Posted by: Jules Birch24/08/2012
Here’s why I think the housing backlash against the Montague report is being overdone.
From some of the reactions so far, the review group seem to a bunch of pin-striped latter-day Rachmans intent on squeezing out affordable housing and trousering the profits in between slaughtering the first born and unleashing plague, pestilence and famine.
I’ve been trying to reserve judgement until I had time to read the report. I have to say that I now think the people who have most to fear from this are not housing associations and local authorities but buy-to-let landlords and letting agents who will face professional competition. The plague and pestilence people this week were Policy Exchange, not Montague.
The fuss has all been about Montague’s proposal on section 106. The leaks in advance of publication suggested that he would want market housing to count as affordable in planning deals, raising fears that it would squeeze out the funding stream that has underpinned around half of social housing over the last few years (rising to more than 60 per cent in 2008/09). However, I think that stems from a misunderstanding both of what the report says about section 106 and about what is already happening on the ground.
Montague recommends that local authorities should be able to use existing flexibilities in the planning system to enable the development of private rented homes where they can meet local needs. Government guidance should also include a strong steer to specify private rental needs as part of their strategic housing market assessments.
However, the report as a whole argues that the fundamental reason why build for let has not taken off so far is that the income yield is too low. Although the total return on investment in residential has beaten every other kind of property investment over the last ten years, most of it has come from an increase in capital values. Institutional investors want a steady income so they will choose the 5.6 per cent income return and 1.6 per cent capital growth seen in retail over the 3.5 per cent income return and 5.9 per cent capital growth seen in residential. As in the rest of the housing market, the fundamental problem is that house prices and land values are too high. Build to let will only work if land values are based on rental tenure rather than theoretical valuations based on sale.
Montague argues that the section 106 and community infrastructure levy negotiations on build to let sites should take this into account and that the need for affordable housing should be weighed against the benefits build into market rent developments. ‘In many cases, it will be appropriate for authorities to waive affordable housing requirements in relation to schemes for private rental, or to the private rental component of larger schemes also including an owner-occupied component. And local authorities should review stalled sites to engage the potential of private rented units to engage the potential of private rented units to accelerate delivery.’
Much of the criticism seems to be based on the assumption that the report is calling for a general relaxation of section 106 in a way that will damage affordable housing. In fact, it is only calling for a relaxation for the private rental element.
In the meantime, and in a way that has nothing to do with Montague, a general relaxation of section 106 is already happening and is set to become even more damaging for affordable housing. For examples, just see what has happened with the redevelopment of Tottenham Hotspur’s stadium or plans by its former manager Harry Redknapp for a new apartment building in Portsmouth or the surge in the number of councils taking cash contributionsin place of affordable homes.
This is partly a result of the downturn in the housing market undermining the viability of schemes (Tottenham’s classier rival Arsenal, for example, delivered 40 per cent affordable housing on its stadium scheme but that was during the boom). However, it is also the result of a drive by the government to cut ‘red tape’ for housebuilders. As I’ve previously argued, this has made their land holdings hugely more profitable without leading to the construction of any extra homes. The latest developments include a subtle but profound change in the definition of ‘affordable’ in the National Planning Policy Framework and the implementation of previous plans to force the renegotiation of section 106 agreements made before 2010.
Some of this is necessary to make schemes viable and get building started. Some of it is simply giving housebuilders what they want without any guarantee of any more homes in return. It’s hard to predict the overall impact but the chief executive of one major housebuilder, David Ritchie of Bovis Homes, said earlier this week that the result could actually be to reduce the number of completions.
Ironically, this general relaxation of section 106 requirements could also undermine the proposals in the Montague report because it would remove the proposed land value advantage for private renting. What’s bad for affordable housing is also bad for build to let.
All previous attempts to revive institutional investment in private renting have failed, partly because of investor suspicion about the regulatory regime but mostly because of the house price/income return conundrum. The Homes and Communities Agency tried very hard with its private rented sector initiative in 2009 but it found that it could not make development viable without subsidy. Montague’s way round this is for the public sector to bring forward land using build now, pay later and joint venture models to share the risk and the profits and for the government to adopt a broader definition of value for money so that land does not have to be sold for the highest possible price. Once the model is established, the hope is that build to let will have enough of a track record to attract more investors.
It remains to be seen if this will work and recent history suggests it will be an uphill struggle. The Montague report is far from perfect. It is intentionally short but so light on evidence in places that it does not answer some of the questions in its original terms of reference – it is less a ‘blueprint’ than an outline sketch. It is largely silent on conditions for tenants apart from a vague-sounding voluntary code of practice. A doubt remains in my mind about the identity of the institutional investors: will they be pension funds or commercial insurance companies or could they be rather less desirable housing partners? Sir Adrian Montague himself represents the respectable end of the private equity industry but the more rapacious end of the sector seems to have its eyes on housing in the United States and eastern Europe.
However, despite these doubts, the Montague report deserves a chance. For better or worse, the lines between social and private renting are blurring all the time. It would be a tragedy if misplaced criticism about section 106 helped to undermine a desperately needed source of new investment for housing.
From Inside edge
Housing commentator Jules Birch puts the latest news in context