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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 50-i
HOUSE OF COMMONS
TAKEN BEFORE THE
COMMUNITIES AND LOCAL GOVERNMENT COMMITTEE
PRIVATE RENTED SECTOR
WEDNESDAY 8 MAY 2013
RICHARD BLAKEWAY, STUART CORBYN and NEIL HADDEN
IAN FLETCHER, PAUL SMEE and NIGEL TERRINGTON
Evidence heard in Public
Questions 391 - 522
USE OF THE TRANSCRIPT
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Taken before the Communities and Local Government Committee
on Wednesday 8 May 2013
Mr Clive Betts (Chair)
Mrs Mary Glindon
Examination of Witnesses
Witnesses: Richard Blakeway, Deputy Mayor for Housing, Land and Property, Greater London Authority, Stuart Corbyn, Chairman, Qatari Diar Delancey, East Village Operations, and Neil Hadden, Chief Executive, Genesis Housing Association, gave evidence.
Q391 Chair: Welcome, everyone, to our sixth evidence session on private rented sector housing. Before I thank the witnesses for coming, Members have the chance to declare any relevant interests. I own a flat, which I rent out.
Simon Danczuk: My wife has an interest in a small rented property.
Andy Sawford: I have a small interest in a small rented property.
John Stevenson: I have an interest in two residential properties.
Q392 Chair: Right. Those are our interests. I am sure you have a lot more interests that you want to talk about in a minute, but welcome to all our witnesses this afternoon. For our records, may I ask you to say who you are and the organisation that you represent? We will then come to our questions.
Neil Hadden: I am Neil Hadden, the chief executive of Genesis Housing Association.
Stuart Corbyn: I am Stuart Corbyn, the chairman of QDD athletes village management.
Richard Blakeway: I am Richard Blakeway, deputy mayor for housing, land and property at the Greater London Authority.
Q393 Chair: Thank you all for coming. First, to Neil Hadden and Stuart Corbyn, your organisations have recently become involved in large-scale market rented developments in east London. People have been talking for a long time about institutional investment and large companies getting involved in various ways in the private rented sector and producing new properties. Not much has happened historically, but suddenly, both of you are there making this contribution. What encouraged you, at this stage, to become involved?
Neil Hadden: Earlier this year, we sold 401 flats to M&G-their property fund-at Stratford Halo. I have a brochure here; I am happy to leave some copies with the Committee if you would like to find out a bit more about it.
Q394 Chair: Are you looking for customers?
Neil Hadden: Maybe. I can do you a good deal. What attracted them to it? We have been reflecting on that, because we are very pleased with the deal. In fact, we sold those flats on a 160-year lease, and we have a management agreement-a management leaseback-with M&G for 35 years. The 401 units are part of a development of over 700 dwellings, and therefore, it is a mixed community. It has shared ownership and a flexi-care scheme-it used to be called extra care. It has affordable rent on the estate, as well as some commercial properties; there is a Tesco underneath.
We think that the scheme was attractive to M&G, because there are 400 units in one place. It will be managed by a housing association with a track record of managing rental units, and indeed, since 2006, a track record of managing private rented sector housing. The deal was attractive, in that we struck the deal at a particular yield, and it will be uprated on an annual basis by RPI. The income that they get from Genesis basically matches their outgoings, their long-term liabilities, and they know that we will be managing it for that 35-year period.
What made us go into that? We had this development: we built it to sell it in the first place. The sales market, as you know, has not been fantastic over the past few years, and we saw an opportunity in the marketplace. We were very keen to move into market renting at this point in time for a number of reasons. First, we all know about generation rent and the difficulties that the younger generation have in accessing home ownership or indeed social housing. We also know that increasingly the private rented sector is a bigger feature of tenure in this country. We believe that feature is going to last for some time to come, and therefore this is a business stream that we want to get involved in.
Stuart Corbyn: QDD is a joint venture between Qatari Diar, which is Qatar’s sovereign wealth fund, and Delancey, which is a private property company, formed for this particular acquisition of the private part of East Village-the former athletes’ village: 1,439 flats that will be the ones that we own. It was seen as an opportunity to buy in scale, because there are very few opportunities to buy enough private rented property in one area, which is part of what we see as essential to help with the management of it. Private rented has only really been possible for the past 25 years or so, and there have not been all that many opportunities that have come up in that time. The idea was initiated by Delancey, which has certainly had experience of the residential market in the past. We see it as an opportunity for long-term investment, concentrating on private renting.
Q395 Chair: I suppose there has always been a discussion about whether things not happening in the past were due to a lack of available property or lack of available finance. To what extent are organisations, such as sovereign wealth funds, starting to get more interested in the private sector housing field and feeling that it is a good place to put their money for the long term? Do you think there has been a change of climate at all?
Stuart Corbyn: The change of climate has largely come about because of the change in legislation with the ’88 Act. Private renting was normal for institutional investors, even up to the ’60s and ’70s, but it died away. Nobody is going to dive in just because legislation changed in 1988 and now private renting is possible; it takes people some time to feel-
Q396 Chair: It is over 20 years.
Stuart Corbyn: It is, but I think people are perhaps suspicious of politicians, because legislation does change, and there is a need for people to feel comfortable with the environment. There have been few opportunities to buy of sufficient size, and that is one of the issues. Income returns are quite low with private renting. Management costs are very high. It is only when you have the full package of management set up that you can deal with those sorts of things. If you look across the whole of conventional forms of property-retail, office, industrial and residential-residential has performed better over the past 10 years than the other asset classes. An organisation called IPD has been doing analysis on those, and IPD itself only started looking at the residential side over the past few years and has therefore been able to produce statistics to demonstrate how the residential market has performed.
Q397 Chair: Richard Blakeway, given what is happening with these two particular schemes and what else you are aware of, do you anticipate now that developments of this kind are going to play a greater role in meeting the housing needs of London over the next 10 years? Do you have any idea of the sorts of numbers that might become possible?
Richard Blakeway: Yes, I think they will feature more in London’s residential market. If you look at the appetite there has been for the Government’s build to rent programme, about a third of the schemes that have gone through are in London, and that will be a significant quantum of housing-several thousand units of housing. In addition to these guys, you are also seeing London & Quadrant do quite a lot, Fizzy Living do a lot and PRUPIM bought Barclays portfolio, so there is obviously significant appetite. The only thing that I would put down is, first, a test: how is it different from what you would build for sale? If we are going see more of this development come forward, it has to be distinct and the product has to be clearly aimed as a rented product, both in terms of the design of the scheme and also in terms of what the offer is to the consumer. The second thing is to be realistic about how much of it there would be in London’s market. In Europe, I think the largest proportion of institutional investment as part of the housing market is in the Netherlands, and that is 37%. In the United States, institutional investment in resi is about 13%. Those are LSE figures. In London, we are looking at 10% at the moment. Even in those more mature markets, it is still only a proportion of London’s market, so I suspect that owner occupiers and buy to let landlords will continue to be the predominant investors in London stock.
Q398 Chair: Do you have a feel for the numbers in the next 10 years, or is it too early?
Richard Blakeway: It is probably too early to say. You will see a significant amount of build to rent come through; it could be as much as 4,000 units on current bidding, but some of those schemes will fall back through due diligence. In addition to what is happening here, I know London & Quadrant said that their aim is 1,000 units, but I am not sure whether Genesis has put a figure on exactly how much it wants to do. We know of at least 5,000 units that will come forward in the next few years. That is not a huge amount, but it demonstrates an increase in institutional interest.
Q399 Chair: Neil Hadden, is there a feeling that housing associations offer a degree of certainty and managerial experience, so that institutional investors can see what you have done over the years and know that you are not fly by night organisations but are there for the long term? Given the business plan that must be involved in sale and leaseback, has the regulator expressed any concern or has it been comfortable with that approach?
Neil Hadden: Yes, the regulator, the Homes and Communities Agency, has expressed an interest, and you may be aware that it recently issued a discussion paper, Protecting social housing assets in a more diverse sector. It is concerned that there is no leakage from social housing assets into commercial activity, such as market renting. The premise is that in future housing associations should ring-fence social housing assets and therefore also market rent or other commercial activities so that there is no leakage. That is something we were thinking of doing anyway, because our vision is that our development subsidiary should be able to stand on its own two feet. It should make schemes such as this work, and it should be able to access money on its own balance sheet. That is the strategy we are working on, so the regulator’s view may be a bit heavy-handed, but it is not out of line with our thinking.
Q400 James Morris: Going back to the Government’s build to rent fund, I think you were a bidder, Mr Hadden.
Neil Hadden: Yes.
Q401 James Morris: What was your motivation for wanting to bid into that fund? What benefits did it give you as a potential investor, and how many new housing units will come out of that investment?
Neil Hadden: There are two ways of looking at the incentive, and why we bid for this. First, there was a pot of money available, and frankly there isn’t a lot of public funding around for housing at the moment, so we were looking to see how we might make it work. Secondly, we have a big development programme of more than 2,000 new homes either committed or on site, and this is one way of de-risking that development programme. In terms of the numbers, we have allocations for five projects, and together they will deliver 361 new homes.
