diversified portfolio.  If that portfolio includes a small share (typically) held in commercial property, might they not also invest in market renting? This, it was argued, would help to modernize the sector, encourage new build purpose build renting, normalize the rental market and even encourage new partnerships with a potential role for housing associations as management agents. This would be good for the fluidity and stability of the housing system as a whole and would further wider economic objectives.

We have seen over the years tax based vehicles, plans for guarantees, loan funds and trusts – but the sector remains largely unincorporated and is fragmented among many small-scale landlords (the exception being the student housing model). This is despite the growth of buy to let and the sector over the last 10 years (even with the interruption of the housing market and economy collapse), as owning became less accessible and more expensive to achieve.

What now for institutional investment and will the current wave of policies and subsidies for the rental market achieve the desired effect? I was a minor player in a new report published this week for Homes for Scotland, written with Christine Whitehead, Kath Scanlon and Peter Williams. The report is called Building the Rented Sector and is available at . The focus of the research was to clarify how to help house builders increase the supply of new homes for the rental market. The research sought to identify key barriers to investment and development and how we might overcome them through new financial models.  Aimed at the Scottish housing sector, the research also speaks to the wider UK rental market.

What were the main findings?

First, the principal challenge is to create investment opportunities that are profitable for developers but also earn a sufficiently high risk-adjusted rate of return for investors (from both income and expected capital gain) that exceeds their opportunity cost of investment. While most of the growth in private renting has come from the reuse of existing stock in the last few years, the underlying strong demand for rental housing could be met from new investment in purpose built rented housing provided the barriers to earning the required returns could be overcome. Our starting point was evidence from the sector that there is increasing interest in the potential for large-scale investment on higher density urban sites financed by institutions and managed professionally.

Second, interviewees told us that the main barriers to investment were: the difficulties developers have in competing for land for renting against owner-occupation; the lack of development finance; low yields; lack of investor experience and hardly any performance data to benchmark with; the need for scale; negative investor and local government attitudes to the sector; poor quality and expensive management; reputational risk and uncertainties around the taxation and regulatory regimes. The lack of investment, also came down to a number of specific factors, prominent amongst them were variations in professional language and understanding of basic issues such as planning and development risk and even the determinants and interpretation of yields.

Interviews in Scotland and England suggested that the barriers did not really differentiate between Scotland and elsewhere in the UK. There is evidence of yields approaching the investment level, of demand in Edinburgh and potentially also in Glasgow and Aberdeen. However, UK investors will demand evidence of success first but may yet stall investment in the absence of the perceived scale required which may not be forthcoming outside of London and major English cities.

Third, what’s to be done?

  • Land, probably in mixed tenure developments, is required for new build and land for rented housing needs to be identified in local plans and perhaps in some cases exempted from S75 conditions. English policies have covenanted land, often public land, so that it remains in long term private renting.
  • Development finance is often an important market failure and may require something like the Build to Rent fund partnership with the State to overcome it.
  • Intermediaries will be required to aggregate up providers so that they match the minimum scale requirements of investors.
  • Investors are looking for a guaranteed income stream, especially as the market is in its early stages – the UK Government’s guarantee scheme for the PRS only applies to debt reducing cost but not addressing the need for secure income.
  • Management costs in Scotland appear to be relatively high, professional management is scarce and housing associations would have to learn to work in a quite different setting.

Fourth, the report made a number of specific recommendations. While there is no magic bullet in the form of a single financial model that seems workable without subsidy, guarantee or state-led partnership participation, it may be possible that a few practical steps might encourage the basis for developers and institutions to work together effectively. These would include: promoting a champion of the sector who would work with key stakeholders, trade bodies and government; explaining what the sector requires; supporting pilots and seeking to strengthen the environment that would encourage investment while at the same time encouraging innovation and experiment (there are 20 recommendations in all in the full report).

Reflecting on the wider questions, it seems to me that the current controversy over short tenancy length and calls for more regulation miss the point – the rental market is highly varied and the need for raising the floor of standards and protecting tenants at the bottom should not undermine the quality end of the rental market that purpose built institution-funded rental property would seek to promote. There is a challenge for policy to find ways to improve the quality of the poorer end of the market without dissuading the increasing interest in investment in different higher quality market rental segments. We all know the sector is split up into distinct sub markets – can we not facilitate regulation that recognises these differences? Wouldn’t a strong housing association role as a managing agent help do this as well as diversify their income base and promote the reputation of the market segment?

