London Update
Issue 41
Feature Article: Private Renting - a Policy for Our Time?
Economic and Market Roundup
Regeneration News
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About Young Group
Feature Article: Private Renting - A Policy for Our Time
Liz Peace
Chief Executive
British Property Federation
There are those people who claim the residential model of house building for purchase by owner occupiers is effectively broken and that even when the economy recovers we will never see the levels of private sector house building that we have enjoyed in the past. I am not sure that is true since the Englishman's love affair with his house is not something that is ever going to disappear completely and even in what are extraordinarily troubled times for the house building industry, they have still managed to build and sell some 60,000 houses/apartments over the last 12 months.
But what the crisis of the last 18 months has shown is that there needs to be an alternative model for providing homes to the people that need them and that there should be an option that sits between house purchase, and the millstone of a huge mortgage that home ownership brings, and what we now call social housing. We in the British Property Federation believe that that intermediate option is private renting.
Renting is not new. At the end of the First World War some 76%[1] of homes were rented from private landlords but successive waves of interventionist legislation and regulation, all intended to protect the tenant from unscrupulous landlords, coupled with the rise in home ownership, drove many landlords out of business. Renting is however a popular form of tenure in other countries; in the Netherlands some 43% of total housing stock are rented homes[2] and in the US the percentage rests around 28%[3].
In the UK it seems to be an obvious solution, albeit only partial, to the problems of the housing market. If we believe Government numbers, we are going to need somewhere in the order of 240,000 houses a year to keep pace with rising demand. But clearly the private sector house builders are not going to be able to come anywhere near the 167,600 that they provided in their heyday back in 2006/7[4]. And the RSLs, who have depended heavily on the Section 106 agreements with the house builders will be lucky to reach anything near the 53,000 affordable homes delivered in 2007/8[5] this year. So on the basis of some pretty simple arithmetic, it would appear that there are going to be a lot of people who cannot find homes.
Renting does, of course, have some unfortunate reputational issues and indeed every time I get hauled up in front of some committee or other of MPs I am always lambasted about the iniquities of Rigsby type landlords who subject their tenants to bad, even unsafe, conditions and rip-off rents. But the majority are decent people who do their best for their tenants. The problem is that many of them are, in effect, amateurs whereas what the renting industry needs is large scale professional companies coming into the market with substantial portfolios of well built, well maintained and well managed properties that they rent out to tenants in just the way the owner of a portfolio of offices rents out his premises to businesses. The US has just such a regime in the shape of their multi-family housing developments where standards, and rents, are driven by healthy competition to attract tenants.
The big problem in the UK, however, in seeking the assembly of substantial portfolios of private rented property is the unwillingness of the institutional investors to put money into this asset class in the way that they support the office, retail and industrial markets. There are a number of reasons why the investors will not invest – lack of suitable stock, potential reputational damage, the chore of managing the properties. But the principal one is that up to now the numbers have simply not stacked up and the returns have not met those that could be achieved from commercial property. Part of the problem has been that individual buy-to-let investors have been prepared to buy up property, often individual units, at a capital cost that does not reflect the rental income, on the basis that capital growth will make up the difference and more besides. And even if the property remained empty, which clearly many of these buy to let investment properties have, then the capital growth still provided the investor with a return in due course. Clearly these sort of market conditions, with massive capital growth, no longer apply – which suggests that buy to let may have had its day – so the big question for all those supporters of a professional private rented sector is whether its time has at last come and the income return that can be obtained from residential tenants will at last start to look attractive.
The new Homes and Communities Agency (HCA) certainly thinks so because they have decided, after much lobbying from the BPF and its residential members, to see whether they can kick start some serious investment in private renting. They have already been engaging with potential investors to determine what it would take to get them to come into the market and they have now decided to put this onto a fully open basis by asking the private sector to register 'expressions of interest' in putting together an investment proposition that would acquire stock and manage it for rent. The initial invitation documentation is fairly sketchy, probably because the HCA does not want to deter 'bidders' from putting forward novel ideas - which could be based around existing unsold stock from the house builders or new developments, that may or may not have an existing planning permission. The HCA is also noncommittal on the subject of financial inducements though its document does hint at the possibility of rental guarantees being on offer and also possible gap funding for otherwise non-viable schemes.
