Build to rent or build to build?

Build to rent, is it a way to get some top quality new rental housing or just another brick in the wall? There’s plenty of chatter about this new type of development coming forward, but what is it, what does it mean for the planning system and affordable housing and what will happen as the market matures?

Build to rent is in many ways something new. Large scale investors like pensions schemes are seeking ways to find returns and have hit upon the idea of having their own property portfolios. These aren’t mom and pop landlords with a property here and there, but organisations who have the ability to buy and sell entire buildings and blocks on a whim. But there is part of the problem- they like the idea of rental income from assets that grow in value over time but don’t want to have to deal with the issues relating to having leaseholders or other owners to get in their way.

What they’d prefer is a nice clean, wholly owned asset that can be theirs outright, traded easily and the rental returns known. This kind of housing doesn’t exactly exist in the UK (or in many places in the world) and the most obvious way to create it is to build it. So yes, there is hundred of millions of pounds floating around right now looking for investment in housing- hooray!

But that money doesn’t particularly care where it is investing, as long as it can get the best return for the investors. Where the best deal is might relate to the rents that can be expected, the land cost, the costs associated with planning and who will let them build exactly the kind of block they’d like to see. Manchester of Salford, Leeds or Bradford, London or Colchester, Milan or Barcelona- what matters to them, quite reasonably, is where the net return is highest.

Of course all housebuilders are like this to an extent, but whereas traditional builders are looking for a pipeline of land across a range of sites, from city centre to the surrounding countryside, to buy develop and then sell, build to rent developers are looking for inner city properties where the principle of development has been agreed since Victoria was on the throne where they can buy the land, build the asset and then hold it as such, selling on the whole unit at the appropriate time.

With traditional housebuilders the key issue fought in the planning system is where homes will be built. With build to rent the key issue is what homes will be built. As I mentioned above, the need for a nicely packaged up unit precludes anything quite as messy as sales of flats to a housing association or even something as messy as shared ownership or even, shock horror, someone else owning a property in their building! It would be bad for the portfolio to have a couple of appendages and provisos thrown in with any sale and therefore reduce the market value of the asset.

Many authorities in the UK, including big cities need significant amounts of new housing. This is both due to a genuine requirement to meet the needs of their residents and because they have more or less objectively assessed needs that are required to keep their planning system ticking over. A developer, whoever they are, turning up and stating that they are interesting in building a few thousand homes on underused or unused city centre sites is a godsend.

So let’s say you work for the planning department and a developer comes in saying just that- they want to build thousands of properties to rent. But there is a catch. Firstly, they are also talking to a few other cities and can only really decide on one or two locations to build at the scale they want. Secondly, their business model doesn’t really allow them to have affordable housing on site, so could they pretty please just pay cash instead? Thirdly, like all other developers, costs are high and profits are low, so they might not be able to pay all that much towards affordable housing anyhow. Fourthly, they operate in a cut-throat market where information is king, so please could any negotiations and agreements be held in secret?

Now, generals are always fighting the last war, but you’d hope planning departments are a bit quicker off the bat than that. Because let’s be clear, the opportunities for significant new developments are enough for authorities to have to consider changing their rules to keep ahead.

Earlier this week I praised Jennifer Williams’s recent article on affordable housing in Manchester. One of the key things behind the continued growth of city centre housing in Manchester -but also the complete lack of on-site affordable housing- is the willingness to get in front of the curve for build to rent. You can’t apply planning rules just for certain types of investments though, so every developer gets to play the same game- offsite contributions for affordable housing (sometimes called commuted sums), confidential viability reports, excellent but private shared spaces without significant contributions to public spaces.

Perhaps “race to the bottom” is too strong a term, but I think we need to see that Manchester is the outrider for city centre housing outside of London and look at the impact build to rent is having there.

As I’ve mentioned before, commuted sums as opposed to affordable housing onsite isn’t necessarily a bad thing, although there is a need to prevent areas from becoming ghettos of either rich or poor households. Councils or housing associations can use that money to invest in their own large scale schemes rather than a smattering of housing here and there and the smart ones could create their own mixed schemes with market and affordable homes side by side.

But no payments, or money that disappears into the ether through a viability process or into an “affordable housing saving fund” that never gets spent is never a positive thing. Development after development in or near a city centre without public space is also not great.

