A place to stay, a place to call home: a strategy for the private rented sector in Scotland

CHAPTER 2 THE PRS IN SCOTLAND

THE PRS IN SCOTLAND

The private rented sector in Scotland has undergone significant recent change. This chapter examines the profile of the PRS, the drivers of change and the current market context which will influence development of the sector in future.

Commentary draws on the supporting analytical paper 'Evidence Review of the Private Rented Sector in Scotland' ^[3] , which provides information on key statistics and trends.

What is the Private Rented Sector?

The private rented sector is a housing tenure with properties owned and let by private landlords on the open market. Most tenancies in the PRS are let under the assured tenancy regime, which came into effect from 2 January 1989 ^[4] . Within that, the vast majority of lets are Short Assured Tenancies.

There were an estimated 267,000 households in the private rented sector in 2011, accounting for 11% of households in Scotland ^[5] . In some parts of Scotland, the proportion of local housing stock accounted for by the PRS is significantly higher. In Glasgow, the City Council estimates that private rented housing accounted for 19% of all dwellings in 2012 ^[6] .

In the recent past, the sector was viewed as a tenure most suitable for those seeking flexibility in their living arrangements. In this sense, the PRS has been viewed as a 'transitional' housing option on the way to owner occupation or social housing.

Since the credit crunch, the role of the PRS is being re-evaluated by many as a longer-term housing option.

The Scottish Housing Market

As a result of the credit crunch, the Scottish economy experienced a recession during 2008-09 and in 2012, and subsequent growth has been weak. Such economic uncertainty has had a considerable impact on the housing market, where credit is much harder to secure (in particular for first-time buyers), and the 'Buy-to-Let' mortgage market is more constrained.

Home ownership has become harder to access for many. House sales have halved over the past few years, while house prices have remained relatively stable.

Research by the Joseph Rowntree Foundation ^[7] predicts that by 2020, the private rented sector will house 37% of all young people in the UK. The Institute of Public Policy Research ( IPPR) ^[8] also recently highlighted the social impact this market context may have on the current generation of young people.

Growth in the PRS in recent years may be viewed both in the context of the housing boom years between the late 1990s and mid 2000s, and as a consequence of housing market conditions in the post-credit-crunch era. During the boom years, growth was facilitated by the easy availability of credit and 'Buy-to-Let' mortgages. Post-credit-crunch growth has been fuelled by stagnation in the housing market with many 'accidental landlords' entering the sector unable to sell properties.

The effect on the housing market, five years after the credit crunch, has persisted leading many to view this as a period of market re-adjustment that will continue for the foreseeable future.

As well as evident challenges, this may also present an opportunity to create a more sustainable housing market. The pre-credit-crunch period saw rapid growth as part of a burgeoning and volatile housing market, where returns on investment were seen primarily through the lens of capital accumulation from the sale of property. The new housing market context may provide a more solid foundation to build on, with less volatility, where returns for landlords and other investors are realised through steady rental income.

Private Rented Sector Profile

Over the last 12 years, the private rented sector has grown both proportionately and in absolute numbers. Up to 2007, when the social housing sector was reducing, both the private rented sector and the owner occupied sector increased. Since 2007, the private rented sector has continued to grow, while the owner occupied sector has begun to decline. Overall, the private rented sector has more than doubled, from 115,000 dwellings (5% of all homes) in 1999, to 267,000 (11% of all homes) in 2011 (see Table 1).

Table 1: Percentage tenure breakdown of Scottish housing stock

	1999	2001	2003	2005	2007	2009	2010	2011
Owner Occupied	61	64	65	66	66	66	65	64
Social Rented	32	28	26	25	23	22	23	23
Private Rented	5	6	6	8	9	10	11	11
Other	2	2	2	2	2	2	2	2
Total	100	100	100	100	100	100	100	100

Column percentages. Source: Scottish Household Survey

Many of these new PRS properties will have come from transfer of existing stock from other tenures. One of the key challenges for the future is to create a sector where PRS growth will be accelerated by the supply of new housing. Chapter 5 will look in further detail at growth of the PRS.

