2 Private investment |
13. Given current limitations on both debt finance
and public funding, there is inevitably a need to look to other
sources if we are to raise sufficient finance to meet the country's
housing needs. This chapter will consider the potential for investment
by large financial institutions, both in the private rented and
housing association sectors. It will then examine possible vehicles
that could be used to channel investment into rented housing.
Investment from pension funds
and large financial institutions
PRIVATE RENTED SECTOR
14. Some of our evidence suggested that large
financial institutions and pension funds could make a significant
contribution to new housing in the private rented sector. Ian
Fletcher, Director of Policy (Real Estate) at the British Property
Federation considered that the conditions were "all there
for large-scale institutional investment in the sector",
adding that it was "now or never".
The Resolution Foundation, an independent research and policy
organisation, discussed the potential for a "new approach
to build-to-let development using institutional investment",
arguing that such an approach could help to meet "the housing
needs of individuals and families on low-to-middle incomes who
are unable to buy a home in the medium to long term".
15. Not all witnesses were so enthusiastic about
the prospect of "build-to-let" investment. Paragon Group,
which provides mortgages to investors in the private rented sector,
warned that investment from institutions might not produce the
right type of housing:
The kind of properties that institutional investors
are likely to invest in through "build-to-let" schemes,
such as two-bedroom flats, in large purpose-built developments
are unattractive to tenants and there is already an over-supply
of this type of property caused by pre-credit crunch property
developer and investment club activity.
The housing charity, Shelter, said that institutional
investment "would clearly be welcome, if it can provide additional
sources of financing for high quality homes, but we should not
expect a revolution in housing finance to come from this source".
It added: "Even in countries with much larger private rented
sectors and significant institutional investment in housing, it
remains the case that the bulk of landlords are small scale investors,
and particularly individuals, much as in the UK".
16. In Laying the Foundations, the Government
announced that it would be "putting in place an independent
review of barriers to investment in private homes for rent".
Subsequently, Mr Shapps, the Minister, announced that this review
would be led by Sir Adrian Montague, non-executive chairman of
the private equity firm 3i.
On 21 February 2012, Sir Adrian issued a call for evidence. He
set out two "fundamental questions" upon which he wished
to focus: "Will the changes that the Government has introduced
go far enough to generate significant new flows of investment?
And, if not, what can be done to accelerate things?"
17. Professors Tony Crook of Sheffield University
and Peter Kemp of Oxford University, discussed attempts over the
last 30 years to bring in institutional investment. They considered
that successive governments had sought to adapt "existing
schemes designed for other purposes" rather than bringing
forward initiatives "with the specific needs of private renting
in mind"; moreover, governments had not addressed "the
fundamental barriers preventing the emergence of larger companies
and institutional investment".
In the view of Nick Jopling, Executive Director of Property at
Grainger plc, the
three main barriers were "scale, suitability of stock and
yield". He explained:
An institution wants to invest in scale; it is not
interested in buying buy-to-let property. There is no stock for
it to go and buy. There are no portfolios of rental stock for
it. There may be some distressed portfolio, but they are not interested
in that, because there is often a reason those properties are
distressed in the first place. Suitability of stock: we address
that through building purpose-built stock for rent. That is the
multi-family housing US model. And then the yield. Yield has always
been a challenge, because the cost of entry, against the rent
and the net rent that comes off the bottom, has always been too
high. In particular in London, the net yield is so small, so one
has to deal with the cost of entry, and that is the cost of construction
and the land.
Alan Benson, Head of Housing and Planning at the
Greater London Authority, expressed a similar view, saying that,
for him, "the yield question" was "the absolute
crux [...] of why institutional investment has not got off the
ground in the UK".
18. Grainger plc's submission gave details of
institutional investment schemes in which the company had been
involved. The G:res fund, which it said was the "UK's largest
private rented sector residential investment fund", and in
which it held a 22% stake, had approximately £400 million
of residential assets in the UK.
Grainger's submission also described a partnership it had established
with the construction company Bouygues Development Ltd, "with
the aim of creating and co-investing in a new Build-To-Let Fund".
It was anticipated that this fund would "provide institutional
investors with the opportunity to invest in scale into the Private
Rented Sector [...] which to date has been relatively inaccessible".