Q402 James Morris: Are they schemes that you would definitely not have invested in?
Neil Hadden: No, we already own the sites and we were going to develop them anyway. The issue was what tenure mix we would deliver on those sites. This fund came along, so we said, "Okay, we might as well see whether it works for us."
Q403 James Morris: Mr Corbyn, were you a bidder for funds from this Government scheme?
Stuart Corbyn: No. The units we are acquiring at the moment are built. We are buying or will buy completed products. At East Village, we have development sites with outline consent for another 2,000 flats on six sites, and we might look at that. We are looking at other sites around London.
Q404 James Morris: So it was not necessarily the nature of the Government’s scheme that made you decide not to bid? What sort of scheme could the Government promote that you would be interested in bidding into?
Stuart Corbyn: Development projects-new build. The 1,400 or so flats that we are buying now are already built, effectively. I don’t think we felt entitled to bid for that, but for development sites where we would be starting from scratch, we might do so.
On Neil’s point, access to pots of money is always attractive. Even institutional investors like to feel that they do not necessarily have to put in all their own money. For East Village, the commitment we are making at the moment is £557 million, so it is quite a significant sum of money. Another 2,000 flats would be large sums of money, so an element of gearing is something that we would regard as worth buying into.
Q405 James Morris: Mr Hadden, in terms of the money that you receive from the build to let fund, what percentage does that money represent?
Neil Hadden: It is a loan that will cover 50% of the costs of development.
Q406 James Morris: Mr Blakeway, the Chairman asked you some questions about numbers, but specifically in relation to the build to let fund, what additional housing numbers would you expect to be produced in London as a result of the scheme?
Richard Blakeway: The way the fund works is that there is an initial tranche of money, which was announced back in September and has been topped up through the Budget, so we will have to wait to see what happens there. On the initial bidding, so far about a third of the schemes going through are in London, and the quantum of homes is about 4,000. That number may reduce though, because there has to be further due diligence.
Q407 James Morris: How much does that contribute, in your assessment, to the housing gap in the rented sector?
Richard Blakeway: It will certainly help to contribute to overall housing numbers, and I think we can be very confident that these homes would have been built far slower if they had not benefited from the fund.
Q408 James Morris: The Government are also talking about a guarantee worth £10 billion. Is that something that interests you, Mr Hadden?
Neil Hadden: There are two guarantees: one is for affordable rent, and one is for market renting. It is difficult to answer that question, because all the details of the scheme are not yet known. We think that we can move on with the schemes we bid for under the build to rent fund without the guarantee. There is always an issue about what terms and conditions apply to particular pots of money and whether they are beneficial to us. The beauty of working in this type of area is that we can be more in control of what we do, rather than having to follow Government rules.
Q409 James Morris: Are you saying that a guarantee would not necessarily affect your commercial investment decisions?
Neil Hadden: No, because we can borrow money quite cheaply anyway. There will be a fee that goes to the HCA, and there will be a fee that goes to the aggregator. By the time you have totted all that up, with the guaranteed low cost of borrowing it will perhaps not be much different from what we can borrow at anyway.
Q410 James Morris: Mr Corbyn, what about you?
Stuart Corbyn: It is too early for us to say.
Q411 John Stevenson: My line of questioning is on the tenancy itself, its length and flexibility. Mr Hadden, your organisation is offering tenancies of one, two, three, four and five years, and you are also offering the tenant, after six months, the opportunity to bring the tenancy agreement to an end with two months’ notice.
Neil Hadden: Yes.
Q412 John Stevenson: Is that built into the legal agreement? If I were to take a tenancy of, say, three years from you, could I give you two months’ notice two years into it?
Neil Hadden: Yes. Obviously, we are looking for as much certainty as possible, both for the tenant and for ourselves, but if circumstances changed and the tenant came to us and said, "We want to renegotiate the terms of the tenancy"-
Q413 John Stevenson: No, that is not my question. Is it actually built into the legal agreement, or is it just a good-will undertaking on your part?
Neil Hadden: You are talking about a legal agreement. There will be a tenancy agreement.
Q414 John Stevenson: Yes, but is a two-month notice period written into that legal agreement?
Neil Hadden: Yes.
Q415 John Stevenson: So if I am two years into my three-year or four-year tenancy and I come along and say, "I want to give you two months’ notice," it is built into my agreement?
Neil Hadden: Yes. What you have to remember is that-
Q416 John Stevenson: Sorry, but that is a really important point.
Neil Hadden: The answer is yes.
Q417 John Stevenson: Thank you. That is clarification, which is what we need. It creates flexibility for a tenant.
Neil Hadden: Yes.
Q418 John Stevenson: How many tenancies do you have under way that are more than, say, one year?
Neil Hadden: Not very many at the moment. We have only just started to market the Stratford scheme, and this is the first area where we will be piloting the approach.
Q419 John Stevenson: If I was a tenant and I came along and said, "I want three years," would you automatically give me those three years?
Neil Hadden: There would need to be the normal checks on tenants’ backgrounds-the credit checks, all that sort of stuff-and if they were all satisfactory there would be no reason why we wouldn’t.
Q420 John Stevenson: It would still be subject to your discretion.
Neil Hadden: Of course.
Q421 John Stevenson: Richard, the Mayor is looking to introduce a pilot scheme. Could you give me some details of that pilot scheme-the numbers involved, when you think it will be up and running, and the extent of the scheme with regard to flexibility and length of tenancies?
Richard Blakeway: First, we are very keen to explore whether you can do longer tenancies, but critically within existing ASTs, because an assured shorthold tenancy is quite flexible, and we are very keen to explore the potential to do them within that rather than have additional legislation.
In so far as the pilot is concerned, there are two parts to it. The first is that we are very keen to work with major landlords-QDD, Genesis and others-to evaluate how their projects are working. It is very early days at the moment, but we are very keen to evaluate the success for them, what the demand has been, and how it has operated.
The second bit we are keen to explore is whether you could do a similar pilot with build to let landlords. I understand that there is some work on this happening in other parts of the country. In Newcastle I think there might be something happening, and I am keen to see how successful that is and what the terms of a London pilot would be; but clearly if we could do something with the buy to let sector as well as with bigger social landlords that would be very good news.
Q422 John Stevenson: Would you like to see the same offer made-for example, flexibility for tenants-so the tenant can have that two-months’ notice in, say, a three or four-year tenancy agreement?
Richard Blakeway: Particularly for buy to let landlords the ability to get vacant possession would be critical for their investment and for securing mortgage finance, so I think you have to keep within the AST framework.
Q423 John Stevenson: So you would like only to see six-month or 12-month tenancies, rather than four or five-year ones?
Richard Blakeway: No, where appropriate we would like to see landlords offer longer tenancies. In reality the majority of tenants in London end up staying for longer than the initial six to 12-month AST period, but I think that notice period, the two months, is critical.
Q424 John Stevenson: For the tenant?
Richard Blakeway: Well, for the tenant, or indeed for the landlord.
Q425 John Stevenson: Right, so if you are having a longer tenancy, you are quite happy-a three-year tenancy-but you are still allowing the landlord to have the two months, because under the present legislation if you have a three-year tenancy the landlord cannot bring it to an end within those three years. They have to wait until the end.
Richard Blakeway: Under an AST there is obviously, because of rent arrears and the rest, flexibility on both sides, and the AST framework is the one we are keen to support.
Q426 John Stevenson: But would you like to see landlords offering longer tenancies?
Richard Blakeway: Yes.
Q427 John Stevenson: Stuart, in the Olympic village what length of tenancies are you going to be offering?
Stuart Corbyn: We are going to be announcing it in a couple of weeks’ time, but I can give you an indication of the sort of ideas that we have talked about. One is a 12-month tenancy, which tends to be the standard one. Other people have talked about five-year tenancies, or even longer. Some people have talked about giving 10-year tenancies. Ten-year tenancies throw up other issues because of the ability to deal with service charges, and pass service charges back to tenants over the lease, over seven years. The probability is that we will be looking at something like three years.
John Stevenson: Again-because if you go for three years, the landlord is subject to that-would you like to throw in flexibility for the tenant, so that they could bring it to an end earlier?
Stuart Corbyn: That is entirely possible. There is an issue-
Q428 John Stevenson: It is really a straight choice. Does the tenant have the flexibility or not?
Stuart Corbyn: It comes down to a question of rent level, because one of the issues for landlords-a point that Neil touched on-is that they like where possible to have security. If a landlord knows that they have security of income for three years it is much more attractive than being at risk of somebody leaving at any time during the three-year period on two months’ notice. A landlord would therefore be in a position to come up with a lower rent if he felt that a tenant was committed to staying there for longer. Whether the London market is fully ready for that, I am not sure, because in some of the discussions we had with focus groups flexibility was one of the things that appealed to them, so the idea of being able to-
Q429 John Stevenson: Flexibility on whose part?
