11th June 2013
Should buy to let landlords be worried about proposals made by Ed Miliband in his welfare reform speech? By Jill Insley. “We can’t afford to pay billions on ever-rising rents, when we should be building homes to bring down the bill,” he said. “Thirty years ago for every £100 we spent on housing, £80 was invested in bricks and mortar and £20 was spent on housing benefit. Today, for every £100 we spend on housing, just £5 is invested in bricks and mortar and £95 goes on housing benefit.”
While building by local authorities has ceased up, private landlords have stepped into the breach – providing accommodation at a premium. The average cost of private rents is £30 a week higher than local authority rents – more than £1,500 a year, according to Bill Davies, a researcher at IPPR North.
To combat this situation, Miliband proposes several moves, starting with an overall cap on benefits designed with the help of an independent body “to avoid pushing people into homelessness”.
He also wants to enable local authorities to negotiate directly with landlords over rent. “Labour councils in Lewisham, Liverpool, Leeds, Manchester, Sheffield and Birmingham have all come to us and said that if they had power to negotiate on behalf of tenants on housing benefit, they could get far greater savings than the individual on their own,” he said. “So a Labour government would give councils this power, bringing the cost of housing benefit down.”
But the most effective way to reduce the cost of rent, and therefore housing benefits, is to increase the amount of housing available. Miliband proposes boosting the UK’s property stock by allowing local authorities to keep some of the savings they make through negotiating rent with landlords on the condition that they invest that money in building new homes.
Earlier in the year Miliband said a Labour government would introduce a national register of landlords, and provider greater powers for local authorities to “root out and strike off the rogues”, end confusing, inconsistent and opaque fees and charges, seek to remove the barriers that stand in the way of longer term tenancies.
Landlords will no doubt have very mixed feelings about his proposals. The billions spent on welfare, especially housing benefit, have provoked anger in some, especially when reading stories about large families living in big houses courtesy of state benefits costing thousands of pounds a month.
But the idea of further controls on the amount of rent that benefit claimants can be charged – on top of those already introduced by the Coalition government – will no doubt dismay many.
David Newnes, director of the LSL group, which owns letting agents Your Move and Reeds Rains, points out that landlords have increased rents at a lower rate than inflation in the last few years: “While landlords have increased the supply of available homes since the financial crisis, rents have actually fallen in real terms, compared to other household bills, by an average of 1% a year. Rents have gone up below the rate of inflation in four of the last five years.
“Any change to the role of councils that could disrupt this success should be treated with trepidation.” It could prove to be the final straw, driving some from the housing benefit sector to the private rented sector, says Lucian Cook, head of UK residential research at Savills. This could result in a lowering of the quality of private rental properties available to those claiming housing benefit.
“Government controls on private sector rents would cause buy to let landlords to think twice about letting to those on housing benefit especially as the demographics of those renting widens,” he says. “Where they do remain committed to this sector, they are likely to focus on minimising their repair and management costs to protect their income returns.”
The space left by private landlords could be filled by institutional investors, which are showing increasing interest in the retail rental market.
Until now the £840bn private rented sector has been dominated by small buy to let landlords, with less than 1% owned by major corporate landlords. Savills says that institutional investors have traditionally cited low yields as a major barrier to wide scale investment.
But in the last 20 years UK residential property has outperformed commercial property and other mainstream asset classes on the basis of total returns. Rental income is an ideal match for investors such as pension funds seeking long term value growth.
Cook adds that the HCA Build to Let fund, expanded from £200m to £1bn in the 2013 Budget following huge demand from private and public providers, offers economies of scale that appeal to large institutions. “The government has estimated that the first phase of activity will deliver up to 10,000 rental homes. This in itself will not transform the market,” he says. “But the proof of concept these deals provide – setting out the models that work for all parties – will create a new market for residential property investment.
There is already evidence of large scale investment into the private rented sector by institutional investors, with the recent acquisition by PRUPIM of the Berkeley Homes private rented property portfolio and the tie up between APG Asset Management and Grainger plc on a £349 million portfolio.
However this is unlikely to prove a threat to small buy to let landlords in the short and medium term. “There is the prospect of additional competition from institutional investors, though until and unless that gathers significant momentum, it is likely to be relatively localised,” says Cook.