Build To Rent, Power and Political Donations

Build To Rent, Power and Political Donations

Go back to before 1960 and you will have found that big institutions were the main players in the private rented sector.

But as successive governments over-interfered in the sector the big boys found they could no longer make it work. The final nail in this particular coffin was the advent of rent controls in the 1960s. The big property companies and the good smaller landlords all exited the market in droves, leaving only the bully boy landlords of the Peter Rachman ilk to stay in and profit handsomely by bullying tenants. (Some politicians on the left are deluded enough to think that rent controls will work again. Some people never learn from the lessons of history!)

When in the late 1980s, the Conservative government of Margaret Thatcher introduced the assured shorthold tenancy, the situation suddenly changed. Now it was possible to charge a market rent, and, God forbid, even get back possession of your property if you wanted it! (having first given two months fair notice) and without having to give a reason. (Before then, and ever since the 1950s, the only reason under which a landlord was allowed to regain possession was if the tenants did not pay rent for months or if they engaged in severe anti-social behaviour).

And who got back into the sector first?

Yup, it was nimble private landlords, the entrepreneurs of the day. It was not the big boy build to rent institutions and property companies, the latter being presumably still perfectly happy investing pension funds in equities and the bond markets. (In the 1980 and 90s high inflation will have covered up the outrageous fees most institutions still charged to manage funds).

Small Investors, Big Results

And so the small scale private landlord grew the market back up again from its low point in 1989, when it was about 8% of all housing to where it is today – at about 18% of all housing. (Note that this is still miles off the post WW2 level of around 50% of all housing stock, though).

Fast forward to 2009. With the new low inflation environment, the big institutions are now finding it harder to make money by managing funds composed of equities and bonds. And, of course, the fact that their fees are high tends to now show up more too. After all, when inflation (and fund growth) is at 20%, few will notice a fee of 2% for managing a fund. When inflation is less than 5% or even near zero, these chunky fees tend to get more obvious.

And so the big pensions fund and life investors now really woke up, once again, to the possibility of the private rented sector as a way to make money. They wanted to get “back in” again to the market they had abandoned decades before.

The only trouble for them was that the small scale private landlords were doing it so much better and more cheaply than they ever could.

Build To Rent and Costs

Most big-player build to rent institutions  work on an operating cost (excluding finance cost) to rent ratio of about 35 to 40%.

We think the figure for the average private landlord is about 25%. Un-agented landlords, (who do all the investment and tenant management functions themselves without using a letting agent), are able to get the same figure down to between 10 and 15%.

And so, the institutions and builders, led in part by the trade organisation, the British Property Federation (BPF), has been constantly in the ear of governments – of both right and left – to try to make themselves look a better/ nicer proposition than the small scale “Mum and Dad landlords”.

And they have worked hard to get themselves a deal in which they compete better with the small guys.

How have they done this? Well, in the early noughties, under Labour, there had already been various soft loans and guarantees doled out by government to help them under the Private Rented Sector Initiative. But this only went so far.

And so I believe, it was the big institutions, led by the BPF, who then strong armed the government to deliver more, to make the sector more attractive to them (and if the by-product was to deliver some knock out blows to their pesky competitor, the private landlord, then that was all to the good).

And boy did the Conservative government deliver – via an attack consisting of three separate hits.

First off, the “turnover tax” in which loan interest could, from April 2017, no longer be deducted at the borrowers highest rate of tax. This was the biggie, (to be phased in over 4 years), and the one which pushes lots of landlords into a higher rate of tax whilst forcing many others to go from good profits to big losses.

Then there was stamp duty land tax. Landlords (and second home owners) would have to pay a special viagra otc extra 3 per cent levy more than other buyers.

Finally, landlords were clobbered with having to remain on the old higher rate of capital gains tax on property sales. Everyone else would see capital gains tax slashed by 10 per cent, but landlords (and second home owners) would have to stay on the old rates of 18% (for basic rate taxpayers) or 28% (for those on higher rates). So, even those who had had enough of the attacks would get hit hard when they wanted out.

The PRA Wades In

To add fuel to the fire, the Prudential Regulation Authority (the PRA), an arm of the Bank of England, directed lenders to be more tight with lending to landlords, requiring a higher rent to interest calculation to be used (see last blog) and for “portfolio landlords” to face a more rigorous underwriting criteria.

Their argument was that the harsher lending regime reflects, in itself, the tougher fiscal regime that landlords now face thanks to Mr. Osborne’s changes.

You might have thought that the big institutions would be satisfied. But no, not a bit.

I read in “Property Investor News” that they now think they ought to be exempt from the new proposed minimum room size regulations too. Apparently, they think that if they provide a concierge and provide other facilities outside the flats they build, it does not matter if the rooms are small. Mmm, go figure the logic of that one.

And so their requests go on.

They will probably get this and more.

But how do they get all this? How do they get government on their side?

Build To Rent, Power and Political Donations

Well, money talks.

So, if you take a look at the big players in the world of institutional build to let, we can see the same names keep coming up. Names like Telford Homes, Legal & General, M3 Capital Partners (owners of Essential Living), Thames Valley Housing Association (Fizzy Living), Aviva and M&G Investors.

Some of the big players in the world of big build to let (though not all these) make big donations to the political parties to keep them sweet. And, we would argue, to also get their way when policy is formed.

The buy to let landlords have no such power. They are small in number and most are not even members of any representative organisation. Up against the likes of the British Property Federation, with its massive lobbying power and members’ political donations, it is hardly a fair fight.

But that does not matter. For all Teresa May’s kind words, it is the big money that counts – and what big businesses want is what matters most – and is usually delivered in the end.


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