The Department for Communities and Local Government has published the findings of Sir Adrian Montague’s eagerly awaited review of the barriers to institutional investment in private rented homes.
The review, which was commissioned as part of the Government’s 2011 Housing Strategy, looks at what can be done to increase investment in private rental properties. Currently, institutional investors have been reluctant to embrace the private-rented housing sector and it is hoped that the review’s recommendations to the Government may encourage financial institutions to increase their investment in the sector and support the large-scale development of new homes built specifically for private rent.
The report has made the following five recommendations:
1. Councils should use the existing flexibilities in the planning system to encourage developments of privately rented homes. This could include (1) waiving affordable housing requirements on new developments of private rental homes or reassessing stalled developments to establish whether the proposed new homes could be made available for rent rather than sale; (2) ensuring homes remain in the private-rented sector for at least 10 years (but possibly up to 21 years); and (3) feeding the revised land values and business plans into negotiations around section 106 and Community Infrastructure Levy negotiations;
2. More public land should be made available for private-rented schemes. The Government has said it will release public sector land with capacity for 100,000 homes by 2015. Each department has a target for land release and has to regularly report back on progress. This impetus should be maintained and, to enhance transparency, the Government should, in addition, publish separate information regarding the use of released public land for private rented projects. To demonstrate its commitment to making a success of private rented schemes on public land, the Government should (1) work with local authorities and the Greater London Authority to identify sites in locations where there is a good demand for rental housing and make them available to developers on the basis of a pre-determined volume of build-to-let, and (2) ensure that value for money in these projects is considered in the round in order to test whether best value, and not just the highest cash consideration, can be achieved;
3. Government should provide carefully targeted incentives to stimulate the rapid development of new private-rented sector business models, from a range of promoters: public sector landowners, registered providers, or private sector housebuilders. The funding suggestions include: (1) equity or debt funding to support schemes that can be sold into the institutional market once completed and which would act as demonstrations of possible viability; (2) A government-seeded institutional fund in order to leverage in other private capital; and (3) the possibility of sharing the investment risk in the short term in the same way as universities did in the early days of the student housing market;
4. A Task Force should be set up to provide some of the expertise and support to assist investors and to overcome barriers around the unfamiliarity of these build-to-let schemes. The Task Force would work closely with the Homes and Communities Agency, and would be composed of a range of officials and private sector specialists, including developers, lenders, investors, valuers and lawyers, under the leadership of a private sector Chief Executive. Its role could be (1) to act as the focal point for private rented schemes across the public sector and to co-ordinate with interested parties in the private sector, including financial institutions in the UK and overseas, landowners, banks with distressed land, developers and others; (2) to promote a standardisation of the process, (including a statement of expected standards and forms of contract); (3) to identify and scope recommended pilot projects; (4) to work with the Homes and Communities Agency to ensure that the private sector is fully aware of all opportunities regarding surplus public land held for release; and (5) to provide transactional support to the public sector; and
5. Create renting standards that could be adopted across the build-to-let sector. It was decided that a formal or mandatory “kitemark” might be overly-bureaucratic, but it was agreed that tenants should have the right to expect a certain level of service and standards from landlords, including (1): the quality of the accommodation and the standards of construction; (2) the level of energy efficiency and sustainability of the building; (3) the building owner’s promises as regards the maintenance and refurbishment of the premises; and (4) the professionalism of the management service.
A formal response to the review will be issued by the Government later this year.
UPDATE: On 6 September 2012, the Government announced that it will be investing £200m in housing sites to ensure that the “high-quality rented homes are made available to institutional investors quickly”. It will also establish a taskforce to bring together developers, management bodies and institutional investors to broker deals and deliver more rented homes.
The Government will also issue a debt guarantee for up to £10bn for this scheme, to give institutional investors the assurance they need to invest in this area. Under the scheme, the Government will enable providers to raise debt with a Government guarantee if they commit to investing in additional new-build rented homes. Housing associations, property management companies and developers are all expected to benefit from the scheme.
Further details on the Government’s announcement are here.