There is institutional investment taking place in London despite the lack of information transparency. There is demand in Scottish cities. There appears to be growth in interest from a range of investment funds in general. Will it be tapped this time? Will the pump-priming of subsidy and finance form Government make enough of a difference to support a self-sustaining market sector of new well managed housing? Perhaps it will in London but like the report says, much else has to be done to help support the rental market quality enhancement – and of course much resistance in Scotland remains in certain quarters. We are at a critical juncture.


Reflections on the Autumn Statement 2013

I am increasingly of the view that one needs to wait a few days after a major Budget statement. There has already been much written, showing how the wider world with its different perspectives interprets and deconstructs the Autumn Statement. It was a characteristically bullish and political performance and I think there are many things from it one would want to discuss further. I am going to focus on four specific aspects: macro questions of austerity, recovery and the deficit; the housing market; poverty and benefits; and, the fine city of Glasgow.

The macro highlights from the Chancellor’s perspective were of course about economic recovery and a positive austerity narrative. Several writers have been consistently critical of the wasteful impact of austerity on economic growth (Simon Wren-Lewis has been very persuasive). Today, there was an excellent post by John Cassidy in the New Yorker. Cassidy makes a number of trenchant points:

– Austerity meant three more years of recession-like economic conditions and this will continue to affect the UK for years to come.
– The UK has failed to meet its 2010 deficit reduction targets and has performed less well than the counterfactual growth projections established in 2010 by the OBR if there had not been the Coalition austerity programme.
– Research by Jorda and Taylor at California Davis suggests that 3/5 of the fall-off in economic activity was down to the austerity programme and this may be downward biased.
– Wren-Lewis argues that the average UK household is £3,500 worse off as a result of the first three years of the Coalition programme.
– The structural budget deficit has not fallen but actually risen and will still be higher than 2010 forecasts as far forward as 2014-15. The debt burden will not peak till 2015-16 (at 80% of GDP).
– The economy’s nascent upturn is an ‘old-fashioned attempt to ramp up the real estate market’.

And what of the housing market and housing policy? Jules Birch, Alex Marsh, Gavin Smart and others have already commented at length on the key points. We knew already that funding for lending was being switched to SMEs away from housing. AS13 also announced plans to tax future capital gains made by non-residents of residential property (but not till 2015 risking accelerated sales) and confirmed plans for the Bank to act to moderate asset bubbles (though it is still not clear how this is to be achieved in practice). The Treasury also plans to make technical changes to CGT private residence relief to reduce the incentive to exploit this by landlords.The Bank are to advise the Treasury as to whether the HTB scheme remains appropriate. The Government will make £1 billion of loans available to help ‘unblock’ large housing developments. This will fund infrastructure to achieve this over a 6 year period.

Councils had their borrowing limits for council building raised in England but this was not by as much as was asked for and at the same time the right to buy has been strengthened which will in time dilute supply – as will the order to sell off expensive council housing assets.

A feature of the AS13 was the announcement of an overall welfare cap (along with sundry commitments to see that it is enforced in the future). It quickly became clear that this cap only applied to that part of the social security system that was not to do with pensions and ‘most cyclical’ elements of welfare (e.g. JSA and JSA-passported elements of Housing Benefit). Nonetheless, more than £100 billion of welfare benefits annually will fall into the scope of the cap.

All of this when the Joseph Rowntree Foundation ‘s annual Monitoring Poverty and Social Exclusion Report tells us that 52% of people living in poverty are in families where there are people working. The combination of buyer power in the labour market, non-traditional contracts, low wages and a consequent dependence on in-work benefits – shows just how misleading the benefit reform focus on work incentives into work really has become.
Finally, amidst the other details on the basic pension age, higher education fees and the many other issues highlighted, in Scotland, we noted that Glasgow is to have its municipal vision for a City Deal supported by the UK Government (with support from the Scottish Government – as some of the necessary levers are devolved). Glasgow may yet be a model or demonstrator for the delivery of City Deals to other parts of the devolved UK in time to come.

Alongside the Future Cities Demonstrator, these are exciting times and opportunities for the City and its infrastructure. Glasgow already has a major regeneration programme through the Clyde Gateway initiative, the fruits of the completion of the motorway network and the projects associated with the Commonwealth Games. Whether this will make Glasgow ‘one of the fastest growing city regions in the UK’ remains to be seen. However, it is overall an opportunity for Glasgow to both modernise and recover some of the lost ground caused by the recession on jobs across the Clydeside conurbation. It is also clearly time to investigate the English City Deals and their lessons much more closely.