THE FUTURE OF LONDON S PRIVATE RENTED SECTOR (PRS) SPRING 2015

Transcription

1 THE FUTURE OF LONDON S PRIVATE RENTED SECTOR (PRS) SPRING 2015

2 THE PRIVATE RENTED SECTOR (PRS) MARKET ALSO REFERRED TO AS THE MARKET RENTED SECTOR HAS GROWN SIGNIFICANTLY OVER THE LAST TWO DECADES, WITH NOTICEABLE GROWTH IN THE LAST FEW YEARS. The most recent estimates note that PRS comprises 18% of the housing stock in England, and forecasts suggest it may be more than a third by In London the situation is even more pronounced, with up to a quarter of households in the PRS currently. THERE HAS BEEN THE INCREASING DIFFERENTIAL BETWEEN HOUSE PRICES AND INCOME, WHICH HAS STEADILY GROWN OVER TIME, ESPECIALLY IN LONDON, AND MADE HOUSE-BUYING INCREASINGLY DIFFICULT. This growth has been driven by a number of factors, not least regulatory reform and structural change. This includes the influence of the right to buy policy on releasing council housing stock into the private market, the 1988 Housing Act, which abolished rent control and created short-hold tenancies, and the introduction of buyto-let mortgages in In addition, however, there has been the increasing differential between house prices and income, which has steadily grown over time, especially in London, and made house-buying increasingly difficult. Part of the reason for the growth and interest in the sector is the opportunities and benefits that it now offers. These include: Increasing housing supply Increasing quality standards Increasing economic growth Providing worker and lifestyle flexibility. Securing long-term income streams and diversifying risk Securing housing for local people Supporting local authority policy ambitions This report assesses the opportunities associated with the re-evolved and newly-emerging Private Rented Sector in London. The aim is to explore the scale, value, benefits and opportunities within this sector in the London context, and what needs to be done to encourage or facilitate it. A particular focus is on how local planning authorities and major landowners can engage appropriately and successfully in the sector.

3 PRS ACTIVITY IN LONDON BUILD IT AND THEY WILL COME The most robust picture on the status of institutional based PRS schemes in London is provided by Molior, who monitor schemes with more than 20 units from pre-planning to completion. Over the last five years approximately 14,500 such PRS units have come forward in London (as at end November 2014), although institutional interest in this sector within London has been increasing over the last decade. The breakdown by planning status is illustrated in Figure 1, which shows that almost 12,700 PRS units have been delivered or have been approved (although some schemes may have subsequently been lost from the PRS sector). A further 1,800 are at various pre-planning stages, although Molior note that just over 1,000 units have entered the planning approved or construction stage since November The distribution of recent institutional-quality PRS schemes across London reveals a number of interesting patterns, and the levels of activity by borough are illustrated in Figure 2 on the next page. Almost 70% of the PRS units are located within the Inner London boroughs, with a particular emphasis to the East. Newham, Southwark and Tower Hamlets have been the primary focus of activity and contain over 80% of the Inner London stock. Almost 4,800 PRS units are located in the Outer London boroughs. However, Croydon dominates as the focus of activity in this area, with over 1,000 units with planning permission or under construction. This includes two schemes Delta Point and Concord House that between them provide approximately 530 PRS units. Nevertheless, there is a spread of activity across the boroughs, if not to the same extent as at Croydon. As a general trend, the new schemes i.e. those going through the planning process - tend to be larger than those with planning permission or already built-out. The average PRS element has increased from approximately 90 PRS units per scheme for existing schemes, to approximately 175 PRS units for those applying for planning permission or at pre-planning stage. This may well reflect growing confidence in the take-up of units, although the influence of plot size and density cannot be ignored. The average rental values of PRS units is summarised in Figure 3 on the next page, which is based on evidence from across the portfolio of PRS schemes, including asking rents and actual rents. This suggests that 1-bed units average 1,460 per current month (pcm) across London as a whole, with Inner London values at 1,570 pcm and Outer London at 1,150 pcm. In very broad terms there is a 20% premium on 2-bed units compared with 1-bed units, and a 30% premium on 3-bed units compared with 2-bed units. However, care is needed in viewing these average rental values. Recent research by Molior has identified the achieved rents for PRS schemes. This suggested that the London average for 1-bed units was 15% above the full portfolio average rent, whilst for 2-bed units the average rent was 20% above the full portfolio average rent, and for 3-bed units 40% above full portfolio average rent. In other words, what is actually being achieved can be well above the reported or published figures, highlighting the demand for this type of product. The number of developers and companies active in the PRS market has been growing as the market has developed, with over 50 delivering institutional quality schemes. In addition, a growing element of the PRS supply pipeline is emerging through office-to-residential conversions just over 10% according to Molior. Of particular interest is the increasing involvement of Housing Associations and local authorities in the PRS sector. L&Q and Notting Hill/Foilo London, for instance, have over 1,300 units between them. Whilst it is difficult to be precise about the scale of public body involvement in PRS because of joint-venture arrangements, getting on for 20% of the PRS stock is backed by Housing Association or local authority interest. Figure 1 Development Status of PRS Schemes in London Source: Molior and Carter Jonas Pre-Planning Planning Application Planning Approval Under Construction Complete 0 1,000 2,000 3,000 4,000 5,000 6,000