The fund had "a dedicated portfolio of purpose built PRS
development sites in London and [the] South East of England".
Nick Jopling said that to address "cost of entry" issues,
all four of the sites put forward were "on public land".
19. Building on public sector land is a useful
way of overcoming the key barriers to institutional investment:
the release of large sites can enable the development of purpose-built
stock at a viable scale. If public bodies are prepared to defer
payment or enter into a partnership, this can reduce the costs
of entry for the investor. Richard Hill, Deputy Chief Executive
at the Homes and Communities Agency (HCA), told us about its work
to make land available. He said that the HCA had a role in using
"public sector land where possible for a variety of developments";
the agency would "be prepared to defer the return for a longer
period, take some of the rental during that period, and look for
capital return further down the line".
20. We heard from the Association of Greater
Manchester Authorities (AGMA) about a pilot scheme being developed
by Manchester City Council with the Greater Manchester (GM) Pension
Discussions with the GM Pension Fund have been taking
place to develop a Housing Investment Model in Manchester that
will deliver both low and high rise mixed tenure options, capable
of being applied across GM. The basic premise is very simple;
there are two investment partners, the council with land to invest
and the pension fund with cash to invest. Together the investors
procure a house-builder, sales and marketing function and a housing
managing agent with which it enters into a minimum 10 year lease.
Through the lease, both investors are able to take a guaranteed
revenue return on their investment and both share in any capital
return on the sales properties. The new build housing is targeted
at economically active households.
AGMA identified a number of barriers and challenges,
not least the need "to demonstrate to all partners that the
While it is too soon for us to make a judgement on the scheme,
it does raise some interesting issues, including the possibility
of public sector pension funds investing in housing. Andy Hull,
Senior Fellow at the Institute for Public Policy Research (IPPR),
considered that local government pension funds could be an important
source of finance "because they have in excess of £150
billion worth of funds, because they can be quite patient to see
the return over time and because they have councillors on their
management boards who should understand [...] what a crisis we
are facing in terms of housing need".
21. Another way in which local authorities could
support institutional investment was to take a flexible approach
to affordable housing requirements in section 106 agreements.
Grainger plc suggested that "reducing or altogether removing
affordable housing requirements on [private rented sector] developments
would greatly increase the viability of the scheme and improve
Stewart, Director of Economic Affairs at the Home Builders Federation
(HBF), however, referred to "glib comments about, for example,
making private rented sector schemes work by waiving affordable
housing", adding: "I am always rather concerned when
there is talk about reducing the regulatory burden for one source
of capital or one particular provider within one tenure. I am
much more a believer in a level playing field".
Responding to these comments, Ian Fletcher said that HBF "members
are investing capital for the best part of a year at most, sometimes;
my [British Property Federation] members are investing in capital
for 20 years; there is a greater cost to their doing that and
they should be treated more favourably".
We consider that there may be merit in a flexible approach, but
this would need to be balanced against the impact upon affordable
housing provision across a local area. The onus should be on the
individual council to assess how best to strike the balance.
22. We heard about a number
of steps that public sector organisations can take to encourage
institutional investment in the private rented sector, addressing
the key barriers of scale, suitability of stock and yield. We
recommend that all public bodies, both local and national, consider
the potential for contributing their land alongside institutional
finance to support build-to-let initiatives. We urge local authority
pension funds to be alert to the benefits of investment in residential
property, whilst ensuring transparency and security for their
investors. We would hope that their doing so would pave the way
for private funds also to invest in residential property. Finally,
we encourage local authorities to consider taking a flexible approach
to affordable housing requirements in planning obligations on
a case-by-case basis, where this will help to stimulate build-to-let
investment and will not be to the detriment of the wider housing
needs of the area.
INSTITUTIONAL INVESTMENT AND HOUSING
23. An alternative way of overcoming some of
the barriers to institutional investment would be for investors
to work in partnership with housing associations. Considering
the prospects for institutional investment, the Cambridge Centre
for Housing and Planning Research said that it was difficult to
obtain "a portfolio which is simultaneously sufficiently
diversified but also spatially concentrated (for economies of
scale in management) [
] within the short time frame required
by investors". It suggested that housing associations could
offer a solution to this problem:
In this regard it can be argued that the most practicable
means of creating large scale, long term, institutional landlords
in the private rented sector may be to encourage housing associations
to expand into market renting, since they already exist, are of
a viable scale, and have the necessary expertise. The key issue
here would be to develop regulation to ensure that any cross-subsidisation
is from private to public rather than the other way around.
