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

CHAPTER 5 ENABLING GROWTH AND INVESTMENT

ENABLING GROWTH AND INVESTMENT

It is clear that Scotland needs more homes. Our population is growing; the average household size continues to fall; and there will be some existing housing that needs to be demolished and replaced. This chapter sets out how new supply in the PRS might be encouraged and how further investment might be secured for the existing sector.

New Supply in the PRS

Re-adjustment of the housing market has continued since 2008, and has led many to view the current market as the new norm. In this market context, demand to buy is constrained while demand to rent has increased significantly over recent years. This has placed additional pressure on all rented housing.

Demand for home ownership continues to run ahead of mortgage availability. Access to mortgage finance and availability of investment for the construction sector have reduced, and this has led to a lower rate of building new homes for sale.

Although the overall backdrop of the new market norm presents a series of challenges, growth in demand for rented property offers an opportunity for the private rented sector to adapt, developing new business models for the future based on a steady income stream from rents and more gradual capital appreciation over time.

The Montague Report: Enabling Institutional Investment

The UK Government commissioned Sir Adrian Montague to undertake a review of the barriers to institutional investment in private rented homes ^[27] . This examined how best to encourage greater investment in rental properties and explored how institutions might be encouraged to invest in new homes for private rent.

Key actions recommended in the report included: local authorities using flexibility in the planning system to plan for and enable private rental housing development where this meets local need; that a task force be set up to encourage and support build-to-let investment from the private sector; to develop voluntary standards that future landlords would meet and tenants could expect; and that the UK Government provide a number of targeted incentives to encourage the development of build-to-let investment models.

Creating Opportunities for Growth and Investment in Scotland

A role for local authorities

Scottish local authorities have a key role to play if the need for an expanded private rented sector and access to long-term institutional and pension fund investment are to be realised.

Local Authorities are responsible for assessing housing need and demand in their areas through the local housing Strategy process. This includes the level and type of housing required for all tenures to meet local housing need.

Local Housing Strategies are usually undertaken every five years and are aligned to the timescales of Development Plans, which identify a land supply for meeting the housing requirement. The majority of local authorities will have recently developed their local housing Strategy or have proposals in place to do so in 2013.

Feedback on the private rented sector consultative Strategy suggested that some local authorities may benefit from further integrating the role of the private rented sector within their Housing Strategies and related plans for strategic investment.

ACTION 9: Consider, with local authorities, how a better understanding of the need for private rented housing, and its role within overall housing supply, can be developed and integrated into Local Housing Strategies, informing and influencing future investment decisions by pension funds and institutional investors.

Review of the National Planning Framework and Scottish Planning Policy

The Scottish planning system should enable the development of well-designed, energy efficient, good quality housing in sustainable locations and allocate a generous supply of land to meet identified housing requirements across all tenures.

Work is underway to review the National Planning Framework and Scottish Planning Policy, providing more focus on sustainable economic growth and location. Both documents will be consulted upon in 2013.

A role for the construction sector and developers

Many developers continue to face significant challenges in building the new houses that Scotland needs on the basis of the traditional build-to-sell market. The Scottish Government has taken steps to assist our vital construction sector in a number of ways, through support for access to home ownership, to unlocking stalled development sites through the first use in the UK of Government guarantees for housing through the National Housing Trust ( NHT).

It has been estimated that NHT guarantees totalling around £2 million generates around £100 million of investment and supports around 1,000 jobs for every 600 homes built. Homes for Scotland estimate the MI New Home scheme could generate house sales of up to £1 billion over three years and, depending on demand, could create or safeguard around 23,000 new construction jobs and over 650 apprenticeships.

The construction sector itself is actively considering alternatives to the traditional business model. Ideas and proposals have started to come forward from individuals, firms and from representative membership bodies such as Homes for Scotland and the Scottish Property Federation. The build-to-let investment model, or variants of it, appears to have the best prospect for assisting with growth and investment into the private rented sector.

Models like this can combine existing construction expertise with long-term institutional or pension fund investment and have potential to secure the provision of quality housing management services to ensure that tenants get the best possible deal.

A role for investors

Opportunities for institutional investment in rented housing are beginning to emerge. Discussions between the Scottish Government and a range of funds, prospective investors, and their advisers reveal an appetite for investment in the rented housing sector, with certain essential characteristics common to investors' requirements:

• A clear pipeline of projects for future investment, at scale, in order to reach a minimum size of around 1,000 new units;
• Control of the assets either directly, or through a vehicle they have influence over, such as a Real Estate Investment Trust;
• Input to the specification of the homes to be provided to ensure quality of the housing assets;
• Long-term partnering arrangement with a reputable management organisation who can manage the homes on the funds' behalf;
• A predictable and secure level of return on the funds' investment; and
• The need for regulation to protect and ensure the interests of tenants, balanced against the costs involved.

An opportunity for Registered Social Landlords

As anticipated in Homes Fit for the 21st Century, an opportunity also exists for Registered Social Landlords, or their subsidiaries, to position themselves as developers of market rent housing, or provider of housing management services for institutional investor owned housing developments. Funds and institutional investors tend not to want to manage rented housing directly, so there is an opportunity for local authority landlords and housing associations to provide these services.

Support for investment in the private rented sector

Growth and investment within the private rented sector is not just about large-scale, strategic investment in new supply. Existing landlords have investment needs and ideas as well. Work to improve existing private rented property, or enable empty homes to be made available for rent, would benefit tenants. It would also enhance the reputation of the sector and stimulate the economy in local areas.

Bringing Empty Homes Back into Use

It is estimated that there are around 25,000 long-term empty homes in Scotland. This presents a potential source for new private rented housing supply, along with the prospect for increased council tax revenue for local authorities.

The Scottish Government is funding a partnership with Shelter Scotland to help local authorities to work with empty home owners to bring their properties back into use. So far this has involved the use of legislation, for example to allow councils to remove the council tax discount on certain types of property, as well as funding to help renovate and refurbish properties. Other possible actions are being kept under review.

Encouraging investment by existing private rented sector landlords

As property owners, landlords of private rented housing have responsibilities to maintain the physical condition of their properties to reasonable standards, including the Repairing Standard. Additional investment is likely to be required by landlords in order to improve energy efficiency and reduce carbon emissions, and ensure that families and households in the private rented sector receive the best deal possible.

To encourage more landlords to invest in their properties, the private rented sector consultative Strategy identified that more financial incentives could help. This should complement powers to take action when landlords consistently fail to maintain the quality of the houses they let. The incentives suggested included tax incentives, such as reductions in VAT on repairs to property.

This is a power currently reserved to Westminster, but the Scottish Government will continue dialogue with the UK Government on reserved matters where we believe a change in policy is required for the benefit of landlords and tenants in the Scottish PRS.

ACTION 10: Continue to drive actions set out in Homes fit for the 21st Century to encourage growth and investment in the PRS by:

• engaging with landlord representative bodies, prospective institutional investors, pension funds, the construction sector and registered social landlords to identify suitable business and investment models enabling opportunities for investment in new private homes for rent in Scotland; and
• continuing dialogue with the UK Government on reserved matters where a change in the taxation system will stimulate investment in new or existing PRS housing.