As with my previous comments on viability, I’m coming round to the view that no process framed around negotiation will actually be able to put the genie back in the bottle. The changes to the national planning policy framework may make some temporary difference, but I am going to firmly predict that a small army of lawyers and consultants will put us back to where we are now within 5 years. Amending viability simply isn’t enough for affordable housing, the goal must be to remove the connection between the two.

What might be better is putting affordable housing into some form of tax like the existing Community Infrastructure Levy. An amount could be worked out from the average square footage of a proposed development (or sale price of properties if you’d rather) and this could be paid to the council for them to build affordable housing (either directly or by housing association grant), with clear accounting to show this is done. A developer who wants to reduce this bill could offer a number of homes in payment for their charge, but this would be at affordable house prices rather than the full purchase price of the property.

Another change would be for local authorities to work together to set clear boundaries on what they will and won’t accept. Hopefully I’ve shown that there is an oblique strategy, perhaps even an unintentional one, to change the planning system in order to fit it around build to rent. If larger local authorities, for example the metro mayoral cities and the English core cities came together to set out what they would like their planning system to look like, they could seek to insist on published viability statements and set affordable housing quotas. This could stop developers trying to play one city off against another, but it of course comes with a healthy reward for cities going back on the agreement.

It remains to be seen how this new market will mature. As I mentioned at the start of the piece, one of the reasons investors are looking to build is because there aren’t currently the type of properties available for them to invest in. Of course there are other benefits to putting value into a bare bit of earth, particularly the one shared by more traditional housebuilders that this will appreciate the value significantly.

But once there are a raft of new build to rent properties available, will investors keep on building, or will they be happy trading the buildings that exist between each other? I’ll put that another way- there are plenty of shares that come onto the stock exchange, but the vast majority of the role of the exchange is to trade existing shares. Buy low, sell high, or at least buy for a lower price than you sell for! It is fair to say pension schemes dabble in the markets, usually in long term investments, so they are likely to be quite happy to think this way about property as well.

Sure there will be property managers who actually do things like sort out repairs and they won’t be affected by these shenanigans. The average tenant won’t notice ownership changing, perhaps the brass plaque outside the door will occasionally morph overnight into something new. But from a housing supply issue, we have to consider whether build to rent will be a major builder for many years to come or -once there are enough properties to play the asset appreciation game- whether it will be a niche portfolio for certain schemes to hold and trade between themselves.

If it is to be a major source of new housing then the issues seen in Manchester might be heading to a town near you on a large scale. If it is the former, then are the changes (or resistance to changes, such as publishing viability reports) being made to local planning systems (for all developments, remember) worth accepting for a limited local reward?

The long tail of affordable housing and how it can wag again

How fast do you have to run to stand still? And do you really have to run twice as fast as that to get somewhere else?

It’s a question we’ve been grappling with ever since the Red Queen posed it and none more so than with affordable housing.

Well, that was a question I was going to try and look at in this post. But then I found out that not only are they susceptible to a bit of genial name-calling, Shelter also have access to a time machine and have gone back to 2014 to write essentially the same post.

What’s a naptime blogger to do then? Well, it would be helpful to see what has changed since then and maybe have a think about the current trends in net affordable house building.

But first we have to draw a pretty big distinction between affordable housing and “affordable housing”. You see, in most areas when you think about affordable you consider whether someone’s income can cover the cost of the item. Not so in housing, where the government’s definition of “affordable” relates to the market price- the definition of affordable rent is 80% of the market rent in the same area.

This might not seem like a terrible thing and in some areas it just so happens that 80% of the market price is within an affordable range for a relatively low income family. But in reality that’s more of a happy accident than an outcome of wise policy making.

It didn’t used to be wholly this way. Most social housing rents were traditionally set based on the actual costs of paying for the property and its upkeep, with landlords (local authorities and housing associations, in the main) given very broad parameters to set rents. Whilst in power Labour argued that this led to wildly different rents for what was in effect the same house and, through controlled increases in rent, tried to get all social providers to roughly the same rent for the same property- called a “formula rent”. This equation looked at the price of the house and also the median earnings in the area. But it was only a proxy to allow for equalisation in the medium-run.

