Making renting right

Posted by Guest in Portfolio management category on 28 Sep 16

Property Sector

The uncertainty of Brexit is going to make house building slow and the UK’s chronic undersupply of new homes worse. It’s another chance to think about how to improve the rental market. One solution may be to make it easier for long term investors to build properties to rent.

Since the referendum, the share prices of some of the major house builders are down by more than 25%, the construction Purchase Managers’ Index has shown a marked slowdown and the NHBC* recorded that new sites being registered for development were down 8% in the year to May.

The ‘housing crisis’ is one of the defining political issues of our time.

All of this points to less new housing and that, in turn, spells bad news for the prospects of the UK’s chronic housing undersupply. The ‘housing crisis’ is one of the defining political issues of our time. So what could the government do to help create more new homes if house builders won’t build?

A good place to start would be to incentivise long term investors into building high quality rental properties. These investors are happy to do it. The properties could provide durable income streams over a long period. Such professional landlords will be good for tenants. The problem is that investors don’t have the safeguards they need in order to take on the risk of building these blocks.

The incentive could come in the form of a specific Use Class Order for private-rented properties. These orders are created by planning authorities to give tenants and owners the assurance of what a property will be used for. Critically, it makes it onerous to change from one use to another. ‘A1 Shops’ are distinctly different to ‘A3 Restaurants and cafes’; ‘B2 General Industrial’ is quite different to ‘C1 Hotel’, and so on. Setting a use class for private-rented property could give long term investors the assurance that their investment is secure and tenants’ knowledge that they can stay and create a home.

The government could go further and establish a framework that allows lease contracts to be offered where rents are perhaps long term and inflation linked. This would create a stable market that long term investors would feel more comfortable committing capital to. Indeed, longer tenancies are much better for the investors.

Professionalising the private rented sector can work in the UK as it has in other countries. Research from countries like Germany suggests that professional landlords will compete hard to provide tenants with the best services and accommodation. The slavish desire of British people to own property would subside if renters had better quality services and accommodation provided by professional landlords. Investors in residential, in turn, would need to adjust their mindset to seeing the benefit of income quality and its growth as opposed to just chasing capital growth at all costs.

There’s an opportunity for the government to change the nature of the debate about housing if they’re prepared to think a bit laterally. An Englishman may not need to own his castle after all. But we have to make the prospect of renting his castle appealing. And there’s no reason why that can’t happen.

*National House Building Council


The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested.
The views expressed should not be construed as advice on how to construct a portfolio or whether to buy, retain or sell a particular investment.
Issued by Aberdeen Asset Managers Limited. Authorised and regulated by the Financial Conduct Authority in the United Kingdom.

The views and opinions contained herein are third party and may not necessarily represent views expressed or reflected by Willis Owen.

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