David Orr, Chief Executive of the National Housing
I think that there is a realistic possibility of
housing associations bringing institutional investment into very
significant institutions to provide a market rent product, and
to help stimulate new supply of market rent, so that we are talking
about housing associations expanding the range of things that
they donot replacing the things that they do, but adding
to the range of things that they do, in an attempt to respond
to the housing market failures at present.
24. The housing association London and Quadrant
Group (L&Q Group) set out some of the potential advantages
of partnerships between investors and housing associations:
Housing associations are in a good position to attract
private investment. They have a wealth of experience managing
rented accommodation and through this have the capacity to continuously
develop a range of housing products. There is potential in the
future to invest in partnerships with others, including becoming
key delivery vehicles for upstream institutional funders of market
rent which would help to achieve scale. Housing associations also
have the ability to act as guarantor of quality and a degree of
security to the benefit of both consumers and investors.
L&Q Group also discussed the possibility of attracting
private finance by developing "a new form of market rented
housing with a differential offer such as longer tenancy options".
25. Another possibility put to us involved institutions
investing directly in social housing. Newark and Sherwood Homes
Ltd considered that the social rented sector had "a more
stable long term return potential being less volatile than the
majority of market driven investments". It gave the example
of the insurance company Aviva investing in social and affordable
properties with the Derwent Living housing association.
The British Property Federation also commented on this example,
stating that while Aviva's investment did not contribute "to
new stock per se", it released capital allowing the
housing association "to invest in new build elsewhere".
Discussing new ways of providing funding for affordable housing,
the Housing Forum, a membership body for organisations involved
in the construction and repair of housing, said that institutional
models might work "on a longer time span than current financial
models (typically 30-50 years)" and called for them "to
be explored and encouraged". It added: "This will be
a significant catalyst to reshape the housing association sector".
26. We took evidence from Peter Mahoney, Chief
Executive Officer at R55 Group, about a model his organisation
had developed to bring institutional investment into social housing.
He explained that his model was "a funding solution and also
a modular housing solution":
The funding solution is very much a lease-backed
funding solution where it is directly targeting housing associations
and local authorities who are providing modular housing that is
responding to local housing needs, but it also comes fully funded.
Effectively, the housing association or local authority would
provide us with land. We would work with them, understanding their
housing needs and the needs of the Housing Department, and together
a solution is developed.
He added: "it is not debt funded, it is not
reliant upon social housing grant; it is purely funded by pension
funds and life insurance funds that are looking for long-term,
stable, low-risk solutions".
The Northern Housing Consortium and North West Housing Forum also
referred to an emerging model of "lease backed funds"
under which "ownership of the scheme transfers to the investor
and is leased back to the provider until the loan is made".
It warned that there were "concerns around this model, particularly
its ability to manage risk given turbulent performance of pension
markets in recent [years]."
associations should play a role in attracting institutional equity
investment, either by expanding into market renting and providing
the economies of scale required by investors or by using finance
from institutions to bring investment into social rented housing.
We encourage housing associations to explore such opportunities
and to establish a dialogue with potential investors. Later
in the report, we consider the possibility of institutional investment
being used to support "intermediate" products.
REAL ESTATE INVESTMENT TRUSTS
27. Our evidence discussed the role particular
vehicles could play in the channelling of investment into both
social housing and the private rented sector. A common suggestion
was that Real Estate Investment Trusts (REITs), which have thus
far only existed in the commercial property sector, could be used
to bring investment into housing. Professors Crook and Kemp discussed
the background to residential REITs:
The [...] Real Estate Investment Trust (REIT) initiative
(from 2007 onwards) created the possibility of fully tax transparent
residential REITs, notionally able to attract pension and life
funds to invest without a tax loss for them. However, to date
this has not resulted in even one residential REIT being established,
although the great majority of commercial property companies have
now converted to REIT status. This is partly because, despite
the initial impetus to forming REITs being based on the desire
to get institutional funds into the private rented sector, the
initiative became transformed into one addressing investment in
all property not just in private residential property.