Tenant Profile

The PRS is a diverse sector with a broad customer base, highlighting its role in meeting a wide range of housing need and demand. It is recognised as providing a good housing option for those requiring flexibility in terms of employment, for students and for those setting up homes for the first time ^[9] . However, in recent years, the sector has also become a housing option for those seeking longer-term accommodation.

Core demand for private rented housing comes from households requiring transitional accommodation ^[10] and living in the PRS is recognised as a life-cycle stage for many tenants ^[11] .

Students form a significant proportion of the tenants in the PRS at 14% ^[12] in Scotland ^[13] . This group accounts for the vast majority of those living in Houses in Multiple Occupation ( HMOs). There has been an increase in the number of students attending further and higher education establishments in recent years, which has increased demand for private renting in particular areas.

The PRS has also been recognised as attracting a 'young professional' sub-market as younger, relatively affluent, households choose to rent privately rather than buy ^[14] .

Many newly formed households, including those following relationship breakdown, also tend to start in the PRS ^[15] .

Immigration has also contributed to increased demand for private renting, particularly because immigrant households tend to be in the younger age ranges, and are more likely to rent ^[16] .

In the post-credit-crunch era, the PRS is likely to continue to provide homes for young people in the longer term. The proportion of the 16-34 age group within the PRS in Scotland has expanded rapidly - from 13% in 1999 to 34% in 2011 - while owner occupation for this age group has decreased from 53% to 40% over the same period.

Assuming that current market conditions persist, the PRS is likely to become the main tenure for this age group. This has led many commentators to coin the phrase 'Generation Rent', young people trying to save for a deposit in difficult economic times to get on the property-owning housing ladder. This is likely to have a significant social impact for this generation.

Part of the challenge set out in this Strategy is to ensure that the sector meets the growing demand for private rented housing from a range of different household types, including providing a suitable housing option for those with children. The PRS now provides a home for 13% of all households with children in Scotland. The proportion of PRS households with children has risen from 20% in 1999 to 27% in 2011, with an estimated 72,000 households in the sector now with children ^[17] .

Landlord and Letting Agent Profile

The majority of landlords in the private rented sector in Scotland own a small number of properties. In 2009, just over 4 in 5 (84%) of PRS dwellings were owned by 'individuals, a couple or a family', while 14% were 'owned by a company, partnership or property trust', and 2% owned by an institution ^[18] .

In terms of the number of properties, around 7 in 10 (70%) of landlords own one property, and the vast majority (95%) between one and five properties. However, the 5% of landlords that own more than five properties own a larger share of the sector, around two-fifths (40%).

It is important to recognise the pattern of relatively small-scale ownership, as this has implications for engaging with the landlord community.

Many landlords, in particular those entering the sector in recent years, might be letting a property they have inherited or been unable to sell. There also remain a significant number of 'Buy-to-Let' landlords in the sector, who invested during the housing boom years and were a significant driver in the sector's expansion.

Evidence from the 2009 Review of the Private Rented Sector suggested that rental income does not necessarily provide landlords with an adequate rate of return, with many expecting a capital gain when they sell a property.

Landlords seeking return on investment from rising house prices, rather than income from rent, are likely to face a significant adjustment in today's market.

In order to achieve the vision and aims that we have for the sector, we recognise the challenges that many landlords are facing and the benefit of supporting and encouraging landlords to invest in their properties to improve overall standards.

Letting Agent Profile

The scale of the letting agent industry in Scotland has grown in recent years and provides a range of property management services to landlords in the sector. The letting agent sector is a varied one comprising solicitors, estate agents and accommodation agencies.

It is estimated that there are around 500 letting agents businesses in Scotland, accounting for around 50% of all annual lettings ^[19] . These businesses are involved in around 150,000 private lettings in Scotland per year ^[20] .

In a sector with such a large number of small-scale landlords, the letting agent industry already plays an important role in providing a wide range of services and assisting the delivery of high quality services to tenants and prospective tenants. Such services can help ensure that a landlord meets their regulatory responsibilities and also enable effective management and maintenance of privately rented properties.