Recent Government initiatives have gradually transformed the rental sector - in quick succession we've had the Tenant Deposit Scheme, HMO regulations, and Energy Performance Certificates for rental properties.
At the start of May a new initiative, build-to-let, was announced as a further step towards a brave new rental world.
But what is it, what will it mean for the rental sector, and could it spell the end for smaller buy-to-let landlords?
Below we explain what the build-to-let fuss is all about, and talk to advocates and critics of the idea.
Build-To-Let: What’s The Big Idea?
Peter Cosmetatos
Mortgage lenders might be reluctant to lend on new-build property, and the Government doesn’t want to do it, but, given a safe return, big investors might just come to the rescue.
The aim is that through a few tempting planning and fiscal policy changes, large businesses, such as pension funds, will invest in a new 'professional rented sector', which would be let as branded accommodation.
The large investors being courted by the Homes and Communities Agency (HCA) who are currently remaining anonymous, have traditionally steered away from residential property investment because it offered capital growth, rather than income.
But, in the current market, there are profits to be made from renting.
Peter Cosmetatos, director for finance at the BPF (British Property Federation), which is campaigning for changes to encourage the new professional rented sector, says it’s now or never.
"One positive to emerge from the current downturn is that the fall in house prices has made the rental yields offered by residential property, which are typically modest, much more attractive.
"There is a rare opportunity at this point in the cycle for institutional investors to invest in an asset class that provides an excellent hedge against inflation at a good price."
Build-To-Let: the Pros
There are three main advantages:
- Attracts investment for the building of new homes and develops a long-term funding model for new private rental housing
- Creates a high-quality professionally managed option for the growing number of people renting
- Helps kick-start stalled housing developments and make them available to rent
HCA spokesperson Robert Davies says: "We’re not being prescriptive in any way. We want the market to tell us what they need, and what the investors could do for us."
However, he agrees that the main idea is to create a sector that bridges the gap between social housing and owner occupancy.
This could give us a situation similar to that of the US and Germany, where millions of people who can’t, or, importantly, don’t want to buy their own homes, happily rent long term without any stigma.
"One of the main benefits would be to promote private rental as a tenure of choice," says Davies. "These would be good quality homes designed for renters."
The plan is that all the homes would be newly built, to give a cash injection to the housing industry.
And, says Davies, it is expected that the focus would be on London, the South East the Midlands, and university towns.
"It would be large scale for the landlords," says Davies. "But this doesn’t mean that every development would have hundreds of properties. There might be an opportunity to drop 12 houses into a site."
Above all, the HCA, backed up by the BPF and Shelter, believe that the homes would be good news for tenants because, as well as the investing companies having reputations to maintain, high standards would be necessary in order to achieve good returns.
Build-To-Let: Who’s Not So Keen?
The main objections are:
- This will provide tax incentives for large-scale investors which, opponents say, will not be available to smaller investors
- It could create rental ghettoes which are at odds with the Government's promotion of mixed use, mixed tenure development
- Institutional investors may be reluctant to take on some tenants
Simon Gordon, Head of Communications at the National Landlords Association (NLA), is wary.
"Institutional investment would undoubtedly be a way to increase housing stock. But we would need assurances that the rental market remains a level playing field.
"The NLA firmly believes in mixed and sustainable communities with the full range of tenures.
"In many ways, our biggest concern about so called build-to-let would be the creation of rental ghettoes which, because of the funding structures and returns, are invariably going to mean the development of apartments in metropolitan areas.
"We are not convinced this will provide much-needed family housing."
And the Government’s own independent review into the private rented sector, the Rugg Report, published last October, was not convinced that build-to-let was a panacea for all of the rental market’s ills.
As well as warning that it could lead to rental ‘silos’, Julia Rugg, who carried out the study, raised the possibility that institutional investor landlords could be more picky with their tenants, and exclude poorer applicants.
Bad News For Smaller Landlords?
David Lawrenson
However, it appears that the Government will ignore the findings of its own research, and this, says expert landlord David Lawrenson of Letting Focus), could be a mistake.
"Build-to-let has its place," says David. "After all, the population of the UK isn’t getting smaller and we aren’t building houses at a fast rate right now.
"But Julia Rugg’s report proclaimed what a good job small landlords were doing and how institutional investors would likely not do quite so well.
"If the Government does end up giving out tax breaks to the big landlords for residential letting one cannot help thinking it could have saved us taxpayers some money and not bothered to commission the Rugg Report in the first place."
As David points out, another advantage that the professional rented sector could have over smaller private landlords, is the ability to offer tenants more stability with longer leases.
The reason that most tenancies are short is because of restrictions from lenders.
David suggests that, as well as giving out tax breaks equally, changes to encourage mortgage lenders to allow more flexibility in terms of the length of tenancies could help small landlords to compete with the giant investors.
"A good landlord will be more than happy to extend a lease once they have proven themselves to be decent tenants. I usually start with a six-month lease to check that the tenant won’t be a pain.
"But some of my tenants have been with me for years. It’s their home."
Nikki Sheehan