Judging by the attendance at a recent seminar which the BPF ran for its members on this HCA initiative, there does seem to be considerable interest out in the market. Whether this translates into a real residential investment vehicle remains to be seem. There are a number of inducements that the Government might offer, in addition to rental guarantees and gap funding. Dealing with the anomaly of SDLT on bulk purchases (which would see a multi-purchase attracting only the SDLT rate that would apply to individual unit sales) would be a relatively painless concession that the Government could make and indeed we were surprised to see that it did not make it into the last Budget.
There are also some simple changes that could be made through the planning system which would encourage the use of land for rented accommodation, which would in turn feed back into the price for which the land could be sold (though that may be rather less of an issue at the moment with land values at rock bottom anyway). And then there is the whole question of the affordable housing requirement which attaches to new developments and which is one of the factors that has in the past made building for rent unviable. Given that rented accommodation is cheaper overall than living in a purchased property, rental could in reality be regarded as affordable housing in its own right, or at least intermediate housing for those who perhaps do not qualify for social housing but who could not afford to buy. In which case, it would seem to make sense to remove the affordable housing requirement from development for rent.
At the end of the day, the private sector will only invest in residential property for rent if that investment is able to make the right sort of return, which according to numbers being bandied about at the moment would have to be in the order of a return on equity of 6.5%. According to modelling that we in the BPF have done this should be achievable, though how far the government will have to go in providing the necessary security blanket, either through direct guarantees or through some of the other measures outlined above, remains to be seen. With total returns on commercial property, according to IPD, now at record lows, this just might be the moment for the residential investment market to take off – which would have the double advantage of providing much needed homes and also a sound, if unspectacular, new asset class for the investment market. To claim that it's a case of 'now or never' may sound overly dramatic but if we can't convince the markets of the merits of large scale private renting now, when the traditional methods of housing provision are, if not broken, at least significantly dented, then we never will!.
Sources:
1 Table s101, Survey of English Housing
2 2006 fi gures
3 American Housing Survey for the United States, 2007
4 CLG Housing Statistics Release, May 2007
5 CLG, Affordable Housing Statistics
Liz Peace
Chief Executive - British Property Federation
The British Property Federation is a membership organisation devoted to representing the interests of all those involved in property ownership and investment. It aims to create the conditions in which the commercial property industry can grow and thrive, for the benefit of its members and of the economy as a whole
Base Rate Steady at 0.5%
In a move welcomed by Neil Young, CEO of Young Group, both the Bank of England and European Central Bank voted this month to hold base rate at its all time low for the third consecutive month and announced no change to its policy of quantitative easing. “Despite some positive economic news filtering through, the impact of the MPC and ECB's policies will not be felt overnight, so it is no surprise that they have opted to take a wait and see approach,” commented Young.
Deflation Fears Receding
The 10 year break even inflation rate (BEIR) - the difference between 10 year conventional guilt yields and the real yield on an inflation indexed bond of the same maturity - rose this month to 2.9%, the highest level since October 2008, an indication that investors are no longer pricing in a high possibility of sustained deflation.
Services Return to Growth in the UK
Latest data from the Cips/Markit purchasing managers' index showed the biggest jump in its history with a positive jump from 48.7 to 51.7. It was the only country in Europe to venture above 50 points and into positive growth, having remained below 50 points for the last year.
UK and London Retain Inward Investment Top Spots
The UK is top of the tree in Europe for inward investment according to Ernst & Young's annual league table and for the 7th consecutive year, London takes the crown for top performing city, attracting 262 projects out of the UK's total of 686. France was runner up with 523 projects under its belt and Germany third, having secured 390.
Positive News for the Commercial Property Market
According to Cushman and Wakefield's latest business investment market briefing, 23 of 24 key yield indicators remained stable during May, providing the most stable outlook for commercial property since December 2006. The report indicated that average prime yields stand at their highest levels since 1992.