Stuart Corbyn: The tenant only.
Q430 John Stevenson: But you could build that flexibility in if the tenant had the ability to bring a tenancy to an end.
Stuart Corbyn: It would be very easy to grant a three-year lease that binds the landlord to three years, subject to rent arrears or those sorts of things, giving a tenant a rolling two-month break. That is quite possible. It would be normal for a landlord to require a tenant to stay there for six months anyway, so you have a degree of security, and then, beyond the six months, to have a rolling two-month break. That would be fairly standard.
One of the issues that has come out of the discussions with focus groups is whether tenants understand that if they are offered a two-year, three-year or four-year lease with a rolling break, it means they can actually go, or whether they have in their minds that all their mates have 12-month tenancies and they want a 12-month tenancy because they can get out at the end of 12 months. A three-year or four-year tenancy with a rolling two-month break would give a tenant an amazing amount of flexibility. Landlords might like to feel that they had a bit more security.
Q431 John Stevenson: This is a general question for all of you. In Germany, tenancies are indefinite and rent increases are linked to a local index. Is that something that you could see working in this country? Let’s start with Neil.
Neil Hadden: We think there is a downside to the German model. It is that tenants basically build up the right to stay and they also have a right to lower rent rises than might be the case if rents were linked to RPI; therefore landlords might not be able to get the income they need in order to maintain the property. Therefore the standards in those homes would go down and the tenant might not get as good a deal as they might otherwise. It is something we would have to look at very, very carefully. I am not sure we are ready for that yet.
Stuart Corbyn: In a previous job, I was responsible for a large number of statutory tenants-people who had been around for some time and so were there indefinitely-and there were problems from time to time, not just because of the odd dodgy tenant, but because when it comes to repair issues and things like that, the cost of maintaining properties is all a landlord’s. According to the IPD analysis, something like 25% of gross rent goes out, as far as the landlord is concerned, in maintenance charges. The issue is how you deal with that in a situation where somebody has a lease that goes on indefinitely, with whatever mechanism you have for uplifts-whether it is an RPI or a CPI annual uplift-which probably does not cover the costs that a landlord is bearing all the time. I have reservations and I am not actually sure it is necessary.
An answer I gave you earlier, Mr Betts, was about institutional landlords only relatively recently becoming involved. You made the point that legislation had been in place for 20 years. Landlords obviously need tenants, and one of the issues in this country has been whether there are enough people around who like the idea of renting over the longer term, because we have been brought up to have a fixation about owner occupation. The issue is whether there are enough people around nowadays who accept that renting is an alternative option for making a home. It is growing, but it is still some way from the continental model.
Q432 John Stevenson: Richard, is this something that the Mayor would like to see introduced into this country?
Richard Blakeway: I think it would have to be nationwide. I don’t think the German model is appropriate here. One aspect is that it does not reflect the very, very different market that you have in Germany. It is structurally a very different housing market from this country’s; for example, in Germany they do not have a supply problem. It is a very, very different market.
More broadly, there is a challenge to try to balance the flexibility that the PRS offers, which is critically important, particularly for labour mobility and for our economic competitiveness, with greater security, particularly for families, who are forming a larger proportion of private tenants, certainly in London.
Q433 Mark Pawsey: Stuart, you indicated that your company is involved in other sectors of the property market. Could you ever see a situation existing in residential property where people would have a long lease, at a rent, and at the end, if they wished to vacate, rather than handing in their notice, they would sell the lease in the same way as exists in the commercial sector? Could you ever envisage that situation arising?
Stuart Corbyn: If you mean, by a long lease, more than 20 years, no landlord is going to grant a lease of over 20 years these days, because it is enfranchisable. You lose the freehold after two years.
Q434 Mark Pawsey: Okay. Let’s assume 15 years, for example.
Stuart Corbyn: It is a perfectly acceptable model. I am sure there will be people around who will want to use that as a commercial approach. It is not something that QDD has in mind, but I am aware from discussions with other people that it is a model adopted in some parts of the States, for example.
Q435 Mark Pawsey: Why wouldn’t it work here? Why wouldn’t your firm offer it here?
Stuart Corbyn: It may work here. I am not saying it wouldn’t work. As far as QDD is concerned, we see ourselves as long-term investors. That means that you are looking for long-term rental growth and long-term capital appreciation. You are not looking to sell out.
Q436 Chair: In terms of your recent decision about renting arrangements for your development, could you drop us a note about it? That would be helpful.
Stuart Corbyn: Yes, certainly. By all means.
Q437 Simon Danczuk: Richard, I have been reading the Mayor of London’s housing covenant. It talks about a spike in rent increases, which it says are a serious issue. It then goes on to say, "Rent controls are not the answer to these affordability issues." What is the answer?
Richard Blakeway: Increasing the supply.
Q438 Simon Danczuk: Okay. We heard earlier today that some Londoners are using payday loan companies to help them pay rising rents. People in London are really suffering from the spike in rental increases. Londoners, I suspect, do not want to wait for you to establish a better supply. What is the Mayor of London doing now to address that problem for those Londoners?
Richard Blakeway: Fundamentally, we are trying to increase supply. We are doing a lot there; you have heard about build to rent and other programmes. To step back a bit, it is worth looking at why rents have gone up. Over the last-
Q439 Simon Danczuk: I don’t need to know that. I am just asking what the Mayor of London is doing now to address those Londoners who are having to take out payday loans because they are really struggling with rent. We have the analysis of why rents have gone up, but what is the Mayor of London doing, not in terms of future supply but now, about the increased rents that are causing real misery for Londoners?
Richard Blakeway: One thing that is linked to supply but also takes pressure off the PRS is helping people into home ownership who have ended up in the PRS due to the lack of mortgage availability, which has pushed up prices. The whole range of programmes about low-cost ownership, particularly the stuff that the Government have just announced on help to buy, will help people leave the PRS, taking pressure off the sector, which should help control prices. That could be very immediate, but it is still linked to supply.
The other thing that is very important is that there is greater transparency about what people are paying. One of the things that we are very keen to explore-it is perhaps a natural step beyond the redress measures that the Government are introducing in the legislation on letting and managing agents-is what fees are being charged to tenants. I think it is commendable that Genesis, for example, are clear and up front about what fees people will pay. A lot more transparency about how much people are paying, as well as how much they are paying, is important in a lender’s market.
Q440 Simon Danczuk: Londoners watching this will probably leave with the impression that the answer to my question is that the Mayor of London is not doing anything about that spike in rental increases, or nothing significant now.
Richard Blakeway: I don’t think that is fair. First, rent controls are not the answer. One of the most striking things about London’s rental market is that yields are the lowest in the UK. If you introduce rent controls, you will drive away investment, limit mobility and drive away people improving their properties. You will see a deterioration in the quality of rented accommodation as well as a reduction in quantity. The very first thing that I would say is that rent controls are not the answer. If you look at when we had rent controls in this country, the amount of available rented stock was 10%. That will put significant pressure on the sector at exactly a time when we need to be attracting more investment to build more homes. There is a lot we are doing on the London rental standard and transparency of fees, and there is a lot we are doing to remove demand from the PRS and help people into owner occupation or alternatives, which will help on prices.
Q441 Simon Danczuk: Neil, three-bedroom flats in your Stratford Halo development are advertised at £2,850 a month. Is that not beyond the reach of the average family in that area?
Neil Hadden: We have to remember that we are talking about market renting. The market will dictate the levels of rent that are charged and are possible to receive from tenants.
Q442 Simon Danczuk: Stuart, what type of people will be able to afford homes in East Village?
Stuart Corbyn: Young professionals. We have a range of studios and one, two, three, four and five-bedroom flats. We are hoping to attract families as well as the inevitable sharers. We would like to think that we can get families. There is a new school at East Village, an 800-pupil school, which is one of the attractions of the area.
Q443 Simon Danczuk: But they will have to be on a decent income, won’t they?
Stuart Corbyn: Correct. Part of East Village is social housing-just under half of it-which includes intermediate rents, and shared ownership/shared equity. It is run by Triathlon. For the intermediate housing, I think the household income has to be below £60,000 a year. The flats we have are quite similar to the Triathlon ones, so the people who take ours are likely to have household incomes in excess of £60,000.
One of the things we are looking at is using annual indexation. If we go with longer leases-just using your example of three years-we would expect to apply CPI or RPI, so that at least they are known quantities rather than the horrendous stories of 20% a year uplift.
Q444 Mark Pawsey: Mr Danczuk just referred to the Mayor’s housing covenant, and the Mayor is also bringing forward a proposed rental standard, so he has clearly been busy in the private rented sector. But the rental standard will not do anything to help those at the bottom end of the market, from whom we have taken a lot of evidence in this report, because those kinds of landlords will not adhere to it.