The British Property Federation suggested that residential
REITs could also provide a way of attracting individuals' investment
Little of individuals' money (so-called retail funds)
currently goes into collective investment schemes that are investing
in property. Part of the problem is that small investors like
to be able to buy and sell when they wish. That is difficult in
a collective scheme, where most cash will be tied up in buildings
that cannot be instantly bought and sold. The way around that
is to invest in companies or Real Estate Investment Trusts [...]
that invest in housing.
28. Between April and June 2011, HM Treasury
undertook an informal consultation on a range of measures announced
in the 2011 Budget "to support the development and growth
of the UK Real Estate Investment Trust market".
Following this consultation, the draft legislation for the Finance
Bill 2012 included a measure to address certain identified barriers
to entry and investment.
The 2012 Budget confirmed that the Government would legislate
"to support entry to and investment in REITs".
The Budget also announced that in 2012 the Government would consult
on the REITs regime, including on "the role REITs can play
in supporting the social housing sector".
This consultation was launched on 4 April 2012.
29. The Chartered Institute of Housing said that
potential changes to REITs "could see housing associations
becoming interested in exploring the potential of the model to
increase the supply of affordable homes, as it creates easier
access to equity capital markets and an opportunity for balance
sheets to work harder".
The housing association, Places for People, described a proposal
it had developed to create a residential REIT:
Our initial modelling of the REIT proposal works
on the basis that around 5,000 existing rented properties are
purchased by the REIT, including social rented properties that
have been converted into Affordable Rent when they fall vacant.
The funds generated by the sale of properties into the REIT would
be used to finance additional development of new homes in affordable
rented and market rented tenures, and once occupied these new
homes would then be sold onto the REIT. This process or cycle
could be repeated a few more times until the REIT needs to be
reseeded or restocked with existing residential properties.
Writing to us after giving oral evidence, Steve Binks,
Finance Director at Places for People said that Places for People
anticipated "that the Finance Bill will contain the amendments
to legislation which will facilitate a Social Housing REIT".
Places for People estimated that, if the amendments were made,
the REIT could "deliver yields of around 7% to investors
which a number of them have confirmed is acceptable".
30. Ian Fletcher, of the British Property Federation,
wrote to the Committee following the publication of the draft
legislation. He stated that "the current proposed reforms
mark significant progress in reforming the REIT regime to support
residential investment" but argued that there were "other
reforms that we believe are essential if we are ever to see a
significant number of residential REITs". He proposed two
particular additional reforms. One related "to the way the
traditional tax distinction between 'trading' and 'investment'
activities applies in the REIT context". He explained that
a property portfolio could "only fall within the tax-exempt
ring-fence of the REIT rules if it [...] amounts to an 'investment'
business in tax terms". There was, however, "a structural
tendency in the UK residential context to rely to a greater extent
on regular asset sales" than in commercial property; this
meant that residential property businesses were "generally
quite sensitive to the operation of the trading/investment test".
This issue was raised by a number of other witnesses, including
Grainger plc, which had asked the Government to look at the trading
versus investment distinction "specifically in the context
of and for the purposes of residential REITs".
31. The second additional reform suggested by
Ian Fletcher concerned "the scope for using the REIT structure
without the compliance burden of a listing".
In other countries with REITs a further evolution
of their regimes has been the creation of private REITs that are
unlisted. The rationale for only allowing listed REITs in the
UK is understandable, which is that listing provides a degree
of protection for investors, which unlisted REITs would not. However,
because most residential REITs would be started from scratch and
therefore be smaller than existing commercial property REITs there
is an argument that allowing unlisted REITs would particularly
be beneficial to the residential sector.
