Posted by: Adam Roake | April 9, 2009

Time to Rent

Dermot Finch makes a good argument for how now is the Time to Rent and you have to agree with the basic proposition that we need a housing market that’s more flexible therefore less dependent on home ownership and with a proper institutional private rented sector – a market more akin to continental Europe.  I agree with him but, speaking as a developer, there is little incentive to build housing for private rent – it’s just not as profitable as housing for sale. Of course it’s better than affordable housing and you might think that in the current climate, where house sales have dropped off a cliff, building rental property might offer a sustainable alternative. However the reality remains that gross rental returns hover at best around 4 or 5% and when you net off costs you are down to 2 or 3%. On top of that Savills are now predicting rental falls in prime London property of 10% across this year so little prospect of an improvement in yields and anecdotal eviodence suggests there is a glut of rental property on the market because noboby can sell. When you look at rentals outside prime London, generally the yields dip even lower. This simply reflects that renting is cheaper than owning but it gives institutions who want to rent a fundamental problem – to achieve a realistic yield, they can’t afford to pay as much as an owner occupier can for any given property. The money made by private buy-to-rent investors came from capital increases in the value of stock but that’s not likely to happen for the next few years and may not happen again.

So what should we do if we agree there should be a more institutionalised rental market? The current tax system favours home ownership, because successive governments (the current one included) have liked the concept of Britain as a “home-owning democracy” with all that that implies. It would be possible to change that but such a change will have a direct negative effect on 68% of the electorate, so I cannot see that happening. Or you could incentivise buy-to rent, which seems to be what Sir Bob and the HCA are aiming for as Dermot reports and what Liz Pearce of the British Property Federation argues for in Housing Horizons supported by a variety of housing luminaries.  But I just don’t see it generating a strong and sustainable institution-backed private rental market; particularly not if you can sell the rented housing on the open market after ten years, as Liz suggests!

Quite simply housing for sale is more valuable than housing for private rent, never mind social rent. Anyone looking to buy land to develop will not voluntarily forego competitive advantage by working up schemes with less valuable land uses – he simply won’t get to buy the land if he does. And once he has bought the land why on earth would he develop it with a land use which makes a lower return. Even if incentives can be offered which make rented housing close to as valuable as housing for sale, this is only a short term fix. Once the incentives stop, which they surely will, then the rental market becomes untenable again and which institution will consider investing for the long term in a market which has that inherent value impairment.

I don’t see how the rental market will really take off unless a quota system is adopted akin to the now ubiquitous affordable housing requirement so that a percentage of new housing must be for private rent in perpetuity. Everyone knows where they stand and the whole issue becomes a simple matter of economic viability where the reduced revenue from affordable housing and private rented housing get reflected in a lower land value. If that means there needs to be a subsidy to make the project work, well that is what the HCA do best isn’t it? Sir Bob suggested at the Regeneration and Renewal Annual Conference (one of the events he appeared at last week with Dermot) that he wanted to see whether the market would come up with a solution before imposing a quota system akin to affordable housing – if what Liz Pearce is proposing is the best the market can do then I think we can expect legislation to impose quotas.

It is a problem; it does need fixing so I say legislate!

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