Richard Blakeway: It is a fair challenge. I think we have been clear from the start that the rental standard is not statutory; it is voluntary. Therefore, if someone is acting criminally it will not address that. The first thing that we must be very clear about is that there is legislation currently in place that means that if you are a criminal landlord and you are not meeting the required health and safety standards you can be prosecuted. One of the things that we want to do through the London rental standard is ensure that there is more active and consistent enforcement by local authorities, which have powers under the 2004 Act to address the poor state of the market.
Q445 Mark Pawsey: But if that rental standard is not going to address the area where the problems exist, what is the point of it?
Richard Blakeway: The point is to professionalise the market. Rather than demonising it, we are keen to professionalise it. It is important that there is consistency in terms of what it offers. There are 12 elements to the rental standard. Following the consultation, from which we had 5,000 responses, there was a lot of engagement among Londoners in the standard. There are 12 core standards that set out expectations on repairs, contact details, written contracts and so forth. All of that is very important, and it will help to empower tenants. It will also empower landlords. The majority of properties are managed not by the landlord themselves but by an agent. There should be an expectation on the part of landlords of what their agent is doing, and that can include client money protection.
Q446 Mark Pawsey: Neil and Stuart, presumably because the market in which you are operating is at a level beyond that standard, it will have no relevance to your businesses?
Neil Hadden: Yes, we believe that we are operating well above the bar that the standard introduces, but we are a bit concerned about regulation drift and the possibility of double regulation for housing associations, so of course we would want to make sure that Richard and the Mayor and others-
Q447 Mark Pawsey: Would you rather the standard did not exist?
Neil Hadden: I would like to be clear as to who it was applying to, because we are regulated by the Homes and Communities Agency.
Q448 Mark Pawsey: Richard, is Neil’s business going to be regulated by your new standard?
Richard Blakeway: No, but his subsidiary will be-if he sets one up for his private rented properties-because it is not regulated by the HCA.
Q449 Mark Pawsey: Can I come on to advice and information for tenants? Stuart, your organisation is arguing that more information should "be made available to landlords, tenants and professional advisers." In your experience, do people not take up advice before entering into leases and rental agreements?
Stuart Corbyn: I think landlords do, but it is slightly scary that quite a few professional advisers-lawyers as well as agents-do not necessarily know how long an AST can be. An awful lot of people assume that an AST can only be 12 months. There are basic things like that which even professionals need to have a better idea about.
Q450 Mark Pawsey: How about information for tenants? Do you advise prospective tenants, or do your agents advise prospective tenants?
Stuart Corbyn: When we go to the market, we hope that we will be making it entirely clear to tenants what we are providing and what they can do, but there are probably few people around who can say to somebody, "Well, you can only take a 12-month tenancy, but actually you can have a five-year tenancy." I doubt if that information is there. We probably will not be, because we will be offering a form of tenancy and hoping that people will take that.
Q451 Mark Pawsey: Generally, how can we improve advice and knowledge for both landlords and tenants before entering into agreements?
Richard Blakeway: One of the things in the standard is actually using plain English-I think that is important-but also raising awareness of what the responsibilities are. We will have a large marketing campaign behind this, and we have a lot of support from the six accrediting bodies in London, which I think will raise awareness. One of the really striking things, which comes back to the heart of your question-why bother with this?-is that DCLG figures show that 81% of landlords are not aware of the category 1 hazards, which are set down in law. Clearly it is about raising awareness among landlords. I am not saying that they are bad landlords; they are just not necessarily aware of all the responsibilities. Tenants certainly are not: the level of expectation among tenants is affected as well, because of that lack of awareness. One of the key things that we can do through the standard is to raise awareness.
Q452 Mark Pawsey: Will that improve landlords’ awareness of the condition that they need to keep properties in?
Richard Blakeway: Yes.
Q453 Mark Pawsey: When people are in receipt of housing benefit, it has been suggested to us by some that receipt of that housing benefit should be conditional on landlords keeping the property in particular order. Do you agree with that?
Richard Blakeway: I think that has a lot of merit. Particularly where discretion is exercised over the housing benefit direct-the local housing allowance direct-it has even more merit. One of the things that we are certainly encouraging local authorities in London-boroughs in London-to do is, at the very least, to make the landlords that they are working with aware that they could be accredited, and about the benefits of accreditation.
Q454 Mark Pawsey: To go back to the point about the withholding of housing benefit, you said that it has merit. Would you support such a change?
Richard Blakeway: If the Government sought to introduce it, yes. The challenge that we have, though, and that boroughs in London have, is accessing sufficient PRS. It would be another barrier to accessing private rented stock, but it has enormous merit. When the public sector is paying enormous quantities in housing benefit, demanding quality because of that is absolutely right.
Q455 Andy Sawford: My questions are about regulation of landlords and letting agents, and the first is for Mr Blakeway. The Mayor’s housing covenant says that you will work towards "greater transparency about letting agent fees so that landlords and tenants have clarity" about the services that are being provided. That is something that we have explored in the Committee. Could you comment on what success there has been in ensuring greater clarity?
Richard Blakeway: It is a good question. One of the things that we would be keen to explore with Government is whether, as an addition to the measures that they have introduced around redress, you have something around transparency of fees. The second thing is working closely with the ombudsmen-there are various ombudsmen operating around this-to make sure that fees are prioritised. The third area is working very closely with landlords to see that they get some leaders within the market. I already referenced Genesis, who are very clear and up front around fees; I am sure that QDD would support this, and I think that getting some market leadership will be important.
Q456 Andy Sawford: If I were to ask a letting agent in London where they felt the force of the Mayor’s office in ensuring that their fees are more transparent, what examples would they give me of how you have impacted on how they tell their clients about their fees?
Richard Blakeway: The Mayor has no formal powers on this-
Q457 Andy Sawford: But the Mayor chose to make a pledge, so there must have been an idea about how he would implement the pledge.
Richard Blakeway: And we set that out in the covenant. We went through a consultation on that covenant and certainly one of the things we would expect is that every letting agent who signs up to the London rental standard-we have a target of 100,000 landlords and letting agents-is transparent around how their fees are charged.
Q458 Andy Sawford: How many letting agents are now signed up to it?
Richard Blakeway: It has not started yet. We have been through-
Q459 Andy Sawford: So given that we are looking at this across the country, there is not really anything in London that we can look to as an example of improved transparency.
Richard Blakeway: No, but that should not be a criticism of the Mayor; it reflects how he is going into very new territory.
Q460 Andy Sawford: Does that go for the means of independent redress?
Richard Blakeway: We are very supportive of what has come through on the legislation around redress. We will have to see, later this year, what DCLG’s consultation says, but we will respond to that and will certainly be pushing it. All the noises are positive.
I think there are three bodies in London that accredit agents and one of the things we have done is to work very closely with them on the London rental standard, so I think you will see a significant increase in the number of agents accredited and, therefore, a bar will be set in London that does not currently exist around greater transparency.
Q461 Andy Sawford: Mr Hadden and Mr Corbyn, the case has been made that local discretionary schemes could deter institutional investment, yet you are both making significant investments in Newham, which is at the moment the national example of a local scheme. Is it not true that claims that those schemes are a real deterrent have been exaggerated? Are there not far more important considerations?
Stuart Corbyn: We had committed ourselves to the acquisition of East Village before Newham came out with their final indication of-
Q462 Andy Sawford: Would you have changed your mind?
Stuart Corbyn: I am sure that we would not have changed our mind, to be fair, but we did try to have quiet discussions with Newham to suggest that their compulsory landlord licensing scheme was something that did not have to apply across the borough; it could be discretionary. They said that the legislation in place-from 2004, or whenever it is-means that they are not able to use any discretion whatsoever. But when you see the form, it is going to be an administrative burden, because apart from the fees that one has to pay, even Newham admit that they are getting the process down for landlords to have to take only 20 minutes per property. Well, 20 minutes on 1,439 properties with whatever ongoing issues will be an administrative burden.
Q463 Andy Sawford: Is it not in the interests of the reputation of those organisations investing in the private rented sector, and indeed landlords, that the quality of provision in the private rented sector is improved?
Stuart Corbyn: Oh gosh yes.
Q464 Andy Sawford: So there is a social responsibility-another reason that surely has economic benefit-to support the local discretionary scheme.
Stuart Corbyn: Even Newham themselves say that they do not like the scheme that is in place because it does not give them the degree of flexibility that they would have liked.
Q465 Andy Sawford: That is not what they told us.
Stuart Corbyn: Well, this is the conversation that we have had with Newham-
Q466 Andy Sawford: The Mayor was quite supportive. Could I ask Mr Hadden the same question?
Neil Hadden: There are two issues about local schemes that certainly need to be looked into very carefully. Firstly, will the costs of registration or fees, or whatever, not be passed on to tenants in the rent? Secondly, will more regulation drive out potential landlords? I think that, anecdotally, any additional regulation or extra costs have the potential to do that.
Q467 Andy Sawford: As someone with huge experience in the sector, with all the time you spent at the Housing Corporation and so on trying to raise standards in the sector, in your cost-benefit analysis, what price would you put on safe, reasonable quality housing?
