How local authorities can foster investment by corporate landlords in new private rental housing report

The PRS had doubled in size in the last two decades and now houses 1 in 5 of all households in England. It is increasingly the home of ‘generation rent’ and now also houses many households with young children.

The growth of the PRS has largely resulted, not from new construction, but from the transfer of formerly owner occupied and local authority owned housing. Most landlords are private individuals who operate on a very small-scale, mainly investing for capital gains and letting on short term tenancies. Although the PRS now has a much better reputation than in the past, with many dwellings in good condition, located across all types of neighbourhoods, and adequately meeting the needs of those seeking short term accommodation, there are still significant challenges.

Most BTL landlords do not have a long term investment horizon, which creates the risk that the PRS is a very volatile part of our housing supply. Few BTL landlords have the professional knowledge and skills needed to manage their tenants’ homes properly; few newly constructed dwellings are coming into the PRS market; and the sector does not adequately meet the needs of those seeking longer term accommodation. Meanwhile, recent tax changes affecting individual landlords are likely to reduce BTL returns and therefore lead some existing landlords to disinvest and deter new landlords from entering the market.

What is now required is the development of a more modern form of private landlordism that involves corporate owners operating on a substantial scale and investing long-term in purpose designed and built homes that are managed to high professional standards and let on long-term tenancies, but meeting the needs of both short and long term tenants alike.

Many of the barriers that once prevented the emergence of this corporate sector have now been removed. The long term income returns that can be earned from an efficiently constructed and managed newly built sector are attractive to many developers and their funders (including pension and life funds because the long term returns match their liabilities).

Most of the tax and legal impediments to the emergence of this corporately owned PRS sector have been largely removed and the government has set up a special fund to help ‘kick start’ new building for the PRS. But potential investors cannot find the large scale well managed portfolios that they need to make their investments work. Nor do
they want to take on the tasks and risks of creating these new developments themselves. What they want instead is to be able to acquire newly built and fully let portfolios producing the income returns they want.

What is needed to create this more modern PRS is a partnership to take on this ‘development risk’. Residential property companies and local authorities are well placed to do this. Property companies can bring their development expertise and development finance to the partnership. Local authorities can bring their planning powers, their land banks and long term pension funding into the partnership.

Working together, local authorities and property companies now have the opportunity to create a portfolio of newly built PRS dwellings, meeting a wide range of housing needs. This will help local authorities to meet their strategic housing requirements and assist households who are unable to buy their home and are not a priority for social rented housing. A new-build PRS sector constructed through such partnerships will reduce overall housing shortages, thereby helping to dampen increases in house prices, rents and housing benefit payments. By adding to the housing stock in this way, local authorities will be better placed to remove the poorest PRS properties owned by rogue landlords because their tenants will have somewhere else – higher quality, more secure and better managed – in which to live.

To read Sigma’s full report on click on the link below.

How local authorities can foster investment by corporate landlords in new private rental housing report

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