building london’s private rented sector 3 march 2014 kathleen scanlon christine whitehead lse...
TRANSCRIPT
Building London’s private rented sector
3 March 2014
Kathleen ScanlonChristine Whitehead
LSE London Lent term seminar
Some recent headlinesCouncils urged to build homes for private rent Local councils should set targets for building homes for the private rented sector, says new report (Telegraph 24/2)
A better private rented sector can weed out rogue landlords for good It's the fastest growing area of the market, but rented homes are dominated by amateur landlords. It's time for that to change (Guardian 26/2)
We need rent controls to solve London's housing crisis Too many essential workers are being priced out of the capital. Rent controls could address the uncertainty and unaffordability they face (New Statesman 27/2)
What happened?• Post-deregulation (starting in the 1950s)
companies wanted to sell – and did over the next twenty years
• Owner-occupation grew rapidly with well- developed leasehold arrangements and the possibility of buying long leases
• Tax benefits and other incentives meant private sector building was almost always for owner-occupation
• New rented housing provided in the social sector
Decline and revival• PRS declined to 11% of total stock in
England by the mid-1980s • Deregulation of rents in 1988 led to slow
increase in supply • Owner-occupation for young people
badly hit in early 1990s• Buy-to-Let mortgages introduced in late
1990s – PRS started to increase quite quickly
• Affordability crisis in early 2000s added to pressure on PRS
The financial crisis and its aftermath
• Credit and housing markets dried up• Sellers could not sell; purchasers could not buy –
so PRS grew rapidly • New construction fell by more than half; while• Immigration and natural growth increased the
population of London very rapidly• Crisis of supply with all net growth concentrated in
PRS and among individual amateur/part-time landlords
• Policy makers looked for more housing overall and new build in PRS in particular
Compared to USA: the perception
UK USA
Individual landlords Corporate landlords
Most owning 1-5 units (not buildings)
Owning multi-family
developments
Dwellings originally built for sale to occupiers or as social housing
Purpose-built for rental
Funded by buy-to-let mortgages
Funded by commercial loans
Amateurs Professionals
Current UK policy direction• Encourage construction of rental
developments – to provide big investments for institutions, – allow faster construction on large sites, – introduce specific features suited to rentals
• Attract more institutional investors– to bring professionalism and financial stability
• National subsidies specific to PRS – Build to Rent Fund– Investor guarantees for debt finance
What barriers must be overcome?
• Attracting institutions to the sector has long been the holy grail
• Institutions have argued that yield is too low and that owner-occupation will always be more profitable and will therefore determine land prices
• Has the world changed?
Decision-making by developers and investors
The developer: Land price =
gross development value – build cost – required profit
The investor:Yield = Income / asset price
Investor’s net income made up of revenue…
Revenue
Number of units Rent per unitAnnual rent increase
Yield = Income / asset price ( Yield = Income / asset price )
…less costsVoids
Average tenant length of stayAverage time to find new tenant
Re-lets Average cost of refurb between tenantsCost of marketing
Management
Property supervision, including letting and running the propertyRent collectionArrears and bad debts
Other costsRepairs and maintenanceInsuranceService charge and ground rentsUtilities
( Yield = Income / asset price )
Risks add to required yield. Some fairly easy to price:
Planning risk
Add X% (say 15-20%) for land and planning risk to required returns to developers
Development risk
Add 5% for construction risk
Initial lettingLittle experience with large-scale rental developments on which to base estimates
Operating or management risk
Add x% for operational risk to investor model OR require rent guarantee from AA counterparty
( Yield = Income / asset price )
Others less so
Exit riskWill investor be able to sell—to owner-occupiers or another investor?
Reputational risk
Problem tenants, bad management, more general issues with PRS
Policy or regulatory risk
Will rent control or security of tenure be reimposed?
(Yield = Income / asset price)
Barriers related toland, construction and
product• Value of land driven by owner-
occupation • Supply of land (particularly in
London) in the right location• Local authority policies (Mayoral
policies vs those of boroughs)• Lack of development finance
Barriers related to yield
• Illiquidity of residential property
• Lack of robust market information
• Management
• Scale of potential investment
Barriers related to investor attitudes
• Predictability of demand into the longer term
• Investors not willing to take planning/development risk
• Investors’ mandates (industry benchmarks)
• Reputational risks• Regulatory and policy risks • Lack of expertise within investment
houses
Have the barriers to investment been
overcome?• Few dedicated new PRS developments
to date—but increasing interest• Government programmes starting to
bear fruit• Mayor’s Draft Housing Strategy calls for
5,000 per annum specifically for the PRS • Possible introduction of covenanted PRS
– but benefit of mixed sites?• Experience of the early adopters (QDD,
Genesis etc) will be crucial