And it didn’t get there, because Labour slowed down the process and then the Conservatives came in and chose to increase and then reduce social rents at the same rate for everybody. Only now are they looking to allow authorities to increase rents again. This means rents are still quite divergent between providers and between areas.

So, and I can’t be clear enough about this, neither social rent on older stock nor affordable rent really have any direct connection with affordability built in. Social rents are by and large lower (in many areas far lower) than affordable rents and are therefore more affordable. But there is no real mechanism to ensure that stays the case. New social rented homes (those few that are built) often have rent set at the formula rate, but then affordability is only one consideration among others.

When the new “80% of market” definition came along most providers didn’t immediately switch all of their properties to it when a new tenant moved in. What many did was make newly built homes (usually by developers as part of s106 agreements) available for affordable rent as a way to cross subsidise other, more affordable housing. Indeed, until recently building for affordable rent was required through the government’s affordable homes programme, meaning councils who couldn’t borrow (because of central government limits) had no other choice than to build homes for “affordable rent”. Collectively, although mostly for the legacy reasons, this means that the vast majority of affordable homes available today are at a social rent. That’s the good news.

The bad news is the number of new build social rented homes has fallen year on year, from nearly 40,000 in 2010/11 to 6,800 in 2015/16 (with even fewer provisionally accounted for in 2016/17). The number of right to buy completions has been edging up since 2011/12, both when the financial crisis was bottoming out (and when low income households were more able to get mortgages) and when the government significantly increased the amount of discount a household could receive to buy their home. What’s more, as most new affordable homes won’t yet have a right to buy discount, we can safely assume these were almost all social rent homes sold.

Screenshot 2018-01-23 at 3.28.16 PM

So in 2015/16 more than 3 homes at sold under right to buy for every social rent home that was built. Even if you add affordable rent into the mix there are only 1,358 more homes being built than lost. And what’s more, whilst there should be 1 for 1 replacement of homes sold under right to buy, that has never been the case, looks like it will be a very long time until it is the case and if it does happen it will by and large affordable homes replacing social homes, thus adding little to the mix of truly affordable homes.

Put that another way, since 1991/92 there have been 215,000 more homes sold under right to buy than new social rented homes built.  That’s more homes than there are in Bradford.

This is also the case with affordable housing in parts of new developments. Where “affordable homes” are agreed as part of s106 agreements, they often either become “affordable rent” or an intermediate option that is most likely shared ownership. More councils are starting to accept payments in cash for off site provision in lieu of affordable accommodation, which at least means councils can build what they want but does lead to worries about the ghettoisation of “rich areas” and “poor areas”.

Of course developers are hit and miss when it comes to actually providing affordable homes as part of their developments. As part of the planning process they are able to argue that they cannot make their scheme viable with the level of affordable accommodation set by the local authority. This means they are able to negotiate, often significantly or to zero, the amount of affordable housing on the site. Of course every single site can be just about viable at the same time as the heads of the developments earn £100 million bonuses.

In fact it is fair to say that there is something more than a cottage industry set-up to help developers argue their case for lowering affordable housing requirements through the viability process. Perhaps we could call it a 6 bedroom, triple garage industry?

The recent government consultation on viability (amongst other things) goes some way to address this, effectively saying that the local plan is the place to be clear about viability of individual sites and once agreed there is little reason to change it. There are however a couple of issues with this. This first is that councils will take time to update their local plans (remember it is a process that is measured in years) so the current system will remain in each area until they have (or are at least approaching) a replacement plan. The second is that there will still be flexibility in the system (for example by judicial review on the reasonableness of individual decisions) for developers to tease open a loophole or two that they can then drive a bus through. Followed inevitably by bus lane markings and an open highway. Perhaps this is the world-weary cynic in me, but I fear the approach laid out there will lead us back to the same situation in 3-5 years.

Given that developers see having lawyers on a retainer as part and parcel of the industry, I would rather something that looks more like a hard to avoid tax than an easy to evade agreement. Yes, that might mess with their business case and yes, that will meant hey might have to change their modus operandi to suit the new circumstances. Given that might have as many positives and negatives it is a risk I’m willing to pay.

So councils are at the limits of what they can build, when they and housing associations do build they often choose (when they have a choice) to go for affordable rent. When developers build they often try to limit their affordable accommodation and when they do build it what is made is usually “affordable rent” or another type of intermediate accommodation. So where does that leave those who genuinely need truly affordable accommodation?