Neil Hadden: A high price; it is very important. The other part of my answer is that as a regulated provider of housing, we feel that we have sufficient regulation to cope with, and we are providing standards much higher than the standards either in the Mayor’s rental standard or in the local licensing scheme that Newham came up with. Therefore this is not targeted at organisations like ours; it is targeted at landlords.
Q468 Andy Sawford: You see this as an opportunity, don’t you? You suggested that landlords be encouraged to use a registered provider and that the local authority would reduce or waive the fee. Why do you think that the council tax payer more generally should fund improvements in the private rented sector and their regulation?
Neil Hadden: Why do I think that the council tax payer-?
Q469 Andy Sawford: What is the economic model whereby the fees can be waived if a landlord registers with you, because the local authority will still have to perform a regulatory function?
Neil Hadden: We are registered with the Homes and Communities Agency. That should be sufficient for any local authority seeking to get a registration scheme.
Q470 Andy Sawford: But there would be an exception, if they are registered with a registered provider.
Neil Hadden: I think an exception should be made for registered providers, yes, because there are higher standards that we are already meeting.
Q471 Mrs Glindon: Each of you touched on the German model of renting and pointed out some reasons why it might not work here. When our Committee visited Germany two weeks ago, we were impressed by how the private rented market works. More than 54% of people rent there. There is a vast range of tenants. Do you think that we could ever achieve such a mature market here?
Neil Hadden: There are two parts to your question. One is about the maturity of the market going forward. The other is whether it is to be based on the German model. I think that we will see a maturity of the private rented sector coming forward for pure economic reasons. The average age of somebody accessing owner occupation is 37 and the average deposit that they need is something like £90,000, so more and more people are moving into the private rented sector and therefore there will be a maturity, naturally, within the sector. Whether it is on the German model remains to be seen. I think we have to build our own model first.
Stuart Corbyn: I lived in Holland for a number of years. The Dutch were fascinated by the English obsession for owner occupation. They would look at how much we paid for a two-storey Victorian terraced house and wonder what on earth we were doing. As far as they were concerned, renting was a perfectly reasonable way of living somewhere. It is all about choice at the end of the day. I think it will take quite some time before culturally we have moved from this obsession with owner occupation. It is a long, slow process. The sort of things that we are doing help that process, but I think it will be a long time before we ever get to the sort of approach that the Germans or the Dutch take to renting.
Richard Blakeway: It is interesting. I have said before how, structurally, the German housing market is completely different from here. For example, there are higher rates of taxation on ownership there. These are big issues for any Government to have to deal with. Whether they wanted to make property ownership a less tax-efficient asset class is a big question for the Government or Treasury to undertake. The UK rental market and particularly London’s rental market has doubled during the last decade, so now roughly 25% of households live in the rented sector. On our current projections, that will probably go up. By the beginning of the next decade, in the early 2020s, about a third of households will be living in the rented sector. Certainly within this mayoral term, which runs until 2016, we anticipate it being a larger proportion of London’s housing market than social rent.
The rented sector is growing, and there was particular growth during a time when it was far easier to access mortgages. It is very striking. Most of that growth, as Stuart alluded to, came about as a result of the ’88 Act and banks offering buy to let mortgages. Last year, even though it has not got back to the pre-’08 levels, we were looking at something like £16 billion coming through the buy to let market. We think the vast majority of landlords in London own fewer than five properties.
You have a very different market-clearly not an institutionally backed market. You now have a big debate about what standard we should expect and how professional that market is, particularly as agents and others are coming into it, in a way that was not the case before. That is very much where our focus is, as well as trying to see whether we can tap into a more institutionally backed market and talking to individuals in the buy to let sector who are investing in property. Is there a more structured way that they could invest in property that has less risk for them, lower entry costs and generates a better yield for them than the 3% net yield that you probably see in London?
There is a conversation about the product and the quality of that product; there is a conversation about institutional investment and the attractiveness of the UK market, and the London market in particular; and there is a conversation about individuals who, as I say, put in £16 billion of lending last year through buy to let, and about whether there are options for them to invest in housing in a more structured way, rather than through the cottage industry that exists.
Chair: Okay. Thank you all very much indeed for coming to give evidence this afternoon.
Examination of Witnesses
Witnesses: Ian Fletcher, Director of Policy (Real Estate), British Property Federation, Paul Smee, Director General, Council of Mortgage Lenders, and Nigel Terrington, Chief Executive, Paragon Group of Companies plc, gave evidence.
Q472 Chair: Good afternoon. Thank you all very much for coming to give evidence. To begin with, for our records, could you say who you are and the organisation you represent?
Nigel Terrington: I am Nigel Terrington. I am the chief executive of the Paragon group. I am also chairman of the Council of Mortgage Lenders, but I am here representing Paragon.
Paul Smee: I am Paul Smee, director general of the Council of Mortgage Lenders.
Ian Fletcher: Good afternoon. I am Ian Fletcher, director of policy at the British Property Federation.
Q473 Chair: Thank you all for that. The private rented sector has grown quite considerably over the last decade. Is this simply a result of the changed economic circumstances that we are now seeing-the rising cost of properties to buy, followed by the non-availability of mortgages-or is it a delayed reaction to the deregulation in 1988 that has taken some time to work through?
Ian Fletcher: I think it is a combination of different factors. Clearly, the buy to let market over the past 10 years changed dramatically, following the changes we have seen in the mortgage market, with mortgage lenders being prepared to provide finance for the letting of property. Clearly, over the past few years, there has been a significant need for that type of property; it has been building over the last decade, and we have seen the expansion of things like student accommodation. Generally, the sector has, I hope, been a force for good in terms of delivering for those needs.
Paul Smee: There is a cocktail of reasons. Affordability concerns have prevented some people who would previously have got on the owner-occupier ladder earlier from moving into that form of ownership. There has been a perception that mortgage finance was not available. While I believe the mortgage market is open for business, perception lags behind that change. We have evidence as well that people value the flexibility and choice that they get from the private rented sector. I also believe that the quality of rented accommodation on offer in many parts of the market has improved. All those things have come together to lead to this increase.
Nigel Terrington: I think we are in the middle of a long-term structural change in housing tenure within the UK. It kicked off with the regulatory change in the ’80s, and that has been developed further by additional Government policy on things such as the increasing levels of student population. But then moving further afield, it is the social and economic changes that have taken place alongside demographic changes. I am sure that a lot of people who would like to buy a house simply cannot, either because of tighter regulation through the banking system or because of affordability issues. If you talk to the young generation today, they do not want to do what their parents did; they want more flexibility and more choice. They want more flexibility over when they get on to the housing ladder. Families are being formed later in life. People are getting married later in life. There are more people at university, and more people leaving university with debt. As a consequence, that settling-down time has been pushed back. Alongside that, we have all the demographic changes, the most notable of which is the immigration flow where we have clearly seen a significant population shift. We have had inward migration into the UK. Our evidence shows that five years after economic migrants come to the UK, around 70% of them are in the private rented sector. If you compare that with the average tenure mix, you will see that the more that the demographics or population change, the more demand and pressure comes on to the private rented sector. Clearly, the economic environment has not been helpful in that regard. First-time buyers have struggled with the after-effects of the financial crisis. As Paul said, the market is open for business, but its capacity is not as big as it once was.
Q474 Chair: To go back to the longer-term shift, when the recession first hit it seemed that within the private rented sector itself, the buy to let sector was going to be as badly hit as any; mortgages almost dried up as the first reaction was, "We can’t lend there." That seems to have changed quite a bit over the past couple of years. Do you see continuing growth in the private rented sector to be further growth in buy to let, or will it shift to institutional investors coming in, as we heard from previous witnesses?
Nigel Terrington: There was that immediate reaction after the credit crunch, and also a collapse in the level of supply of finance. One of the key reasons was that a lot of the lenders, ourselves included, financed themselves through the capital markets, the securitisation markets, all of which have performed in an exemplary fashion unlike the sister transactions that were done in the States. The point here though was that in that aftermath the availability of new money to do new lending was in short supply, but it has come back quite significantly over the past few years. The other perception was also that there was a much greater risk. That was almost personified by the performance of Bradford & Bingley, which was, I think, down to some very poor lending. If you look at the credit performance of buy to let as a whole it is as good if not better than owner-occupied lending, as evidenced by the CML stats that are produced on a fairly regular basis. I think the growth will come in the private rented sector and in the buy to let sector. In the past few years, the buy to let market has typically been growing at about 20% per annum, which is a much faster rate than owner-occupied lending in the UK.
Ian Fletcher: We have heard from our landlord members that, like any mortgage market, low risk is priced accordingly and a new investor in the buy to let market may struggle to get finance. If they do get it, it is at a higher rate of interest than for an established buy to let player. That will be taken account of, and the market is open for those sorts of landlords.
