Pull together to solve the housing crisis

The Renters (Reform) Bill is the latest in a line of commendable attempts to protect tenants in the current volatile rental market. However, with a myriad of stakeholders to satisfy, the rental crisis is not an easily solved problem. Could this latest development provide the balance needed? The private rental sector is a critical part of the housing sector, and although the build-to-rent element of PRS has grown massively over the past few years – largely thanks to institutional investment – it still only accounts for approximately 1.5% of the market. This small share means the rate of supply of new rental housing stock has not kept up with demand. The result is that rental prices have continued to rise as demand has outstripped supply. Unfortunately, it is not just a problem for the rental sector; there is also a chronic undersupply of “for-sale” and affordable housing. Many policies have been brought forward to change the dynamics of the housing market. For example: increasing environmental standards, removing tax breaks to increase the supply of for-sale housing, the use (in Scotland) of rent controls and tweaking council tax rates for second homes. The aim has been to strike a balance between helping residents and not jeopardising investment. Valuable lessons It has been a long journey so far, but the industry has learned many valuable lessons. Penalising landlords does not result in lower rents or better accommodation: Landlords have faced rocketing interest rates, tax hits and increasing environmental and other regulatory requirements, all in fairly quick succession. This perfect storm has resulted in approximately 300,000 PRS dwellings being lost in the past five years in England – roughly equal to the housing supply in Manchester and Liverpool combined. Diminishing stock leads to constrained supply. Constrained supply means greater demand. Greater demand means rising rents. The PRS has a critical role to play in bringing balance to housing: The PRS provides around 4.5m homes out of a total of 25m in England. It should provide accommodation for (a) transient workers (thereby increasing workforce mobility), (b) those who do not want to buy, and (c) those who cannot afford to buy. Falling levels of rental supply (and therefore rising rents) make it very difficult to achieve these three key aims. And while the rental sector does not consider either housebuilders or affordable housing as a risk to their business, the price of all three are affected by the other. Encouraging institutions to invest in housing is of paramount importance: Using the financial might of big institutions is a fast way of raising the capital for new housing. However, these kinds of investors need a lot of political and regulatory stability to convince them that conditions for investment are right. It is therefore very important not to rely on a succession of short-term or ever-changing fixes as these often have adverse unintended consequences. Rent caps need to be delicately balanced to avoid harming supply: Scotland is an excellent example. Institutions invest in housing as a long-term play, looking for stable 20 to 30-year income. Some investors who were considering investing in Scotland have left the Scottish market until rent caps are abolished. There is an acceptance that residents need help, and rent caps appear to assist them, but it may lead to a lack of new supply, further increasing demand. Renters’ reform One of the main aims of the Renters (Reform) Bill is to give tenants the certainty that they may remain in their property and that landlords cannot terminate their tenancies on a no-fault basis on just two months’ notice. Many build-to-rent landlords already offer two or three-year tenancies with stated calculable rent reviews and with residents having a right to terminate early. Build-to-rent landlords go for occupancy and community. This is completely different to those unscrupulous landlords, who may be more interested in driving up rent than building communities. One of the major concerns of the Renters (Reform) Bill is how future rents will be determined. What will prevent tenants from disputing all rent reviews? How will the courts be able to cope with the likely influx of cases, whether concerning rent review, or termination of tenancies? Is it right that landlords are likely to have to bear the cost of proving the level of rent in rent review? Final thoughts Ultimately, more stock of every flavour is required. How that will be achieved is unclear. What is clear is that it is not right to rely on housebuilders to undertake the massive building programme needed. Housebuilders owe a duty to their shareholders to maximise profits. Politicians owe a duty to their constituents. Landlords have to contend with the same market conditions as their tenants. And institutions have to satisfy their fiduciary responsibilities. As a nation we need to sort out the cause, not the effect. In addition to protecting tenants, we need a faster and smoother planning system, a long-term investment plan for affordable housing, encouragement and incentives for institutions to bring their financial might to bear and a clear, achievable long-term goal. Only by everyone pulling together will we have the housing market we need. Cyrille West is a partner and head of build-to-rent at Eversheds Sutherland Photo © High Level/Shutterstock