A government report titled ‘Review of the barriers to institutional investment in private rented homes’has prompted a storm of media coverage, focusing mostly on changes to the rules on the provision of affordable housing. But most commentators seem to have missed the main point – that this report envisages a fundamental change in the property market.
Written by Sir Adrian Montague, the report looks at how institutional investors might be encouraged to build housing to let, rather than for sale. If the idea took off, it could represent a sea-change in the way the UK property market works and possibly the way we live.
It would mean complete developments, possibly comprising hundreds of homes, with thousands of residents, all of whom would be tenants. The report envisages developments offering long-term security and controlled rents for tenants. But this is not social housing: it is intended for young professionals paying rents at broadly market rates.
This is already happening in a patchy sort of way. A subsidiary of Thames Valley Housing Association, for example, is planning to build 1,000 flats inLondon in the next two years. And the plan is that institutional investors will commission or buy developments, bringing in much more capital than housing associations or developers could do on their own.
The implications for the property market if this were to happen on a large scale are considerable.
1. Buy-to-let Landlords
Small scale landlords could face brand new, well-funded, competition for tenants. That could impact on rental income and raise the standards they would have to offer to attract tenants.
2. House prices
If landlords decided to withdraw from buy-to-let, demand for property – particularly that suited to first time buyers – would fall and supply would increase. The Council of Mortgage Lenders reported recently that buy-to-let loans were up 14% in the second quarter of 2012 compared with a year earlier. If this demand weakened and even went in to reverse, that could suppress house prices, particularly for first time buyers.
3. Long term tenants
In other parts of the world, renting is a lot more common than it is here. If high quality accommodation with long-term security and a cap on rent increases became readily available, would attitudes to home ownership change? The urge to own your own home runs deep in the British psyche and this sort of rented property may be merely a living space while prospective buyers build up a deposit and find somewhere to buy. But it is not impossible that attitudes will change and that renting in the long term becomes the norm for some.
If so, will tenants lose out on the capital gain associated with long term home ownership and will we become a more divided society as a result? Or will they be able to save in way that compensates them for that lost opportunity?
Traditionally, developers build homes to sell. They borrow money to build the homes and then repay it on sale. Building properties to let is more likely to suit those with funds to invest that require an income. Will developers adapt to building for investors? Will they become investors themselves? Or will the investors set up construction arms of their own?
In short, this report is not trivial or a side issue. It is certainly the case that demand for property now is so strong and supply so restricted that new building for rent and for sale can live comfortably side by side for some time. But there is no doubt that a long term trend to build-to-let would have significant implications for the residential property market.
Will it happen? The biggest obstacle seems to be return on investment. For small scale landlords, a large element of the benefit they reap from owning and letting property comes in the capital gain. But investors holding property for the long term wouldn’t have access to that. If not, current rental rates are unlikely to give investors the return they need to justify the investment. But if they could cut land and construction costs, returns would improve. That might explain why one of the key recommendations of the report is for the government to identify publicly owned land that can be set aside for build-to-rent.