Q475 Mark Pawsey: Isn’t it the case that many houses and flats that were built for owner-occupation have simply been diverted to the private rental sector because they were not saleable, or because there wasn’t the money around for owner-occupation? All I want to explore is whether growth in the private rented sector is encouraging developers to satisfy that demand by bringing stock forward specifically for the sector. Is there any evidence of that happening?
Nigel Terrington: I think that happens indirectly. In our experience, landlords prefer to buy through the secondary market and tend to buy used properties-
Q476 Mark Pawsey: Properties that were designed for another purpose.
Nigel Terrington: Yes. They may have been designed as a two-bedroom apartment. The developer some decades ago may not have intended to rent it, but it could be rented. Our experience is that new-build properties tend to be priced with a premium and may be around 5% more expensive than a secondary market price. Also, it is very difficult to value a property in a newly built block.
Q477 Mark Pawsey: Does that mean that you are sceptical about incentives such as build to let funding, because investors will always prefer to buy second-hand stock rather than stock built specifically for letting?
Nigel Terrington: It is a factor. In our experience and from what we have seen, institutional investment in larger blocks has worked well where it has been focused-for example, student accommodation. One thing I am a little concerned about in the production of large-scale build to let projects is the creation of what may be almost rented ghettoes when you perhaps wanted a more integrated housing market.
Q478 Mark Pawsey: Paul and Neil, are you bothered about rented ghettoes?
Paul Smee: I would like to see supply increase, because that would solve some of the root problems in the housing market at the moment. Perhaps I could add a further flavour. We have recently done research about people’s long-term aspirations, and the British aspiration to own your own home remains very strong, with 79% of people wanting to own their own home within the next 10 years. Some will already own them, but they want to stay in that state. There remains a high level of demand for owner-occupation eventually. What has happened is that people’s time scales have moved for satisfying their objective, and that is where the opportunity is for the PRS.
Q479 Mark Pawsey: You are suggesting that people are in the private rented sector with some reluctance.
Paul Smee: Not necessarily immediate reluctance, but with a long-term aspiration to move somewhere else within10 years.
Q480 Mark Pawsey: You said you wanted to see more supply, and that your solution to that is tax breaks for landlords. Why should we give more tax breaks to an already privileged sector?
Paul Smee: I am not sure that that was our particular proposal. We are keen to see supply increased and we have supported things such as the Government’s help to buy equity loan scheme and the original help to buy project that was introduced early last year.
Q481 Mark Pawsey: But you have spoken about there being "merit in individual landlords’ tax demands, upon sale of the property, being more aligned to what a small business would pay." You want landlords to be treated as businesses, which would be an improvement in their tax treatment.
Paul Smee: I am sorry. I thought you were talking about new build. Yes, I think there is a case to be made-
Q482 Mark Pawsey: Make the case. What is the case?
Paul Smee: You want a vibrant and different mix of landlords.
Q483 Mark Pawsey: We want a growing private rented sector, and we have one, so why should give more tax incentives?
Paul Smee: Because if you give tax incentives you will probably get new types of landlord in, and there is a particular interest in increasing the number of landlords who own more than a couple of properties, and moving away from the cottage industry that it has been to date.
Q484 Mark Pawsey: Where would you put the break between treatment as an investor and treatment as a business? Five, 10, 15? Where would you set the determining level?
Paul Smee: I don’t think I have a view on that.
Q485 Mark Pawsey: May I ask all of you about the stability of the private rented sector? People have done very well out of the private rented sector, despite relatively low yields, because of rapidly increasing capital values. We are in an era of not-increasing capital values and, in some cases, capital values are falling back. How do we make the private rented sector viable with such low yields?
Ian Fletcher: I tend to represent the institutional investor, who is investing predominantly for yield. Clearly, they want to see capital appreciation as well, but their business model is being driven on the basis of yield. Therefore, providing that house prices are not going to fall dramatically, the current conditions are conducive to trying to get that institutional investment.
Q486 Mark Pawsey: So yields are currently satisfactory in the absence of capital growth.
Ian Fletcher: It is marginal. I sat on the Montague review, which came forward with a number of recommendations which help support the sector. You asked about institutions not buying second-hand stock, and the primary reason for that is that there is not the stock out there to buy in quantities that an institution would want. It will be satisfied only by new stock, and it wants new stock that is efficient to manage and that is bespoke-built for renting. In that regard, the Montague review was trying to tick a number of boxes.
Q487 Mark Pawsey: Nigel, are you looking for capital appreciation, to justify the low yields on rental properties?
Nigel Terrington: No. Our customers take a very, very long-term view of their property investments, as you should. It is expensive to get in, it is expensive get out, and you need care and maintenance on the way through, so this not a free investment option that they run. The average investment hold period that our customers have on property is 17 years, which is considerably longer than you would expect under normal investment criteria. In terms of our landlords’ return, there is currently a high expectation of return coming from yield, with rental yields averaging around 6%.
Q488 Mark Pawsey: But over 17 years, there is a lot of capital growth, historically and, presumably, in the future.
Nigel Terrington: Yes. What they tend to see, in terms of capital growth, is an inflationary hedge. If you look at the long-term movements of house prices, you had something like 2.5% over inflation over a 30-year period. We have had good periods and bad periods, but if you take a 17-year view on things, you should get through with an inflation-plus return across that period. On the way through, though, rental yield is important to investors, because they have costs to cover, including their debt costs, which represent a fairly significant part. The gross yields might be 6% at the moment, as an average across the country, but, clearly, the net yields will be somewhat lower than that.
Q489 Chair: Let’s move to regulation. Is it really the case that investors will be put off by the prospect of more regulation, or is there simply a fear that regulation might mean rent control? If regulation actually means trying to ensure proper standards in the private rented sector, is there really anything to worry about?
Ian Fletcher: From our perspective, as we said in our evidence, we would support certain kinds of regulation that helped local authorities to do their job in setting standards. We said that we would support landlord registration. Our arguments are a little more nuanced than that. I would not support a registration scheme along the Scottish lines-we set up a register and expect landlords to come, as it were, and register-because the worst landlords are not going to register, in the same way that they break the various laws that are out there at the moment. The registration scheme that we supported was that set out by Julie Rugg in her review, which was far more nuanced and said that you used all the connections that landlords had with the state to check that they were registered. So when they went to court, they needed the registration number; when they entered a tenancy deposit scheme, they needed the registration number; and when their tenants applied for housing benefit, they needed their landlord’s registration number. It became self-reinforcing that way.
We have not been so supportive of licensing. You tend to find that a lot of the effort in terms of landlord licensing goes into bureaucracy-form-filling and people checking the forms-and that takes resource away from-
Q490 Chair: Could you just explain the difference between registration and licensing as you understand it?
Ian Fletcher: The simple registration scheme that Julie set out meant simply that you were identified as a landlord. That would help local authorities in terms of being able to know the landlords in their area and then use their existing enforcement powers, but it would also have some benefits in terms of national Government being able to communicate far better with landlords. You were discussing in the last session the fact that landlords and tenants are not very well acquainted with the existing law. There would be the ability to communicate to them in that way.
Licensing is far more bureaucratic and heavy in terms of landlords having to go through various checks: fit and proper person tests, tests to see that they are abiding by various management standards that are set locally and that sort of thing.
We are supportive of agent regulation-
Chair: We will come to that.
Paul Smee: I think lenders would work alongside any registration system where it was introduced and would take into account whether that affected their view of the security of the loan that they were making. They would take into account any implications of a registration system for the terms on which they advance the money. That said, it would be helpful if there was some sort of central register where details of various registration systems were readily available, which I do not think is available at the moment.
Nigel Terrington: ARLA, for example, has its own accreditation scheme, but clearly if you are going to be a rogue landlord, you will not be a member of it, so I think an imposed register across the country makes eminent sense. In terms of regulation, having operated in the banking sector and seen massive regulatory change in the last few years, I think that the greatest risk is not so much the regulation as the uncertainty surrounding it. Where people do not know what is coming, they will not make investment decisions, because of the uncertainty about what it means or could mean.
Q491 Andy Sawford: To follow up on that point, this is not the first time that it has been argued in the Committee that rogue landlords would not be caught by a registration scheme, but I want to know on what basis you assert that, given that we do not know what the penalties might be for not signing up to the registration scheme. If, for example, the severest penalty was a custodial sentence-a prison sentence-why could we not reasonably expect people to participate in the scheme?
Nigel Terrington: I agree with you. I was saying that we have a scheme at the moment that is run by ARLA, the Association of Residential Letting Agents. It is an accreditation scheme. There is a redress mechanism within it. But if you want to behave badly-if you want to be a rogue landlord-you will not sign up to the ARLA accreditation-
Q492 Andy Sawford: Therefore you’re arguing for a registration scheme.
Nigel Terrington: Yes, I am arguing for that.
Q493 Chair: You said in your written evidence that you thought there could be some simplification of regulation; I think you said there were 70 different sets. Is that really a call for less regulation, in terms of less effect, or simply a call to make it more understandable and more usable?
