UK facing critical rental shortage—what next for generation rent?

11334398 - colorful cargo containers used as home by students to solve housing problem

A recent report from the Royal Institution of Chartered Surveyors (RICS) claims that the UK is facing a ‘critical rental shortage’. Rising house prices and pressure in social housing have resulted in a more than doubling of the number of households in the private rental sector since 2001, with projections showing that one in four households will be renting privately by 2025, and for the 20–39 age group dubbed ‘generation rent’, the figures will be one in two. Jonathan Northey, partner at DLA Piper, considers some of the options to address the shortage.

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What solutions does RICS suggest to deal with this shortage? How would the proposed solutions address the issues?

RICS suggests that reversing the current 3% surcharge on second homes would help with the shortage. I don’t think this would address the heart of the issue, as although the 3% surcharge is the clearest policy intending to discourage individual buy-to-let landlords, there have been plenty of other changes over the last few years which are all mounting up to deter individual investors entering the market. Since the 2013 Communities and Local Government Report: ‘The Private Rented Sector’, which appears to have convinced the government that the majority of rental homes should be provided by institutional landlords as opposed to individuals, there have been over 50 new Acts of Parliament which affect the buy-to-let landlord and a further 70 pieces of delegated legislation. These include:

  • the Tenancy Deposit Scheme
  • immigration checks imposed by the recent ‘right to rent changes’
  • the energy efficiency regulations, and
  • the loss of mortgage relief

So simply changing the 3% would not in itself repair all the damage done to the individually owned part of the market.

Will an increase in home building help to solve these issues?

The burgeoning institutional-led private rented sector (PRS)/build to rent (BtR) market is starting to gain substantial traction with a lot of purpose-built rental stock currently in construction. So if these assets, once up and trading, show good returns then more money will be invested and the size of the stock will increase sharply and help solve the issue of lack of supply. Increasing home building itself won't help the rental market unless more homes being built are designated for rent at the outset.

How have changes to stamp duty in April 2016 affected investment in property? To what extent has this added to pre-existing problems?

There have been estimates that approximately 500,000 properties owned by individual buy-to-let landlords would be returned to the market as a result of the tax changes. However, I think the impact has been more felt on the purchase market than on the sales market. If you are already a buy-to-let landlord then you are not affected by the 3% stamp duty land tax hike as you bought before the change, so it is more the removal of the mortgage tax relief which has had an impact. The changes will have undoubtedly led to less rental properties being available, which is adding to the problem, especially with a growing demand for rental homes.

What has been the impact of right to buy in reducing the number of social housing properties available for rent?

The government pledged to replace each property sold under right to buy on a one-for-one basis. However, this has been difficult to monitor as the replacement stock doesn’t need to be in the same area and the commitment is only to replace within three years. However, from the statistics available, it would appear that closer to one in five has been replaced as opposed to one for one. Therefore, this has substantially reduced the social housing stock, at a time when the social housing grant given to registered providers has been radically reduced.

Will proposed changes in the Housing and Planning Act 2016 (HPA 2016) help or hinder the rental shortage?

The starter home duty is not in force as yet, however the intention as I understand it is that this will be paired with an amendment to the National Planning Policy Framework (NPPF) (which has been consulted on, but no government response to the consultation has been published as yet) to change the definition of ‘affordable housing’ to provide that starter homes for sale are ‘affordable housing’ in NPPF terms. As such local planning authorities could secure starter homes under their duty to satisfy any policy requirements for ‘affordable housing’. This could eat into provision of other tenures where the developer argues that the provision of, eg affordable rented as well as discounted starter homes will make the development unviable.

However, the general emphasis on housing in HPA 2016 may assist in bringing forward private rental housing, for example:

  • section 160 (not in force) provides that housing may now form part of a nationally significant infrastructure project (NSIP) where there is some link (either functional or geographic) to the NSIP—it is understood that this may provide up to 500 associated dwellings
  • section 150 onwards (not fully in force with secondary legislation and guidance expected (consultation already taken place on these documents)—planning permission in principle provisions, which are restricted to housing and housing-led mixed development. This is a new way to gain planning permission through granting planning permission in principle either by allocation of a site in a local or neighbourhood plan or brownfield register, or through application to the planning authority. This will establish the principle and quantum of housing development for which technical details consent must then be sought to receive a full planning permission. I have not seen any suggestion at present that housing built under permission in principle would be restricted in terms of tenure, so it could be used to build PRS housing.

Are there any other trends or developments worth mentioning?

Although the government is still maintaining its backing of home ownership, the recent Conservative party conference did acknowledge for the first time the benefits of renting and their backing for an institutionally backed build-to-rent market. There has also been a real change of mind-set in the UK with more people choosing to rent, which leads to demands for higher quality rental accommodation. Therefore the PRS/BtR market is undoubtedly going to take over a much more significant proportion of the rental market in the years to come. However, to provide BtR units at anywhere near the rate required to keep up with demand will require local and national government to incentivise developers to bring forward sites and to make them viable. We are already seeing the Greater London Authority and Transport for London bringing forward public land for PRS development, but more is needed to be done. Establishing a new use class for PRS only would help councils to zone areas where rental units were required. However, this may cause issues with funding. The simplest way would probably be to provide tax breaks for developers who build PRS.

Jonathan is a real estate development lawyer with particular experience in housing and mixed-use schemes. He advises clients on all aspects of the development process, including site acquisition, land assembly, forward funding, options, leasehold and freehold acquisitions and complex multi-party development agreements.

Interviewed by Jenny Rayner.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

 

 

 

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