Institutional Investment in the Private Rented Sector Draws Closer
More Build to Let and institutional investment in the private rented sector now looks almost a “nailed on” certainty says David Lawrenson of LettingFocus.com. But it could be the biggest threat yet to the profitability of the traditional “buy to let” model.
Many months ago the government appointed Sir Adrian Montague to look at the barriers to institutional investment in the private rented sector and to see what could be done.
The Montague review followed many earlier failed attempts to tempt institutions to invest in the private rented sector on a large scale. The Homes and Communities Agency launched a “private rented sector initiative” in 2009 but it was dropped when little interest materialised.
For many years the city institutions that run our pensions funds and other investments have looked at the private rented sector with a little envy tinged with a touch of bemusement. They will have seen a lot of private “Mom and Pop” landlords generally do rather well and will have mused that they would like a bit of the action too. However, for a variety of reasons which we have analyzed at other blog posts the figures just did not stack up for them.
In recent years the government, bowing to lobbying from the big investors, made the sector a little more attractive still as a result of changes to the way Stamp Duty Land Tax was calculated and to the rules around Real Estate Investment Trusts (REITS). But still there was no flood of city money into the sector and the bulk of any activity continued to be by the British Property Federation and other institution lobbyists asking for more concessions from Westminster.
And so, Sir Adrian was appointed to lead a review.
What Sir Adrian’s Review May Say
Well, as Sir Adrian is busy putting the final touches to his report, the leaks are now beginning to appear and the thinking is as obvious as a hole in a roof in this most soaking of British summers.
According to leaks reported at Inside Housing and in the other specialist housing press, the Review looks set to recommend major changes to planning and funding rules to favour the private rented sector over affordable homes, with Councils having to change their housing strategies to promote new private rented developments – possibly at the expense of affordable housing commitments.
It also looks set to recommend the government offers loans, rather than grants, to support large-scale new build PRS schemes and for the government to set up a specialist housing task force run by a senior figure from the private sector, to bring forward more public land for private rented sector schemes. (I’m waiting for the call but somehow expect the job will be going to someone with a CBE already under his or her belt!)
Of course, the institutional investors have little interest in small scale developments but rather want the large-scale schemes that offer generous economies of scale sufficient to make their investments work.
But when the big investors looked at previous developments, even when they were of sufficient size, the requirement to have a certain amount of “affordable” housing still meant the numbers did not stack up – well, at least this is what the City says. (Other would argue the numbers were fine and the prevarication was all part of the City’s clever plan to wring more concessions, tax breaks and subsidies out of central government).
When I spoke at the Council of Mortgage Lenders Buy to Let Conference three weeks ago, the proponents for institutional investment in the private rented sector argued that there would be room for small scale “buy to let” landlords to co-exist with the institutional investors.
Indeed they might co-exist, but if institutional investment ever takes off in a big way it will surely reduce the returns to the small scale private landords and, as a consequence, the profits to those who supply the sector, including the mortgage lenders who lend to the UK’s smaller scale private landlords.
We are taking a break. The next blog will be published week commencing 23rd July.
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