HCA launches a private rented sector initiative
1 May 2009
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The HCA has today launched an expression of interest process for a new initiative, which could potentially attract significant investment into the housing market by encouraging institutions to fund new homes specifically for private rent.
The objective of the HCA’s Private Rented Sector Initiative (PRSI) is to create an opportunity for investors – like pension funds – to enter the private rented sector on a large scale for the first time. At a point in the economic cycle where there is strong investor appetite for low risk investment, focused on income distribution and a longer-term investment horizon, many believe that this is the perfect time to expand the private rented sector. The initiative will form a key part of the package of proposals at the heart of the Government’s forthcoming response to the Rugg Review of the private rented sector.
The HCA is seeking to work with financial institutions and other investors to develop a long-term funding model for new private rental housing in England. It is anticipated that the potential investment could come from sources such as pension funds or overseas investors which have not traditionally been involved in UK residential letting.
The PRSI could have the potential to help kickstart stalled schemes and lead to a significant increase in high quality new homes for rent, managed in a consumer focused way, which would in turn help to make private rental an option of choice for consumers and relieve pressure within the housing market.
Sir Bob Kerslake, chief executive of the Homes and Communities Agency, said: "Our initiative is one of many innovations we have used to attract new investment, kickstart stalled housing schemes and mitigate against the effects of the market downturn.
"To date, achieving scale has been one of the main barriers to attracting institutional investors into the housing sector. We believe there is an opportunity now for the HCA to work with developers and housebuilders to offer a pipeline of projects for the PRSI, which could result in a positive outcome for all stakeholders.
"But it is only potential at this stage. We will engage with the private sector to develop a market driven proposition which is attractive to investors. Projected rental yields and the current market suggest that the time is right, and that is why we are engaging with the market to develop the proposition further."
The principal focus for the HCA’s initiative is to facilitate the building of new homes for rent, but with the potential to consider recently built homes as “seed assets”. It is envisaged that such new funding will invest in homes predominantly for private rent, with the possibility of supporting a smaller component of intermediate rent. The investment return profile of the initiative is therefore primarily income focused, with the potential for longer-term capital growth.
The HCA will consider support it can give to ensure that new investment into the sector is viable, which may involve some form of limited financial support to stabilise the portfolio and create confidence for investors during the initial years.
It is anticipated that development risk for schemes supported by any new investors would remain with the housebuilders. Crucially, the PRSI could provide a source of pre-sales for projects with suitable product, which in turn could help to reduce the speculative nature of housebuilding and unlock funding on stalled schemes.
Liz Peace, chief executive of the British Property Federation, said: This paves the way for a new kind of private renting that could support new development as the housing market recovers and offer the public real quality and choice in private renting, at little or no cost to the taxpayer.
"The task now is to stimulate interest in the HCA’s proposals, encourage some innovative bids and ensure that we create some attractive proposals that provide solid returns for investors and more importantly, tenants. To make this work, we do need to reflect on the different financial structures of private rented housing, ensuring that we do anything we can to draw in this vital new funding."
The HCA has appointed DTZ as a specialist property advisor.
Ends
For more media information contact Robert Davies in the HCA press office, 020 7881 1624 / robert.davies@hca.gsx.gov.uk.
Potential Investors and other interested parties should contact Charles Whitworth at DTZ on 020 3296 2414/ charles.whitworth@dtz.com
For BPF media information please contact Andrew Teacher in the BPF Press Office, 07968 124545 / ateacher@bpf.org.uk
Notes to editors:
Residential property investment has historically offered capital growth rather than income. This is not attractive for institutional investors who are trying to match investments against liabilities, often pension payments, and hence prefer a steady and reliable income stream. In the current market, on paper, sufficiently high net yields could now be achieved from rental streams without reliance on capital growth. This could produce potential long-term underlying returns to investors equivalent to gilts.
The financial opportunity offered by private rental is the context, rather than the reason, for supporting public sector intervention in the private rental market. Several major policy papers on this subject in the past year from the British Property Federation, the Smith Institute, Joseph Rowntree Foundation, Grainger Trust and review of PRS for the Government by Professor Julie Rugg have all championed the case for a fresh policy approach to private renting. The HCA’s analysis suggests that there are two specific policy reasons for the public sector to now intervene to encourage private rental investors into the market:
- Demand – There is a pressing need to meet the pent-up demand from those people who want a quality home but who may no longer be able or willing to get a mortgage or simply may decide to delay home ownership for many years until the market has recovered fully. For another category of people, renting may be their preferred tenure of choice but the supply of good quality homes in this market is limited. The choice is poor compared with the housing markets in European countries. The potential of a large private rental sector has long been recognised for its role in encouraging labour market flexibility and mobility.
- Stimulating Supply – Private rental investment could help to make ‘mothballed’ mixed-tenure development projects more viable and help maintain capacity in the housebuilding sector. An investor could be willing to pre-purchase whole schemes or parts of schemes, thereby eliminating the speculative nature of house building which so many developers and their lenders can no longer take on their own.
- A growing private rental investment market could reduce the short-term financial focus of the UK’s private housing market so that it may start to display some of the long-term ‘asset class’ investment characteristics of commercial property, with property being held and traded for its quality and performance in use.Scale will generate a profile for the fund that, together with the security of income and prospective returns, could attract the previous buy to let type investors but without the ‘bubble’ risk factors.
Type of Vehicle – The aim would be to create an investment vehicle which would attract institutional and private investors. The vehicle which has no other function other than to buy private rental homes from developers and housebuilders, hold the assets for investment purposes. The portfolio of assets would be professionally managed either by RSLs or other professional property management companies.
A private rental vehicle would buy into whole schemes or rental elements within schemes. Large-scale build-to-let elements within projects funded by the Vehicle would allow a range of new pricing mechanisms within blocks and thereby maintain the policy of mixed-tenure communities.
HCA Role – We have considered what role the HCA could or should play to support the private rental market. Our contact with the City suggests that there is the opportunity for the HCA to ask investors and fund managers to come forward with their own investment propositions on the understanding that the HCA may choose to support more than one proposition – an internally or externally managed fund with external investors. The HCA will not be the fund promoter but will provide support in order to develop investors support for what will effectively be a new investment class, similar to the emerging Student Housing market.
The HCA has been speaking to Government and market participants around the concept of a Private Rental Sector Initiative. This informal market testing has indicated that there is a sufficient level of institutional interest that it is now appropriate for the Agency to formalise its market engagement.
The expression of interest stage will culminate in a short list to take into the next stage which is where ‘hard testing’ of concepts will be the principal focus. It is this stage where the HCA will work closely with the shortlisted parties, finalising the nature of support and ensuring deliverability of supply, and alignment with HCA objectives. It is anticipated that stage 1 will be completed in May.
The Homes and Communities Agency is the single, national housing and regeneration agency for England.
Our vision is about creating opportunity for people to live in homes they can afford, in places they want to live and for local authorities and communities to deliver the ambition they have for their own areas.
This will be achieved by:
- Acting as the bridge between national targets and local ambitions, with a strong regional presence
- Through a process of 'single conversations' with local authorities, RDAs and sub regional partnerships
- Working effectively with the market, housebuilders, investors and other stakeholders
- Understanding the needs and aspirations of people and communities.
The HCA brings together English Partnerships, investment functions of the Housing Corporation, and the Academy for Sustainable Communities, with major delivery programmes of Communities and Local Government.