“Crisis”, “challenge”, “disaster” – some of the words used to describe the current housing in England. Whether informed participants agree with this description or not, in part, depends on which side of the fence, possibly quite literally, they sit. What is clear is that supply has consistently failed to meet demand – even at the easy-credit fuelled peak of the market, just over 207,000 new homes and dwellings were built, still substantially short of the 220,000-250,000 new households being formed every year. Since then the rate of building has fallen by over 30%.
The consequence of this is clear to see. Prices have risen, affordability has been stretched and the housing benefit bill has more than doubled over the last ten years. Home ownership, for many, has ceased to be a realistic dream. More and more families are no longer able to buy, but equally are not deemed in sufficient need to be eligible for social housing. For many households, renting is now the long term solution to meeting their housing needs and no longer just a temporary stepping stone. According to data published by DCLG, 1.6 million more households were living in the private rented sector in 2011, compared to ten years earlier. Since then this figure has continued to grow, and by 2025 the proportion of households in the private rented sector is forecast to grow by a further 20% from 2011 levels.
Going forward, with development finance more limited, and grants for developing affordable homes around only a third of previous levels, it seems unlikely that traditional models of housing development will be up to the task of meeting demand. What is required are new ways of working, and in particular partnership approaches which better share risks and returns among the many parties involved in the supply of housing. Efforts need to be focused not just on new developments, but also on making better use of existing buildings – over 300,000 homes remain long term empty, there are more than 400,000 empty flats above shops and the decline of the high street has left countless numbers of commercial properties empty and ripe for converting back to residential use.
For the private rented sector in particular, concerns over unscrupulous landlords, poor living conditions and absence of security of tenure, while often overplayed, can still be justified. The private rented sector remains dominated by small scale landlords; 95% of all landlords manage less than five homes, and represent over 70% of all property, leading to issues in terms of variable quality and service. Accepting that for some families the private rented sector is likely to remain the only long term tenure option, there is a pressing need to develop at scale purpose built, well managed, decent and affordable rented accommodation, with better security for tenants and more transparent rental increases.
The Montague review in 2012 looked at ways to address the barriers to attracting large scale institutional investment, such as pension and life assurance funds, into the development of new private rented sector accommodation. The report quite rightly highlighted the potentially important role of housing associations and other housing providers with clear social missions. They can help increase the supply of private rented sector accommodation, both as developers but also as the natural asset managers of this stock, given their experience of offering a professional service to tenants. To date, while some of these organisations have already entered the private rented sector market to a limited extent, either as an extension of their social mission or just as a means to cross-subsidise social housing, for the vast majority this remains a significant and untested new challenge.
So what are the key challenges in providing a fit for purpose private rented sector at scale, which can meet the needs of what by some has been dubbed “Generation Rent”? Over the last eight months Social Finance has been working in partnership with the Resolution Foundation, five registered providers and one housing charity – the Dolphin Square Foundation; Derwent Living; GreenSquare Group; Great Places; Home Group; and Plus Dane – to look at exactly this. The work identified five key challenges in developing the private rented sector as a new unique asset class, including: 1) identifying locations with long term rental demand; 2) designing a purpose build rental product; 3) accurately identifying costs of development for a bespoke product; 4) determining management costs and 5) estimating the impact to management and maintenance from offering longer term tenancies. A recently published report (available here) discusses each issue area in more detail, and we hope this will encourage further debate amongst those involved and interested in developing the private rented sector for the benefit of families and individuals who will rely on it to meet their housing needs over the coming years. Later in the year Social Finance and Resolution will publish the next phase of this work, analysing the potential to develop a financing model for institutional investment for a national portfolio of build to rent units aimed at low to middle income households.
By Tim Rothery, Associate Director at Social Finance