Mortgage Approval Trends Uncertain
Gross mortgage lending fell by 9% from March to April and 60% year-on-year according to the Council of Mortgage Lenders (CML) and the Building Societies Association (BSA). But following BoE mortgage data the CML has predicted May's lending will 'almost certainly' show an annual increase for the first time since 2007, although Director General Michael Coogan warns, “It is still too early to spot a pattern of recovery in the housing market.” The figures buoyed the RICS and following its monthly house price survey, it predicted that up to 65,000 mortgages per month could be approved by the end of 2009.
The RICS Issues Valuation Guidance
New guidance from the RICS recognises that valuers may need to provide advice on the outlook for a property's value, not a point in time assessment. This comes as the Financial Times reported surveyors for Nationwide Building Society had pushed down valuations for new property by a minimum of 10% of the asking price. House builders hit back, blaming valuers for curtailing the housing market's revival.
London House Prices Expected to Out pace in Recovery
The RICS' monthly house price survey reports that 25% more agents in the capital expect house prices to rise than fall - a return to positive sentiment for the first time in almost 2 years.
UK House Prices Show Month on Month Rise
According to Halifax, average UK house prices rose in May by 2.6%, the greatest month on month gain since 2002, although the three month average shows a fall of 3.1% from the previous 3 months.
UK Building Sees Largest Slump
The Times newspaper this month reported that Britain's building industry endured its sharpest fall in output for 45 year in Q1 2009 with residential house building down by another 10%.
Rental Rates Stabilise
FindaProperty.com's monthly rental rates across the UK held firm in May for the first time since August 2008. In London, 23 out of 33 boroughs saw an increase in asking rent, pushing the overall monthly change across the capital to a rise of 0.4%. In May 2009 rental properties throughout the UK remained on the market for an average of 65 days, 16 days longer than a year ago.
Industry Reacts Angrily to Proposed Water Liability Shift
The property industry has reacted angrily at Ofwat's suggestion that landlords should be made liable for unpaid water bills left by departing tenants. The possibility was raised in Ofwat's submission to defra as part of its consultation for the Independent Walker Review of Charging for Water & Sewerage Service. The Residential Landlords' Association warned that rents would need to increase to cover landlords' increased exposure and there would be implications for tenants' deposit funds.
Wood Wharf's First Key Buildings Unveiled
Two of the first buildings to be constructed at Wood Wharf have been revealed. Pelli Clarke Pelli - the architect practice that designed One Canada Square - has submitted detailed plans for a 1.6 million sq ft, 194m high building, to be accompanies by Kohn Pedersen Fox's 134m tower which boasts 911,000 sq ft of office space. Completed over the next 10-15 years, Wood Wharf will eventually cover 17 acres next to Canary Wharf and include 1,700 homes and almost 5 million sq ft of office space.
Crystal Palace; Jewel of South London
Plans for £100m redevelopment of the historic Crystal Palace Park, which were called in by the secretary of state in February are undergoing a fierce public enquiry. Supporters, including the London Development Agency, Mayor Boris Johnson and Bromley council have clashed with local residents who oppose plans to sell parts of the 200 acre site for development of 180 private homes to fund a new regional sports centre, museum, shops and cafes in the park.
International Cricket Guaranteed Home at the Oval
Planning permission has been granted to Surrey County Cricket Club for the £35m redevelopment of the Oval in Kennington to include a new 1,600 seat stand and 170 bedroom hotel, after the secretary of state ruled that the Health & Safety Executive's concerns over the site of a nearby gas holder did not pose risk of a serious incident. Paul Sheldon, chief executive of Surrey County Cricket Club, said: “This decision has been a long time coming; we are very pleased with the decision, which secures the future of international cricket in South London.”
Kings Cross
The King's Cross Central Partnership has announced a design competion for the redevelopment of a listed Victorian gasholder within its 67-acre regeneration scheme. Entries are invited from teams looking to create a “one-of-a-kind” multi-use public space or attraction. Initial ideas for the £2.5million project have included an adventure playground, performance space, ice-skating rink or an open picnic area.