4 Figure 2 PRS Scheme Distribution in London Source: Molior and Carter Jonas BARNET ENFIELD More than 1000 Units Units Units Less than 100 HARROW HARINGEY WALTHAM FOREST REDBRIDGE HAVERING HILLINGDON EALING BRENT CAMDEN CITY OF WESTMINSTER ISLINGTON CITY OF LONDON HACKNEY TOWER HAMLETS NEWHAM BARKING & DAGENHAM KENSINGTON & CHELSEA SOUTHWARK GREENWICH HOUNSLOW HAMMERSMITH & FULHAM RICHMOND UPON THAMES WANDSWORTH LAMBETH LEWISHAM BEXLEY MERTON KINGSTON UPON THAMES BROMLEY SUTTON CROYDON Figure 3 PRS Rental Values Source: Molior and Carter Jonas Average Monthly Rent by Unit Size Scheme Location 1-Bed 2-Bed 3-Bed London Average 1,460 1,765 2,290 Inner London 1,570 1,850 2,350 Outer London 1,150 1,465 1,500

5 Figure 4 PRS Opportunity Locations Source: ONS, VOA and Carter Jonas PRS Growth Potential BARNET ENFIELD High Strong Good Limited Less HARROW HARINGEY WALTHAM FOREST REDBRIDGE HAVERING HILLINGDON EALING BRENT CAMDEN CITY OF WESTMINSTER ISLINGTON CITY OF LONDON HACKNEY TOWER HAMLETS NEWHAM BARKING & DAGENHAM KENSINGTON & CHELSEA SOUTHWARK GREENWICH HOUNSLOW HAMMERSMITH & FULHAM RICHMOND UPON THAMES WANDSWORTH LAMBETH LEWISHAM BEXLEY MERTON KINGSTON UPON THAMES BROMLEY SUTTON CROYDON IMPLICATIONS FOR LONDON OPPORTUNITY KNOCKS? The relationship of the various PRS schemes to the existing stock of housing in each borough has been analysed. This looks at how far the identified PRS schemes increase the stock of private rented and social housing. Given the scale of PRS development that has happened in Croydon, Newham, Southwark and Tower Hamlets, it is not surprising that they have added considerably to the rented stock. In the case of Newham the various PRS schemes have increased the rental stock by over 14%, and by 5-6% in Southwark and Tower Hamlets, and by 3.5% in Croydon. There have been particular factors that have driven activity in these locations. In the case of Newham this is strongly influenced by the re-developed former London Olympics site East Village scheme, whilst Tower Hamlets has been responding to an over-hang of employment land so has provided a suitable land pool. The regeneration of South Bank has also added to the attractiveness of Southwark as a residential development location. In fact, housing demand across the boroughs is likely to be a key driver of demand for PRS schemes. This has been used to develop an indicative assessment of PRS opportunity potential across the London boroughs, along with analysis of average private rented sector rents and tenure breakdown. The results are summarised in Figure 4 in terms of the degree of development growth potential. It is important to emphasise that the results are strategic assessments at borough-wide level, and aim to provide an indication of potential. In practice, site specific and individual development characteristics will decide an opportunity. Nevertheless, the results provide a starting point for investigation. Greenwich, Southwark and Tower Hamlets are expected to be high growth opportunity locations, driven particularly by the sheer scale of housing provision required in these areas, with Hackney, Islington and Lambeth likely to see strong growth opportunities. Southwark is more challenged in terms of potential supply to meet demand, which may make securing sites for PRS more difficult. Croydon, Kensington & Chelsea, Lewisham, Newham, Wandsworth and Westminster also present good growth opportunities. At the other end of the spectrum, boroughs such as Bexley and Bromley may have less growth opportunity potential for PRS schemes. In part this is associated with lower housing demand levels, but also reflects lower levels of renting generally in these areas and relatively inexpensive private-sector rent levels.