Nigel Terrington: More the latter. There are, I think, 70 statutes and 50 separate regulations. It is clear from experiences that we have seen and, I am sure, the evidence that you have heard from others that there is a lack of understanding of the regulatory framework that exists at the moment-what people’s rights already are. If simplification to try to bring these 70 statutes up to date in order to deal with the modern world in which we want this market to exist results in fewer and less confusing laws but tougher laws, fine.
Q494 Chair: On the issue of tougher laws, one of the complaints that you get from many landlords-often smaller ones-is, "We’re behaving properly. If you bring in schemes of regulation, we’re going to end up paying like the guys who don’t want to behave properly." Are there any simple ways that we could actually make sure that the costs of doing anything really fall on the people against whom enforcement action needs to be taken?
Nigel Terrington: Consistent enforcement action is probably something to be welcomed. We have obviously seen that certain boroughs and certain councils have taken a very proactive stance on enforcement, but you can walk not too many miles away to find you are dealing with a borough that does not actually have the resources or the will to apply some of its powers-so we need consistent application across the board. I would not be surprised if Newham was successful in driving more rogue landlords out of its area than other boroughs. Maybe that just pushes the problem elsewhere-pushes it down the street-unless there is consistent application.
Ian Fletcher: Local authorities, when they take enforcement action, often do not get the fine income that is coming back to the court and, equally, they are not able to recover their costs in terms of that enforcement action. Two things that I hear local authorities complain about are those two.
Q495 Chair: The idea you put forward about registration would presumably have attractions to HMRC as well, in terms of making sure that the proper share of the rents goes to the tax authorities.
Ian Fletcher: Yes, and we would not object-clearly, people should be paying their correct tax in that respect.
Q496 Chair: On the regulation of agents, which you touched on a few minutes ago, you had quite a lot of evidence in support of the regulation of letting agents. Do the three of you have a view? The Government have obviously signalled their intention to bring in a redress scheme. Is that sufficient, and how should that be gone about? What are the key elements to the design of a scheme that would make it effective?
Nigel Terrington: We thought it was a good idea to bring in the regulation of letting agents. We thought that an opportunity was maybe missed a few years ago, when it was looked at once before. In terms of a redress system, there are many examples. The most important thing is that it needs to have teeth. There are plenty of examples of schemes that exist, including umpteen examples of the financial ombudsman scheme and how that is handled. There is an organisation that has teeth, and has the ability to fine and the ability to seek recovery to the aggrieved party. There are many ways to do it; it must have teeth, though.
Paul Smee: We would certainly have no objections to the introduction of a regulatory system. We think that it should build upon principles of good regulation, as enunciated elsewhere. I think that there is broad support for the introduction of a redress scheme.
Q497 Chair: Would a redress scheme go far enough?
Paul Smee: It is a very good first step. You might want to take a first step and see how behaviours change as a consequence before you follow up with the full apparatus of regulation, accreditation or whatever. It does not necessarily have to be the only step in the journey.
Ian Fletcher: As the others have said, I think it is just a first step. In terms of enforcement, I looked at the lists of estate agents that are members of the existing ombudsman, because it is law that estate agents should be members of a redress scheme, and that list was surprisingly short in comparison with the number of estate agents that I imagine there are in the UK. I do not know to what extent that is actively policed, so I have concerns about the enforcement of this first step in terms of a simple measure. In the BPF, we would have liked to have seen that amendment go further.
A particular issue is shared across landlords and tenants, which is that existing members of ARLA, NALS and RICS have client money protection. The money that is paid by landlords and tenants to agents is not protected in any way, so you do hear horrible cases of rogue letting agents absconding with tens of thousands of pounds of people’s money.
Q498 Chair: That is something that both landlords and tenants would have an interest in stopping, of course.
Ian Fletcher: Yes, and there are certainly a number of bodies in the sector that would support that measure as well.
Q499 Chair: As I understand it, under the Scottish system, letting agents cannot charge a fee to the tenant, because they are regarded as acting on behalf of the landlord. Should we bring in that rule in England as well?
Ian Fletcher: I think the issue is that the first time the parties meet, the tenants should expect a tariff that is clear, not changeable in any respect and gives them peace of mind in terms of clarity and where they stand. I would not support the Scottish model. Going back to my days of letting a property in London, one of the few bits of leverage that I had over the letting agent was that I was actually paying for some services that they were providing to me. If a tenant wasn’t paying for anything, the service might deteriorate and they would be treated just like a commodity. I would like to see more landlords being very proactive in trying to ensure that the letting agents are dealing with the tenants appropriately. Unfortunately, I do not see enough landlords doing that.
Q500 Chair: Could I challenge that? You are saying that because the tenant pays a fee, the letting agent does not treat them like a commodity. But what powers do the tenants have? They do not enter into the contract with the agent; they just have to pay him.
Ian Fletcher: I can remember having unsatisfactory situations with letting agents. The mere fact that I was paying for the inventory to be done and for the letting agreements to be prepared gave me some leverage in terms of saying, for example, that I wanted to sign at x time or that I wanted to agree these terms.
Q501 Mark Pawsey: May I ask some questions about rental levels and the impact of housing benefit, or the interaction between rent and housing benefit? First, in the BPF document, "Rents: The True Picture" you suggest that rents actually fell between September 2011 and 2012 in the north-east and that in many other areas, rental growth was less than CPI. That does not sit neatly with much of the evidence that we have taken during this inquiry. How can you support those data?
Ian Fletcher: Those data are the official data. They are the data of the valuation agency, which, importantly and increasingly, has been improving its data. The data are now being used as part of the ONS’s calculations for the retail price index, so there has been significant improvement in the accuracy of the data. They come from 500,000 incidents of lettings and are by far and away superior to anything out there.
Q502 Mark Pawsey: You are confident that, in some areas, rents are falling and that, in much of the country, they have fallen behind CPI?
Ian Fletcher: Absolutely. I would stake my granny’s life on it.
Q503 Mark Pawsey: How would you account for the growth in the sector if rents are falling?
Ian Fletcher: That is a transient phase. It is something that will change with circumstances. As we have heard, some landlords will rely on capital appreciation as well as that rental income. They will be able to reduce their costs and so on.
Q504 Mark Pawsey: Is this picture recognised by our two other witnesses?
Nigel Terrington: Yes. We have our own in-house team of surveyors, and we draw up regional intelligence. There is definitely a mixed picture across the country. London is a little world on its own, but the south-east has performed significantly better than regions in the north. You can obviously get down to particular postcodes, but as a general picture there is quite a clear north-south divide between house price appreciation and rental levels.
Q505 Mark Pawsey: I am not sure whether Mrs Glindon would recognise that rents fell over that period in the north-east.
Ian Fletcher: I find this frustrating because that is the official statistic. Some really poor statistics have been put out. About two weeks ago, there was a statistic on the front page of the Evening Standard saying that rents in London were eight times income. That was a very poor piece of statistical analysis, because they were using the rental data for London, but average earnings for the UK. The affordability of property in London should not rely on the average earnings of someone in Islay or the Inner Hebrides. There are a lot of dodgy statistics out there. I urge the Committee to come forward with a recommendation on this, very much to support further and continued improvement in those official statistics.
Q506 Mark Pawsey: However, it leads the Committee into difficulty, because the evidence we are getting from tenant organisations does not seem to accord with the sort of official statistics you have just referred to.
Ian Fletcher: And there’s a curiosity there, because on the one hand, Shelter is saying that landlords would be better off with a stable rental contract that is CPI or RPI-linked, yet on the other hand, it is making a lot of noise about rents being out of control. Those two arguments do not really equate.
Q507 Mark Pawsey: I wonder if I might ask one or two questions about the Council of Mortgage Lenders’ view on buy to let lenders prohibiting letting to housing benefit claimants. What is the position there?
Paul Smee: It’s a mixed position. I know that a couple of very major lenders have changed their view on this and have removed or relaxed their restrictions. I think our members will look at their experience, and at the experience of landlords with housing benefit tenants. Possibly you will see some lenders being more relaxed if they are satisfied that the landlord understands what they are doing.
Q508 Mark Pawsey: But what proportion of your lenders would still have a prohibition on letting to a housing benefit claimant within their offer of mortgage funds?
Paul Smee: I might have to provide you with an additional note on the exact figures. Two of our major buy to let lenders have removed that provision. I could not tell you for the moment-
Q509 Mark Pawsey: For those who retain that provision, what happens if someone unfortunately, having been able to pay their rent out of their income, goes on to housing benefit? Does the lender foreclose?
Paul Smee: I think you’ll find that lenders in those circumstances do not take any precipitous action.
Q510 Mark Pawsey: So there’s no point in the provision being there?
Paul Smee: For those lenders who continue to impose it I think it is there because they want to understand the particular circumstances of the landlord to whom they are renting the money. I think that the concern is over whether the landlord can handle those sorts of situations, and that might be what encourages them to have those sorts of provisions in place.