Driving Investment in the Private Rented Sector (PRS)
The Homes and Communities Agency (HCA) is championing a drive to boost the involvement of institutional investment in the PRS. Young Group has been quick to point out that a major hurdle is the fragmented - and often poor quality - asset management that is prevalent within the residential sector. Young Group's approach, driven by accountants and surveyors, is akin to that found in the commercial property arena and is a service that we have provided to private clients since 2004. Young Group is supporting the HCA's drive for institutional investment and has submitted a formal expression of interest to offer our, already successful, portfolio asset management services to institutional investors through the HCA's initiative.
Market Report: Built on Firm Foundations
This month, Young Group produced a new market report on behalf of a top 10 property consultancy and its institutional fund manager clients. 'Built on Firm Foundations' outlines the fundamentals of residential property investment and we are now pleased to be able to make this more widely available at www.younggroup.co.uk/research/.
Young Group's Tax Return Service
Following an excellent response to the launch of Young Group's new tax return service, in association with Felton Pumphrey, we're pleased to announce that an extra date has been added for initial meetings with a tax advisor at our Bond Street offices. We have limited availability on 2, 14 and now 29 July with flexibility for early morning or evenings.
Taking Advantage of Current Market Value
Opportunities exist in the market where property is being offered at competitive price; investors able to complete quickly are buying well, generating strong yields and excellent long term prospects. Young Group has investigated investment opportunities in a number ofpromising locations, offering them to clients who are in a position to act quickly to secure the properties.
Young Group's Immediate Acquisition service enables investors to
capitalize upon:
* Low interest rates
* Increasing rental demand
* A widening yield gap
* Property that is subjected to rigourous due-dilligence
Young Finance - Free Life Insurance Review
In advance of Men's Health Week 2009 (June 15-21), research has shown that 9 out of 10 men have no critical illness cover at all, 93% have no redundancy cover and 87% have no income protection. Young Finance is offering men - and women - a free review of their protection policies. Jane Reeves, head of Young Finance comments, “Often when circumstances change, people don't update their protection policies, which may leave them exposed. This free impartial review enables us to show you how effective your cover is and to identify instances where it may be cheaper and more efficient to combine, top-up or even split policies.” Contact Young Finance on +44 (0)845 356 1000 to find out more.
Landlord Licensing
Many of you will know that in response to last year's Rugg Report into the Private Rented Sector, the Government is currently evaluating landlord licensing in an effort to increase professionalism across the sector. Young London supports this drive to bring improved standards and we will, of course, keep our landlord clients informed of the outcome of the Government's consultation, which ends on 7 August.
Young London Tenants Reach for SKY
Following growing demand from tenants for satellite TV in their new apartments, the Young London website now offers fast, easy access to sign up for SKY TV online at www.younglondon.co.uk/Sky/.
A Twittering Success!
Young London's Twitter is growing in popularity daily as people 'follow' to see the Young London's latest properties and news. Don't miss out!
Follow us at www.twitter.com/younglondon.
Young Index
Thank you to everyone who took the time to complete our annual extended Young Index of investor market sentiment. The response was superb and results will appear in the next London Update.
London Update Feedback and Comments
We'd very much like to hear your views and feedback regarding our monthly London Update newsletter. If you have any comments or suggestions for future themes, please feel free to email moakes@younggroup.co.uk. If would like to respond to any of the items, your comments could be featured in a future issue.
Young Group specialises in providing Property Portfolio Management services to private and institutional investors; offering complete asset management services and the best direct investment opportunities in London. Young Group manages the entire process from sourcing investments through to financing, furnishing, letting and management. Young Group is the principal in many transactions and also retains an extensive portfolio of its own. As the principal, Young Group does not realise any profits until completion and has transacted more than 1,700 apartments, with a retail value in excess of £700 million. The Group's estate agency, Young London, has around 350 property assets under management, across London. Young Group supports NORWOOD and CHILDREN with LEUKAEMIA, two charities that are particularly close to our heart, donating £50 per property exchange.
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