6 CONCLUSIONS THE KEYS TO SUCCESS THE DEVELOPMENT OF PRS SCHEMES WILL NOT SOLVE THE HOUSING SHORTAGE IN LONDON. ONLY BUILDING SUBSTANTIALLY MORE HOMES WILL DO THIS. However, the PRS can play an important role in contributing to increased housing supply, as well as addressing pricing issues in the housing sector. This may be as a bridge or transition for some people between the current levels of unaffordability of buying property in the capital and a longer-term rebalancing of the houseprice/affordability ratio. What appears critical to securing greater levels of PRS provision ideally as a net addition to housing supply - is greater institutional interest, support and activity. PRS meets many of the requirements of the institutional sector in terms of providing secure, predictable revenue-based returns, although there are matters relating to provision of a suitable track record for funds to benchmark investments that need to be tackled. However, the fact that only 1% of landlords in London manage more than 10 units is constraining potential, as this limits investment in the sector and results in very variable quality, reinforcing the need for greater institutional investment. We believe there are a number of ways in which institutional-quality PRS activity could be stimulated further in London. These we have grouped into three categories: financing, planning and engaging. Inevitably, the boundary between them can be fuzzy, but they give an indication of the emphasis of how things could be improved. FINANCING Subsidise supply rather than demand. Incentivise landlords to develop PRS schemes through various forms of tax breaks, off-set against income, capital gains or other depreciation. This could be through legally-binding rent covenants which guarantee a scheme remains in the rented sector for an agreed minimum period. This would help ensure more certainty of delivery of PRS schemes, rather than developers opting for a sale-option once a development is complete. Enable public sector equity and generate additional public sector income streams. Review the best consideration requirement by public sector landowners in order to avoid the preference for a sale option. This could be in the form of the local authority, or other public body, taking an equity stake through land contributions and relaxing the best consideration requirement. This would enable local authorities to use rental income from the PRS scheme to provide a new finance stream, often secured on the back of under-utilised land. Encourage pension fund support. Pension funds are an ideal source for funding given their investment periods (25 years+), but are risk-averse and the lack of investment track record in the PRS sector is a barrier to more active engagement. However, there are potential targets with Aviva and Legal & General exploring this sector given M&G s planned 1bn investment in the sector. Support Tenants. The recent government support for a tenant deposit loans scheme will help people access PRS accommodation by helping to overcome rental deposit requirements, which can be significant for people with lower incomes. The scheme should be supported across the public and private sector. More radical regulatory reforms have been outlined by Civitas to increase supply and protect tenants. This includes creating indefinite tenancies within which freely negotiated rents could only increase by inflation, but with new-build PRS properties being exempt from this measure in order to stimulate new housing supply.

7 PLANNING Build upon the GLA Housing Zones Initiative. The Mayor of London has confirmed proposals for 20 Housing Zones which aim to deliver 50,000 homes through a 400 million joint funding-pot with Government, and which have a significant role for the PRS. These areas are likely to be a particular focus for PRS activity and offer a number of valuable incentives, but it will be important to ensure the rest of London can secure increased elements of new rented stock. Consider a New Tenure Class. The Montague Review suggested a new market-rent Use Class. Such changes may eventually come forward, but meantime pilot projects could be developed within London by the GLA and boroughs to provide this in an indirect or shadow form. This could involve reducing or waiving S106 or affordable housing requirements for developments that guarantee remaining in the PRS sector for minimum periods. The Grainger and Bouygues development that forms part of the Hallsville Masterplan in Canning Town is an illustration of this, with PRS use guaranteed for eight years. THE MAYOR OF LONDON HAS CONFIRMED PROPOSALS FOR 20 HOUSING ZONES WHICH AIM TO DELIVER 50,000 HOMES THROUGH A 400 MILLION JOINT FUNDING-POT WITH GOVERNMENT, AND WHICH HAVE A SIGNIFICANT ROLE FOR THE PRS. Pilot Mixed Rent/Tenure Provision. Agreements could be established to ensure that a proportion of PRS units on a scheme are set-aside for reduced rents, or a blend of sales and rental properties offered. Shared ownership options could also be developed, enabling people to stair-case into the home ownership. ENGAGING Maximise the potential of Housing Associations. Housing Associations could play an important role in expanding the PRS sector in London. The G15 (the 15 largest registered providers in London) control over 15% of rented stock in London. Increased involvement by such providers in setting-up PRS portfolios would help in cross-subsidising their core renting activities and greater coordination with local planning authorities could maximise opportunities. Some are doing this, such as L&Q, but more could. HOUSING ASSOCIATIONS COULD PLAY AN IMPORTANT ROLE IN EXPANDING THE PRS SECTOR IN LONDON. THE G15 (THE 15 LARGEST REGISTERED PROVIDERS IN LONDON) CONTROL OVER 15% OF RENTED STOCK IN LONDON. Promote Design Guidelines. A key benefit of the institution-led PRS market is in terms of raising standards. This can be reinforced through promoting and endorsing agreed design standards and guidelines across the sector. Encourage Landlord Licensing. Newham have introduced mandatory licensing for landlords. Concerns have been raised about the potential downside risks of a mandatory approach, but a voluntary landlord licensing code is likely to be a competitive benefit to the PRS, such as the London Landlord Accreditation Scheme and London Rental Standard.

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