Posted by: Adam Roake | September 13, 2010


The HCA deal with Berkeley Homes has attracted little comment beyond short pieces in Regeneration and Renewal repeated in Planning, Property Week and so on. The further news last Friday that the Treasury would not be taking any serious steps to ease the tax regime following its consultation exercise “Investment in the Private Rented Sector” (see Treasury response to consultation) has been similarly muted. So on the one hand, the government seem to be investing in private homes but on the other they are not willing to encourage the private sector to do the same, apparently content that “Institutional investment is likely to remain niche and small scale, so long as the level of income returns to residential property remain low“. As commonly happens, an agency of government tries to take a progressive approach only to find HM Treasury less than helpful.

It seems to me that there are some really interesting issues that arise; firstly how sustainable is the HCA intervention into the private rental sector and secondly why is scarce tax money being invested in the private housing market rather than being used to deliver much needed affordable housing. Basically nothing has changed in terms of the economics of the private rental market, as set out in my previous posts. Investment is only worthwhile if there are significant capital returns achievable in the future so that the investor can sell the asset to make his profit; there is little profit from the rental income stream alone. There is no information available as to the length of time the Berkeley/HCA fund is expected to hold the various rental properties but Property Week reports that “Both Berkeley and the HCA say they will exit the fund at some point, suggesting the possibility for institutions to come in once it is established“. However more likely the units would be sold on the open market to liquidate the asset and realise the profit. After all any incoming institution will only be tempted by future capital growth, because it is unlikely that rent streams alone will yield sufficient value and such institutions have so far not been tempted into the residential rental market despite periods recently of intense capital growth. So 555 new private rented homes will be delivered now but there is neither certainty that they will remain in the rental market nor any incentive from the Treasury to make them attractive investments in future.

Secondly, this is the first time that I can think of that tax money has been invested in private housing for anything beyond the short term. Kickstart funding came close but is all supposed to be repaid from sale receipts of completed units. This deal apparently offers Berkeley the ability to build out 555 new homes and in return the government, through the HCA, acquires 20% of a portfolio of private housing. In effect our taxes are being used to subsidise privately rented flats at an average rate of £52,000 per flat. On the plus side this is the HCA providing serious support to the private rented sector but on the minus side you have to ask why is the HCA subsidising housing for people in the private sector who can afford to pay market rents? That’s a heck of a subsidy compared to the amounts HCA typically put into shared ownership or other intermediate units, which at least meet some kind of housing need, never mind the subsidy typically paid out for social rented housing units. From Berkeley’s perspective they’ve sold 555 flats in one go and, assuming £29millions is truly 20% of the value of the homes, that represents £145million of contracted revenue over the next two years. And assuming their gross margin is somewhere around 20%, they will be able to match the HCA cash contribution and gear up the fund at no more than 60%, without actually stumping up any cash. Nice deal Mr Perrins.

All in all it seems difficult to see how this deal will benefits the taxpayer. It is presumably the intention of HCA and government that this deal will somehow get PRSI going after nearly two years gestation. However the Treasury are not playing ball, so the fiscal position for potential institutional investors is unchanged. Rental yields are still very low and any real profit will have to rely on capital growth. At the moment that’s not happening and even when it does, realising returns will require investors to sell property, almost certainly taking it out of the rental sector. Of course time will tell but I can’t help feeling this deal will make some profits for Berkeley Group, provide some homes for a few people who can afford them anyway and not much else. I’m not sure that’s what I want my taxes used for.


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