The Great Housing Gamble

Not so long ago, a housing boom nearly destroyed the global economy. Are the Montague Review’s recommendations about to kick-start another one?

In a country obsessed with home ownership, rented homes have often been viewed as the domain of students and young professionals – a temporary home for those looking to move on to bigger and better things, rather than somewhere to lay down roots.

But that is all changing. Many more people now live in private rented homes long-term, albeit not always through choice, with the “squeezed middle” unable to qualify for social housing or get on the property ladder. There are 3.6 million households living in private rented accommodation compared to some two million in the early 1980s.

One third of those are families with dependent children and 20 per cent have been at their current address for more than five years.

Yet despite the burgeoning demand for homes, developers don’t tend to build properties specifically to rent. In a sector dominated by private individuals – many own just a single property and only one per cent have a stock of more than ten – there has been a serious lack of investment.

Mark Allnutt development director for social landlord Thames Valley Housing (TVH) said: “We would support the view that there is a market failure.

“The current delivery system is entirely dependent on the primary need of the stock providers – developers and house builders – which is to return profit to their shareholders. House builders are sitting on thousands of plots, with planning permission to produce homes, but there is no pressure to
turn the plot into a home as there is a generous time limitation on the planning consent. The banks will only lend development funding on the back of off-plan sales.

“Off-plan sales are taken up by investors, often in the guise of buyto- let investors, who are as likely to sell if there is a margin available at completion. Off-plan investors, either way, are largely made up of wealthy foreign investors who will usually have no long-term interest in widening accessibility to the UK housing market.”

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The Government, in its determination to grow the build-to-let market, tasked Sir Adrian Montague – chairman of the 3i investment group – with finding out why institutional investors are not putting their cash into the UK private rental sector.

His report highlights the “real potential” for investment in large scale development of homes built specifically for private rent.

“We are satisfied that the rented sector offers potential investment opportunities of interest to institutional investors,” says Sir Adrian. “There has been some activity in the sector but real momentum is inhibited by constraints affecting the supply of stock by the treatment of rented housing schemes under the planning framework and by the need to create greater confidence among investors in the availability of good projects showing acceptable, secure returns.”

A combination of recent tax changes and wider market conditions have cleared the way for this sector to grow, says the report, which makes a series of recommendations to speed up the timescale for building private rented homes.

These include councils using “flexibilities” in the planning system, such as waiving affordable housing requirements on new developments specifically for private rent and reviewing stalled sites to see whether some of the new homes planned could be made available to rent rather than sell.

It also suggests that a taskforce should be set up to encourage and support build-to-let investment from the private sector, and to develop voluntary standards for future landlords; that the Government provides targeted incentives to encourage the development of build- to-let business models, which could include sharing development risk in the short-term to get building started; releasing redundant public sector land and buildings for build-to-let development; and the Government working with councils and the Greater London Authority to identify sites where there is demand for rental housing and make them available to developers on the grounds that a proportion of the homes built be let to tenants.

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The British Property Federation, whose director of policy Ian Fletcher advised the review as part of an expert industry panel, says the recommendations could “unleash unprecedented investment in house building from pension funds, insurance companies and REITs [Real Estate Investment Trusts]”.

Chief executive Liz Peace said: “If we are to make headway in housing the nation and boost growth we must look at other ways of getting homes built.

“Encouraging institutions into building homes for rent has for some time been seen as the Holy Grail in enabling a long-term private rented sector which is designed and built-tolet and offers renters something a bit different in the marketplace.

“The recommendations in the Montague Review will help address the barriers cited by the institutions and provide an inclusive model, which housing associations, home builders, property managers and construction firms can all participate in.

Gavin Smart, director of policy and practice at the Chartered Institute of Housing, said: “Allowing reduced planning obligations for private rented schemes is a radical step and not without risks, but we need to consider radical approaches at a time when new house building is at record lows. Families across the country are struggling to find a home they can afford. We need to explore new approaches if we are to deal with this country’s housing crisis.”

But while major house builders like Taylor Wimpey, Barratt and Persimmon will no doubt be eager for to see the Montague Review’s recommendations implemented, not everyone is convinced that a new private house building boom kick-started by releasing developers from obligations to provide affordable homes is the way forward.

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This proposal has caused considerable concern in London, where many lowincome workers are already priced out of the private sale and private rental market. It has been suggested that it could put the mayor’s affordable housing programme at risk, as well as punishing people in low to medium paid jobs, or vulnerable families, while pushing up the housing benefit bill.

Councillor Mike Jones, chairman of the Local Government Association’s environment and housing board, said: “Any strategy to boost the number of new rental homes should not come at the expense of new affordable housing.”

Keith Exford, chief executive of Affinity Sutton and chair of the G15, which represents London’s largest housing associations, added: “Many of the proposals in this report are sensible, especially speeding up the release of public land, but we fail to see the case for releasing developers from obligations to provide affordable housing in London when house prices and rents are continuing to increase.

“A shift away from affordable housing to much higher market rents will force more people to seek help through the benefits system, with a huge increased cost to the Treasury. In a market so severely constrained by under supply, affordable housing offers far better value to the Exchequer and tenants alike.”

There are also concerns that the returns on offer for potential investors are not big enough.

Ian Potter, managing director of the Association of Residential Letting Agents, said: “Any institutional investment will look for a reasonable rate of return to satisfy the demands for a return for the pension or insurance fund, whose investors are the general public.

PricewaterhouseCoopers recently released a report which indicated that until 2025, buy-to-let landlords can expect a better return on other investments and this would be a concern for institutions looking for effective investment vehicles.”

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