32. In our view, REITs could be a useful means
of bringing investment into the residential property sector. It
is significant that no residential REIT has ever been established
in the UK; it suggests that there are significant barriers to
entry and investment. We commend the Government's efforts to identify
these barriers and put in place measures by which they can be
overcome. We also welcome Places for People's innovation in developing
proposals for a REIT. We agree, however, with the view that further
action is needed if the contribution of REITs to the financing
of new housing supply is to be maximised. We
recommend that the Government put in place measures to address
concerns about the distinction between trading and investment
specifically in the context of residential REITs. We further recommend
that the Government allow the creation of private, unlisted residential
SELF INVESTED PERSONAL PENSIONS
33. The Residential Landlords Association (RLA)
proposed that the Government "allow self invested pension
funds to invest in residential units, up to a maximum purchase
price of £250,000 per unit outside London (with a suitable
adjustment for London prices)".
Mark Butterworth, Director of the RLA, wrote to us with further
information about the potential for Self Invested Personal Pension
There is £101.7 billion invested into just over
800,000 SIPPs currently. There are different types and characteristics
but of the higher value more flexible type which would have funds
and the ability to undertake the investments required there are
200,000 or 25% of the total number.
He added that his estimate, given during oral evidence,
"of 50,000 that would be interested or likely to take up
such an offer would appear to be on the conservative side".
34. Self Invested Personal Pensions
could provide another source of finance for rented housing. We
recommend that the Government look in detail at the contribution
SIPPs could make and the risks and benefits for those investing
in SIPPs. If satisfied about these risks and benefits, it should
bring forward proposals to facilitate their investment in residential
HOUSING INVESTMENT FUND / HOUSING
35. The National Housing Federation called on
the Government to support the establishment of a Housing Investment
Fund run by housing associations:
Government support and underpinning of a pilot housing
investment fund run by housing associations would enable the development
of mixed tenure sector schemes at scale and would attract investors
and create confidence in the market hopefully acting as a prelude
to it increasing in scale. Housing associations could reach an
agreement with government about underpinning the risk and guarantee
on investor return, but the clear backing and support of government
would attract and reassure investors and government could play
a role as broker.
36. The Confederation of Cooperative Housing
(CCH) described its proposals to establish a fund through bond
financing and institutional investment to finance the development
of co-operative and mutual housing. Under these proposals it aimed
to develop "between 1,500 and 2,500 homes through the development
of between 30 and 50 new co-operative and mutual housing organisations".
The CCH said that it had begun to draw a number of local authorities
and housing associations together as "potential partners"
and was "seeking to work with Government to implement the
37. Shelter proposed the creation of a National
Housing Investment Bank:
A 'National Housing Investment Bank' could attract
investment funds and provide loans for the construction of low-cost
housing. In European countries such banks have proved effective
at leveraging public funds to channel private finance into both
house building and improvements to the existing stock, a model
that RICS [the Royal Institution of Chartered Surveyors] have
called on to be replicated in the UK. The government has partially
adopted this approach through its Green Investment Bank: we would
urge the committee to consider whether this model could usefully
be expanded to include financing house building as well as green
Roger Harding, Head of Policy, Research and Public
Affairs at Shelter, responding to the suggestion that everybody
would be competing for a limited pool of debt finance, said: "If
there is a limited amount of debt, it is vitally important that
we channel it towards new supply rather than inflating the market
that we have got and feeding through into unsustainable loans".
IPPR also suggested the expansion of the Green Investment Bank
into a national investment bank.
Its Senior Fellow, Andy Hull, told us that he and his colleagues
were "arguing for a national investment bank from a number
of different perspectives, not just a housing one".
38. We saw for ourselves an example of a publicly-owned
bank investing in housing during our visit to Netherlands, when
we met a representative from the Bank Nederlandse Gemeenten (BNG;
the Dutch Municipal Bank). We heard that this bank was 50% owned
by the Ministry of Finance and 50% by the Dutch municipalities.
The bank's lending was restricted to public and semi-public organisations,
with 52% of its lending going to housing associations. 98% of
its loans to housing associations were guaranteed. The bank had
a 'triple A' rating from two of the three ratings agencies, was
the fourth largest and second most profitable bank in the Netherlands,
and, according to Global Finance magazine, the third safest bank
in the world.
39. Mr Shapps said that he was "all in favour"
of a housing association-run housing investment fund and that
his officials "have [worked] and will work with organisations
who want to bring those types of things about".
