The number of new houses started in 2008/09 is down by 42 per cent on the previous year, which is leading to concerns about a lack of supply of rental property coming into the market.
At the same time, demand for private rented property has been increasing steadily due to demographic changes and constraints facing potential housebuyers.
The UK’s biggest letting agents Countrywide reports that July and August have seen an unprecedented increase in rental demand while the Royal Institution of Chartered Surveyors says rents have risen in the first two quarters of this year due to a lack of supply.
The Treasury report acknowledges that a healthy rental market supports the economy in several ways.
It says “A responsive housing supply supports key economic and social policy objectives: delivering macroeconomic stability and supporting microeconomic growth.”
It says the sector has been driven by private investors: “Historically, private rental sector supply has been driven by individual investors/ landlords and in recent years the introduction of buy-to-let mortgage financing had accelerated this.”
Under the last Government, the buy-to-let sector reached £44bn in gross lending in its peak in 2007, 11.3 per cent of all mortgage lending that year, according to the Council of Mortgage Lenders but funding constraints have seen buy-to-let lending all but disappear.
Precise Mortgages managing director Alan Cleary says this will not change for the foreseeable future as non-retail bank lenders are still showing no signs of returning to the UK. “Until securitisation comes back, there will be limited funding and that funding probably will not find its way into the buy-to-let market.
“The non-banks and the landlords were the ones who held up the private rented sector in the past but now it feels like Government is just waiting for them to get back on their feet. Non-bank lenders have been excluded from any form of help from central government completely and it has been overlooked by many that non-bank lenders did good things for the economy as a whole.”
Mortgages for Business managing director David Whittaker says lenders have been putting pressure on existing borrowers by tightening lending criteria.
He says: “Banks are calling in their loans they lent too long and too cheap, reissued under less favourable terms, so landlords will have to sweat rents more. All this while the politicians sit there with their arms folded and argue they cannot afford a social housing policy so someone else needs to fund the private rented sector. Professional landlords are getting on with it but while money is in short supply they cannot step up and fill the gap.”
Whittaker says the landlords he is dealing with are becoming more confident of securing funding than they were at the start of the year but the levels of lending and terms available are still a long way short of what was available two years ago.
Private sector investment in housebuilding has also been under pressure. The Home Builders Federation reported this month that the number of new homes built in 2009 was at its lowest level since 1923.
Another potential source of funding in the private rented sector is institutional investors but the Treasury report says: “The role of institutional investment has been limited to niche areas of the private rented sector.”
The Treasury says that, as an asset class, rental property has a low correlation with other classes and offers opportunities for diversification and concludes that “institutional investment could lead to better management and improved quality in the sector”.
Could institutional investors be the solution to the housing problem?
National Association of Pension Funds policy adviser Julian Le Fanu thinks not. He says: “Pension funds investing in the private rented sector are still very much a niche investment. Our view is there is not much interest and not likely to be interest in the sector for pension funds.”
Le Fanu says many funds invest in commercial property but rented property is too much of a commitment. “In a sense, it is all bricks and mortar but the problem with the private rented sector as opposed to other property asset classes is that it needs a lot of management and that is why it is attractive to individuals rather than institutions.”
If buy-to-let investors cannot access funds and institutions are unwilling to take on the task of managing rented accommodation, where will the money come from the build more homes?
The Home Builders Federation says the key is Government assistance and cites a recent project by the Berkeley Group as a good example of how this can work.
The project sees the Homes and Communities Agency provide Berkeley Group with funding for the project to build 555 rental homes which the company will put into a private rental fund owned by the company. In return for the cash, the HCA will retain a 20 per cent interest in the fund.
Berkeley Group managing director Rob Perrins says this is a significant innovation in funding for the private rented sector and HCA chief executive Sir Bob Kerslake says: “We know that more people are choosing to rent and, as well as accelerating the supply of new open market and affordable homes, the creation of a bulk portfolio of homes for rent could be a blueprint for long-term investment in the private rented sector in the future.”
’The creation of a bulk portfolio of homes for rent could be a blue – print for long-term investment in the private rented sector in the future’
An HBF spokesman says Government assistance is the only way to solve the problem of funding. “The recent deal with Berkeley shows that there is a realisation and a need to provide homes of all types over the next decade but we do need some public investment to lever in some private investment.
“We have a huge undersupply of homes – all signs point to more than a million – and the main constraint on that is a lack of mortgage availability. There is room for the private rented sector to grow and if public funds can be allocated to lever in the private that is clearly going to benefit the market.”
Cleary agrees the only way to help fund the private rented sector is Government assistance but thinks this should be through stimulus to the buy-to-let lending market. He says: “If the Government really wanted to get the private rented sector moving, they could get Bradford & Bingley or Northern Rock lending affordable buy-to-let loans or they could just support securitisation coming back into vogue. It has already guaranteed the hell out of various institutions, so surely it could do something to make securitisations more enticing to investors?”
The Government’s response to these pleas for help is not encouraging.
The Treasury says it is looking at several ways of boosting investment in the private rental sector, such as the annual allowance for the rent-a-room scheme which allows homeowners to sub-let a room and raise up to £4,250 without having to tell HM Revenue & Customs and the VAT rates for property management and renovations. It has also promised to look at whether there are any incentives that could be offered to Reits to stimulate their interest in the private rental sector.
Any stimulus is unlikely to be financial. The Treasury says changes that entail a cost will have to be considered in the round with all the other calls on Government finance and “deficit reduction remains the Government’s main priority”.
Whittaker says: “The problems facing housing have all the makings of a perfect storm. There are a lot of questions and the Government does not seem to know how to answer them, so we are at a total impasse.”