The investment holy grail
The government is on a quest to secure institutional investment in the private rented sector but, given the failure of past attempts, can the latest initiatives succeed or do ministers need a miracle? Carl Brown investigates
‘Institutional investment in the private rented sector’ is a phrase guaranteed to be met with eye-rolling cynicism in housing circles. After all, the sector has heard this ambition to help increase the supply of new homes spoken about at great length over the past decade as though it were the holy grail. But very little has happened.
The Homes and Communities Agency launched its private rental sector initiative in May 2009 with the aim of getting life insurance companies and pension funds to invest in rented stock. Despite much hype around plans for £1 billion funds and partnerships with developers, the scheme never took off - largely because investors could not be assured of the returns they needed to make the leap of faith. The PRSI has since ceased as an HCA initiative.
There is, however, a sense the mood is finally shifting. A government-commissioned review which is expected to be published next month by City grandee Sir Adrian Montague will contain measures aimed at making the sector more attractive to investors. As Inside Housing revealed last week, landlords have concerns this could come at the cost of affordable housing, as likely proposals include pushing councils to waive affordable housing requirements to promote private rented schemes.
With the PRS now outstripping the social sector in terms of numbers of tenants - there are almost 8 million private renters - and homeownership increasingly out of reach for would-be first-time buyers, the demand for a long-term quality rental offer has never been stronger. So will the institutions finally be converted and if not, why not?
Only this week, Jake Berry, MP for Rossendale and Darwen and parliamentary private secretary to the housing minister, told a seminar organised by east of England-based housing association alliance East 7 that institutional investment could be a ‘huge opportunity’ for social landlords.
He admitted the government has struggled to convince institutional investors to spend money on homes, however he claimed the reason for this is because investors have no track record. Mr Berry said: ‘It’s chicken and egg. I think we have got to get a few of these [investments] away to show it is model that works.’
Regardless of the demand or social need for rented homes, investors will only invest if they can make money. Typically they need a long-term net income yield of at least 4 or 5 per cent, and investments in the PRS in the UK have often ‘struggled to get anywhere near that’ according to Bill Hughes, managing director of investor Legal and General Property. Mr Hughes is adamant nothing has changed. He says there is a ‘strategic case’ for investing in the sector but adds ‘without question there are barriers to entry’.
Chief among these barriers is the problem of scale. The PRS in the UK is dominated by small-scale buy-to-let landlords. Investors prefer large, single-tenure developments enabling them to benefit from economies of scale and stock which is easier to manage as it is one place.
Mr Hughes says: ‘A lot of concerns investors have are around how you can get exposure to sufficient scale in a sector that is small and fragmented.’
The Montague review’s likely suggestion that the requirement for affordable housing could be waived as a condition of receiving planning permission is controversial but could be one way of providing increased scale and boosting yields.
Nick Jopling, executive property director at the UK’s largest private listed landlord Grainger, says: ‘Yield could be improved by reducing (or in some cases removing) section 106 planning obligations, such as the affordable housing element, as currently happens for student accommodation. Of course a strong case must be made for providing market-let housing in place of affordable housing.’
Michelle Chivunga, policy and practice officer at the Chartered Institute of Housing, who is currently writing a report on the PRS due to be published in August, is more cautious. ‘Waiving affordable housing could increase supply, but at what level of affordability?’ she asks.
Another way to drive cost down for investors is for councils or other public bodies to put in land as equity. Manchester Council is carrying out a pilot scheme under which it has put in land matched by £25 million of investment through the Greater Manchester Pension Fund.
A consortium led by housing association RCT Homes, in Wales, is finalising a deal with institutional investors which it believes will create £1 billion of investment for 11,000 homes. Chinese investors pulled out of the negotiations because they wanted an investment of £2 billion, illustrating problems of scale, but a deal with another group of investors is set for completion in the next six weeks.
Under the scheme, public bodies will put land in, thereby reducing costs and improving returns for investors. Malcolm Wilson, commercial director at RCT, says: ‘The investors will receive an index-linked return [that matches the rate of inflation], which is what they want.’ The landholders, social landlords and the development consortia will all hold equity shares and RCT will guarantee rental incomes.
Costs can also be reduced by buying sites which already have planning permission. Mr Jopling says replacing planning costs could make the build-to-rent model more attractive.
The other thing that investors look for is what Mr Hughes describes as the ‘appearance of permanence’. Institutions need to be confident they can get a stable rental income over the long term - around 30 years - and that governments are unlikely to make drastic changes affecting the sector.
Mr Hughes says cross-party consensus on the PRS is crucial. In this respect at least, there are signs of investors getting their wish. It was noticeable that both Boris Johnson and Ken Livingstone pledged to encourage institutional investment in their London mayoral election manifestos, albeit with little detail.
While investors need certainty around the wider funding environment, they also need to be confident about rent levels over the long term, and they therefore need reassurance that properties will be maintained to a high standard. As a result, Ms Chivunga says there are opportunities for housing associations to manage properties. ‘Investors don’t want to get bogged down in management, they are looking for returns and don’t want to get too involved,’ she adds.
Institutional investment in private rented housing has certainly moved up the government’s agenda as it looks for ways to boost the failing economy. Regardless of the recommendations contained in the Montague review, sceptics could be excused for rolling their eyes at the words ‘institutional investment’ until the money is on the table.