Q511 Mark Pawsey: Can I ask each of you your views about the issue we raised in the previous evidence session, on the receipt of housing benefit being conditional upon landlords maintaining the condition of their property? If a landlord permits his property to fall into disrepair, with tenants on housing benefit, the benefit should not be payable in those circumstances.
Paul Smee: Clearly, that would affect the lender’s view of the landlord and the lender would want to have a conversation with the landlord about it to ensure that the landlord took action to ensure that that situation did not continue.
Q512 Mark Pawsey: Would lenders be proactive in helping to get properties up to scratch in those circumstances?
Paul Smee: I think there would be a time lag. Proactivity might be the wrong word, but I think that would be a positive circle, where the lender would be pushing the landlord in the same direction.
Nigel Terrington: Buy to let has been a significant force for good in terms of the improvements in the quality of the housing stock in the private rented sector since probably the mid-’90s. One of the reasons for that is that we will not lend to someone where the property is substandard in the first instance-it is just a straight no. Secondly, a landlord will have an obligation under his loan agreement to maintain the standard of that property.
Q513 Mark Pawsey: But how often do you inspect? How do you ensure that?
Nigel Terrington: It is a threat. The landlord knows that we-
Q514 Mark Pawsey: So it’s of no practical use?
Nigel Terrington: It’s there as a threat and it can be invoked.
Q515 Mark Pawsey: How often is it invoked?
Nigel Terrington: It is rarely invoked. However, I can tell you that the standard of properties, certainly within our loan portfolio, is very high because we make sure that we select the right landlord with the right property on day one. If you look at the credit experience, our 90-day-plus arrears stands at only 40 basis points-0.4%-compared with something nearer 2% for the whole of the mortgage industry.
Q516 Mark Pawsey: Mr Smee, we hear a lot about the accidental landlord. Have you got a view about how many people have a conventional repayment mortgage but are letting out the property when they shouldn’t be?
Paul Smee: No, we don’t. I would believe it was the exception, not the rule.
Q517 Mark Pawsey: Would it be 10% of mortgages?
Paul Smee: No, I think far fewer. If you look at the way in which arrears have been handled-
Q518 Mark Pawsey: But the lender may not know about the arrears-there may be no arrears. What percentage of buy to let landlords have the wrong mortgage?
Paul Smee: I know of no study where we have attempted to estimate this, but I think the evidence would be that it was a very small proportion. I am, again, willing to see if there is any better evidence.
Mark Pawsey: It might be helpful.
Paul Smee: I think it would be a small proportion. If you look at the way in which the industry treats those borrowers who get into difficulty with their mortgage repayment-because the idea is that they will have purchased a home for themselves to live in.
Mark Pawsey: Absolutely.
Paul Smee: If you look at the way in which arrears are handled, I think the evidence would confirm my view that it is only a small number.
Q519 Mrs Glindon: On length of tenure, a lot of other countries have indefinite tenancies with index-linked rent increases. Why do you think that model would not work in England?
Nigel Terrington: You can get longer-term tenancies by mutual agreement today. The concept of indefinite tenancies-a permanent rolling contract-has never been tested, but clearly one of the things that has been emerging is a desire for longer-term tenancies, particularly with evidence that more families are seeing the private rented sector as a permanent source of housing tenure for them. Shelter came out with some good points, in one of their recent papers, about the idea of a longer-term tenancy with index linking. The concept of "indefinite" may be leaping to the second or third stage or iteration of that. Some of Shelter’s views were good-but not perfect. They wanted five-year letting agreements one way, and two months the other way. I think landlords would find the imbalance there a little troublesome to deal with, and therefore, that may turn them away from it. But three years and six months, or something like that, may be a better balance to strike between the two.
Paul Smee: It is worth adding that only about 30% of properties in the private rented sector are subject to a buy to let mortgage, so the buy to let mortgage providers are not exactly driving all the conditions prevailing in the sector.
Ian Fletcher: I don’t think we have addressed the issue that stops this head on. To me, the major barrier is being able to gain possession of your property as a landlord-or indeed, as a lender-and being able to do so at over market value. Properties that have tenants unfortunately tend to be valued at less than market value, because of a sitting tenant in there. Memories remain long and hard about that from previous examples of rent control and security of tenure. I think we need to address that issue, and it is about speedy access to the courts, and the ability, as I say, to gain possession.
If there was a way of ensuring that we had some sort of guarantee that you could have possession cases turned around in court in eight weeks, that would probably go a lot further, in terms of getting our landlords’ confidence to consider longer tenancies, than some other issues that are being bandied around at the moment-for example, whether it should be an RPI or CPI link, a fixed uplift, or reverting to market, etc., and equally, whether it should be a five-year, three-year or one-year tenancy. The big issue is addressing that possession and access to the courts.
Q520 Mrs Glindon: Mr Fletcher, the British Property Federation has specifically stated that index-linked rents would jeopardise investment. What does the organisation mean by that?
Ian Fletcher: I have concerns about index-linked rents. Part of my day job is facing the commercial sector, and over the past 15 or 20 years, the worst deal in the marketplace has been index-linked rents. Market rents have been better for tenants. Fixed uplifts and things of that nature have also been better, and I see also, in the property sector, that you get a lot of complaints about how business rates are going up. Business rates, obviously, are linked to RPI each year, so that small increment each year compounds quite dramatically and you find, for example, that small businesses’ business rates have increased by something like 200% over the past 20 years. Actually, market rents where the landlord is not raising the rent every year, which is what tends to happen in the marketplace, are quite a good deal.
Q521 Mrs Glindon: Mr Smee and Mr Terrington, we have often heard that the biggest barriers to longer tenancies are terms and conditions in mortgages that restrict lets to six to 12 months. Why are such conditions insisted upon?
Paul Smee: It goes back to what Mr Fletcher was talking about: the ability to get vacant possession if a landlord gets into trouble. I know that lenders are looking very seriously at how they can remove that condition from mortgage offers, and the circumstances in which they can do so. I know that one major lender has been doing a very serious review of its policy and expects to announce a conclusion shortly. They may want to look at the landlord to whom they are offering a mortgage without the condition, because they want to focus more on those with some experience of the market, who can handle the implications of longer tenancies.
It is also fair to say that the lender has not felt a great surge in demand for these mortgages from landlords, not least because I think there is lots of evidence that those in the private rented sector value the flexibility that a one-year tenancy agreement gives them. Quite a complex mix has led to this condition being introduced into mortgage documentation, but it is being considered at the moment to see whether more flexibility is possible, possibly in return for different economic conditions, because the risk in the lending would change for that particular contract.
Nigel Terrington: We have asked our landlords on a fairly regular basis what things they see from tenants and what they want. Specifically, a question has been asked about longer-term tenancies. The demand coming back to us from our landlords is very low. It may appear that we have landlords saying there is no demand, but the tenants appear to be asking for it. There is clearly a gap that needs to be understood and bridged, particularly given the way that the private rented sector seems to be developing and will develop over the years to come.
From a lender’s perspective, there is clearly a risk to their security if they have a property in arrears, there is a long-term tenancy in there and the landlord is not paying. There is nothing they can really do about that. Trying to sell the property with a tenant in situ, where the rent may be under market, is not a great position to be in, hence the reluctance of landlords to enter into such agreements.
However, one of the tools that is available to lenders is the ability to appoint a receiver of rent. "Receiver" sounds a terrible word, because it immediately conjures up "fire sale." It is far from that; it is essentially where the lender takes control of the landlord’s job, as it were, and ensures the correct management of the property. At that point, the tenant will pay the rent to the bank or lender, which, if the rent is sufficient to manage the debt-service costs on the loan, can count down the days until the tenancy agreement ends and deal with it in an orderly fashion. But it is important that the lender is able to use that receiver of rent tool to achieve that. If it is six months into a five-year letting agreement, that is a long period of work-out and management to be dealing with, hence I think it probably needs to be pulled back from a five-year to a three-year period. That should be explored further by the industry to accommodate those changing needs.
Q522 Mrs Glindon: Mr Fletcher, you suggested that tax incentives could be used to promote longer tenancies. How would they work?
Ian Fletcher: Clearly, I think there is a range of different things that might help to get landlords voluntarily to adopt long-term tenancies. For example, on the tax incentive side, particularly if you combine it with registration so that you are able to have the checks and balances in place to ensure that incentives go only to those who are having those longer tenancies, you could have some sort of VAT differential. At the moment, landlords charge VAT on their management costs. That would be one way of doing it.
There are other things that we have already discussed. Clearly, it would be more attractive if there was greater security of income for the landlord than just the two months that the tenant is able to give notice. I notice that Genesis has discussed having anything up to five-year tenancies, but in their case the institution that is investing the money is getting a lease-back from Genesis, so Genesis is taking the risk-whether or not those tenancies are occupied, it is not the end investor. Another way of perhaps getting more long-term tenancies into the sector is to have the sort of intermediaries that can facilitate and take some of the risks of that lack of occupancy.
Chair: Thank you very much for coming to give evidence this afternoon.