Private rented homes – an increasing alternative to home ownership?

The government has recently published an independent report written by Sir Adrian Montague, who was asked to undertake a review of the barriers to institutional investment in the private rented homes sector.

Sir Adrian is possibly the busiest city grandee there is, having chaired or held directorships in Friends Provident, Cross Rail, British Energy, Anglian Water Group, 3i and recently announced as the new head of the Governments Green Investment Bank).  He was also advisor to Gordon Brown for some 4 years and has also worked as Head of Partnerships UK, a Treasury body whose object was to promote PFI projects and ensure that they operated effectively. 

The Review was commissioned because of the rapid growth in this sector in recent years and the "dominance of small landlords where just 1% of private landlords owned more than 10 properties". 

The Review needs to be seen alongside the government's Housing Strategy published in November 2011, which sets out the Government's plans to boost housing supply.  The preface to the review suggests that Sir Adrian increasingly took into account the contribution that house building can make to economic growth. 

This, with mortgage lending continuing to prove problematical, it is easy to see why the Government would wish to find new participants in the housing market particularly those that may have their own source of funds rather than being reliant on bank finance.  The Review also falls against a backdrop of a huge growth in the number of households being created each year, while new build house completions have fallen.

The Government asked Sir Adrian to consider what evidence there is about the ability of the private rented sector to respond to future demand and also the impact any failure may have on labour markets and growth. 

It would seem that the Government anticipates that a lack of accommodation available to rent privately may hinder economic growth through making it difficult for people to relocate to other areas to find work. 

Clearly, this could work at two levels – both because suitable housing might not be available in an area where work is available and also because those who own houses may be more resistant to relocating elsewhere in the UK (or, indeed, the European Union) to find work.

The Government also commented that the level of home ownership is much higher in the UK than many other countries which have a well-established letting market and where homes are let on longer term tenancies with more sophisticated arrangements dealing with such issues as breakdowns in fixtures, property management and so on. 

The Review called for evidence from interested parties and concluded that there are some obstacles currently restricting the amount of institutional investment into the private rented sector.  However, it did not see those obstacles as insurmountable and recommended that:

1. Local Authorities should use recent relaxations in the planning laws to encourage the development of more homes specifically intended for private sector rental

2. The Government should maintain its commitment to release public sector land, with capacity for 100,000 homes by 2015

3. The Government should provide incentives to stimulate the development of new business models to allow this investment to take place

4. The Government should establish a dedicated "Task Force" to work closely with the Government and related organisations to help overcome some of the barriers

5. Clarify what prospective tenants can expect from new-build rented homes, although the Review did fall short of recommending that some kind of "kite mark" or quality standard is developed.

All of the recent indications from Government are that they wish to stimulate the house builder market and consider encouraging institutional investors such as pension funds to buy newly built homes and rent them privately as one of the ways that they can ensure there are buyers for these newly built homes.  Nonetheless, the Review does not examine (let alone address) in any way the social impact of encouraging and incentivising reduced home ownership and increased renting. 

It may be that the Government is simply trying to address the difficulties in getting onto the ownership ladder, by proposing something radically different instead.  However, the attitude of "an Englishman's home is his castle" is widely held and the Government may find people resistant to moving away from personal home ownership when one considers the emotional attachment to where one lives and the security that home ownership can provide. 

Thornton Allen is a partner in the Commercial Property Department of Michelmores LLP.