He questioned whether such initiatives really needed government
support, saying: "If [...] there is something Government
could do, are not doing, and it does not cost a fortune, then
come and talk to me, but most of the time my message out there
to housing associations and to councils is, 'We are giving you
all these flexibilities. Go and use them.'"
The Minister was unenthusiastic about the call for a national
housing bank, saying that he was "not convinced by that argument
at all. I think the banking system in this country needs to work
for all industries and sectors".
40. We welcome the Minister's enthusiasm for
a housing investment fund run by housing associations. Such a
fund could help housing associations, and smaller associations
in particular, raise finance for house building. We
support the establishment of a pilot housing investment fund run
by housing associations, and recommend that, in discussions with
the National Housing Federation, the Government explore how it
can give its backing. The pilot should consider the viability
of a fund, its ability to attract investment, and any risks to
the Treasury arising from Government support. Subject to the success
of the pilot, the fund could be increased in scale. We further
recommend that the Government work with the Confederation of Cooperative
Housing on the Confederation's proposals for an investment fund.
41. We consider that there is
merit in the suggestion that a national housing investment bank
be established. In other European countries such banks have proved
effective at channelling investment into new housing development.
The work already underway to create a Green Investment Bank offers
a useful opportunity; there is a clear case for allowing this
bank to invest in housing as well as green infrastructure. We
recommend that the Government consult on proposals for the extension
of the Green Investment Bank's remit to include the funding of
new housing and, potentially, of wider infrastructure projects.
The bank could play
a leading role in offering new forms of finance such as REITs
(considered earlier in this chapter) and retail bonds (which we
consider later in the report).
37 Q 56 Back
Ev w88 Back
Ev 151 Back
Ev 87 Back
Laying the Foundations, p 33 Back
"Review to examine institutional investment in private rented
homes", DCLG press release, 23 December 2011, www.communities.gov.uk Back
"Sir Adrian Montague calls for evidence on barriers to institutional
investment in private rented homes", DCLG press release,
21 February 2012, www.communities.gov.uk Back
Ev w51 Back
Grainger plc is a property company involved in a number of institutional
investment build-to-let schemes. Back
Q 130 Back
As above Back
Ev 120 Back
Ev 119 Back
As above Back
Q 133 Back
Q 316 Back
Ev 131, 132 Back
Ev 132 Back
Q 4 Back
Section 106 agreements, or planning obligations, involve a local
planning authority entering into an agreement with a developer
in association with the granting of planning permission. They
have been frequently used to secure a contribution from a developer
to the provision of affordable housing. Back
Ev 118 Back
Q 60 Back
As above Back
Ev 77 Back
Q 257 Back
Ev 171 Back
Ev 170 Back
Ev w4-5 Back
Ev 105 Back
Ev w11 Back
Q 276 Back
As above Back
Ev w28 Back
Ev w51 Back
Ev 106 Back
"Informal consultation on REITs measures announced Budget
2011", HM Treasury webpage, www.hm-treasury.gov.uk. Back
HM Revenue and Customs and HM Treasury, Overview of Legislation
in Draft, December 2011, p A89 Back
HM Treasury, Budget 2012, March 2012, para 2.178 Back
HM Treasury, Budget 2012, March 2012, para 2.177 Back
HM Treasury and Department for Communities and Local Government,
Consultation on reforms to the real estate investment trust
(REIT) regime, A) to explore the potential role REITs could play
to support the social housing sector, and B) to explore the tax
treatment of REITs investing in REITs, April 2012 Back
Ev 114 Back
Ev 167 Back
Q 264, footnote Back
Ev 167 Back
Ev 107-08 Back
Ev 121; See also Ev w53 [Professors Crook and Kemp]. Back
Ev 107 Back
Ev 108 Back
Ev 147 Back
Ev 149 Back
As above Back
Ev 156 Back
Ev w21 Back
Ev 84 Back
Q 24 Back
Ev 74 Back
Q 22 Back
"Global Finance names the World's 50 Safest Banks 2011",
www.gfmag.com, August 2011. Subsequently, Global Finance has updated
its list, and named BNG as the world's second safest bank, "Global
Finance announces a half-yearly update World's 50 Safest Banks:
April 2012", www.gfmag.com. Back
Q 333 Back
Q 334 Back
Q 333 Back