Monthly Archives: August 2014

Housing minister defends pace of rental programme progess

Housing and planning minister Brandon Lewis has jumped to the defence of the government’s efforts to promote the private rented sector.

“Thanks to our dedicated Private Rented Sector Taskforce, we’ve identified more than £10 billion in potential investment for homes specifically built for rent,” says Lewis in a letter to the Financial Times, just published. He insists the £1 billion Build to Rent fund, designed to pump prime development of long term rental housing, “is well on track to have contracts in place for up to 10,000 new homes specifically for private rent by March 2015″.

Lewis’s decision to leap to the defence of government initiatives comes after a critical article in the Financial Times, published on July 29. That article noted the failure of a £7 billion guarantee fund, half to support affordable housing development and half for private rented projects. “Whitehall had planned to back investors who bought rented homes, but the structure of its guarantee did not cover the construction period, which is seen as the riskiest part of the housebuilding process,” said the FT.

Emma Reynolds, Labour’s housing spokesman was quoted being critical of the scheme’s failure, while James Coghill of Savills also noted that the market had failed to be inspired by the government plan.

Separately, the Build to Rent funding – a loan from government that will have to be repaid – has seen some take-up and was described by Coghill as a “catalyst”. That initiative has not been without criticism, however, and required developers to bid for a tranche of funds, then wait for due diligence to be completed. The complicated nature of the scheme has, according to other reports, pushed some developers to choose open market sale instead as a simpler exit from housing projects.

In his letter, Lewis insists the original article “portrays an inaccurate picture of our efforts to build a bigger and better private rented sector.”

Housing market slowdown to benefit rental market

The promised slowdown in the residential sales market, and a tightening of the dysfunctional mortgage market, promise to help redress the balance in the rental sector.

Agents are now suggesting that residential sales in the peaky London and south east market are now easing off, with prices stabilising after a long period of growth. An influx of foreign buyers and renewed economic confidence have conspired to push prices skyward, with complaints that local “real world” homebuyers can no longer afford to live near their work. Liam Bailey, head of residential research at Knight Frank, is among those predicting a cooling of the market. He has pencilled in a major slowdown in 2015, with a 4-5% rise in the market annually over the medium term.

Meantime, mortgage availability is tightening. New rules put in force earlier this year demand that banks are far more careful when making mortgage lending decisions. And Lloyds has just announced it will be restricting its mortgage lending for homebuyers.

The slowdown could help encourage more investment in the rental market, albeit this will need to be at values which are sustainable over the long term. Recently, housing association Notting Hill decided to sell 36 new homes in Tower Hamlets, rather than rent them, as previously planned. “We have found that one one particular onsite scheme, due to rising sale prices and build costs against static rents, will not now pass our appraisal criteria.” Local sale prices had advanced 19%, while construction costs had gone up 25% ahead of those expected.

Notting Hill told Inside Housing it was still pressing ahead with private rented homes, where they make financial sense, with decisions on a site by site basis.

Others remain committed to looking long term at the rental market. Richard Evans from Thames Valley Housing Association told the publication: “Unlike the build to sale market which is entirely cyclical, PRS – if done properly – is market neutral. It represents a good cross-subsidy opportunity for landlords that operate in high value areas.”

Affordable rents

One issue is affordability. While foreign buyers may have been keen to put their capital in the safe haven of London, they have discovered that an expensive flat can’t necessarily deliver a great rental return. While sales prices have headed north, the salaries of individuals who rent – many of them young professionals in the London region – have not risen in the same way, and so letting agents report a ceiling on rents.

In some areas, this has led to a crazy mismatch. Bloomberg reported on a Fulham property, which four sharers are renting for £2,600 per month. Sale prices have risen so dramatically, that were the four to contemplate buying the house, their mortgage would be £7,100 per month; Bloomberg bases this on a 25 year mortgage with a 20% deposit paid, and 3% mortgage interest.

Mortage madness

One other issue that will help the rental market, is the availability of mortgage lending to small buy to let investors. Banks and building societies, while slower than ever to approve lending on private homebuyer mortgages, seem happy to lend instead on buy to let acquisitions.

For homebuyers, the lender must now stress test personal finances and income against interest rate rises. Lump sum payments from, for example, pensions are routinely excluded from calculations of the ability to repay a mortgage.

In contrast, the brakes are off when it comes to buy to let. According to brokers, any would-be investor with sufficient deposit can obtain a mortgage, so long as the expected rental is 125% of the interest payment on the buy to let mortgage.

Relief as tax threat for overseas investors is lifted

Proposals to introduce a capital gains tax for overseas property investors have been scaled by the government, to the relief of all those involved in the private rented sector and the wider property investment community.

The plans were put forward for consultation, suggesting government ministers might impose a new capital gains tax on profits made by overseas investors in UK real estate. While the idea did come with some concessions, representations were made to ministers, pointing out the potentially damaging consequences to markets, should overseas investors find the UK to be a less attractive market, as a result of the new tax.

Among those making strong representations was the British Property Federation, which noted that overseas institutional investors are playing a key role in opening up the UK rental property market. Already this year, the Abu Dhabi Investment Authority has backed Fizzy Living with a £200 million investment, for example.  Were the proposals to become law, the future of such investments could be put in danger.

As a result, the government has made clear in an announcement that institutional investors will not be affected by any changes to the rules from April 2015. In a statement, it said: “This should ensure that the extension of CGT will not apply where a disposal of UK property is made by a diversely held institutional investor that holds UK residential property directly, or by one which invests indirectly through an arrangement that is not controlled by a few private investors. The government will draw on existing legislation to achieve this.”

“We are thrilled that the government has recognised that large-scale institutional investment is crucial to increasing the UK’s housing supply, and that imposing capital gains tax on overseas funds could be detrimental to the economy,” said Ion Fletcher, director of policy (finance), British Property Federation. “We are currently facing a housing crisis and it is important that government maintains a stable tax environment to attract overseas capital, which will help deliver economic growth. However, much work remains to be done on the all-important details of the new tax and we will continue to engage with government to ensure that overseas investment is safeguarded.”

“Our consultation response outlined particular concerns about the impact of government proposals for investment in the nascent build-to-rent sector, which has so far relied on overseas institutional investors for a number of significant projects, so this announcement is reassuring in that respect.”