I fear trying to create a new type of rent level will just lead to another competing layer in the market. Removing “affordable rent” from what counts as affordable rented accommodation, especially under s106, would help restore some sense. Whilst councils are free to set terms in their local plan I think it would make sense for discussion on affordable accommodation to be based on what proportion of people in the local area could afford to live in the agreed accommodation. So if “affordable rent” stays, it could be renamed “rent that X% of people locally could afford to pay”.

Local authorities and most housing associations truly do want to build genuinely affordable homes, so giving them the powers to do borrow and build will make a huge difference in building of new affordable homes. Central government continuing the move away from “affordable rent” will allow councils and housing associations to build homes at a rent they think is appropriate and needed in their local area.

Finally, without wanting to sound like a scratched record, the bath will only fill if you put the plug in. Right to buy is leeching away truly affordable housing, giving some households a cash injection (when they sell the homes) and giving a number of private landlords an unearned field day as they swoop in, buy a former council home on the cheap and move in tenants paying market price. In a way, it would be better to give the tenants the discount to buy another house, at least then the landlord wouldn’t have to go through the cost of building a new property, although it wouldn’t help take the steam out of the wider housing market.

It would take many years for the total supply of social housing to dry up, but if we don’t look to do something more about it now then it could still happen. Given the need that clearly exists for affordable accommodation, that would be a huge mistake.

Delving into devolution

Never plan ahead unless you are prepared to throw away. That’s a lesson I have had to learn over and over again.

As I’ve said elsewhere, I had a plan to talk about the trend of government “doing deals” instead of offering the same policy options to everywhere, both through devolution and for new council housing.

Never mind that the letters were falling off from behind Theresa May, her housing policy proposals didn’t once mention the deals government have been working on with some councils for many months now.

I don’t think that means that the deals are not going to happen, just that government thinking has bypassed them for now. Rather than hark on about something that is on the back burner, I will try and talk about devolution more widely, in particular a wide view of what it could mean for the country (and by that I mean England) as a whole.

Now that the dust is settling on the first tranche of devolution deals, with elected metro mayors in a number of larger city regions, I think we need to calmly and reasonably look at where devolution could be leading us as a country and comprehend what this new multi-speed system is going to look like.

We should first take a couple of steps back. Right back to 1974 in fact and forward through many acts to the creation of many of the local government systems we see today. What we need to understand is that England is already a diverse system, with London having its own rules and the rest of the country being split into unitary systems, two tier systems, metropolitan boroughs, non-metropolitan boroughs. Some authorities have a committee system, some a cabinet system and some elected mayors.

The impact of these different systems and the negotiations that brought them about means that councils can be big or small, self contained or not. In just one example, Leeds City Council covers a huge, diverse area. You can walk around the edges of the Leeds district, only very occasionally interacting with something that isn’t countryside or a village. Even the urban join with Bradford isn’t that wide, when you look at it or walk it. Manchester City Council covers a much smaller area, is bordered by Salford and Trafford, both themselves large urban areas part of what the layman would call “Manchester”, although be careful doing that in some parts of Salford!

The reasons behind this are tied up with history and practically ancient politics. Yes, it happened that Manchester and Salford centres grew up next to each other, and Newcastle and Gateshead for that matter. There are historical and political reasons Herefordshire is a unitary authority and Worcestershire isn’t and why it is Herefordshire and Worcestershire, not “Hereford and Worcester”.

The point is, the structure of local government has evolved to both reflect and create very different areas and has done so because government has usually been remarkably pragmatic and open to what they perceive to be the requirements of the local area. But most powers given to councils have been across the board, with only tinkering or one off payments between them. Authorities have often been able to come to their own conclusion on how they wish to run services, but not which services they choose to run.

This was even the case in local authorities that opted to have elected mayors; it was simply another way of administering the same services. In the early 2010s two things changed. One is very techie but could be important in all number of ways- in 2011 councils became able to do anything an individual could do. So they could set up companies more freely, take on other non-statutory responsibilities and were generally more free to act. It is worth pointing this out because really there is nothing apart from finances stopping many authorities from doing what they want- as long as it isn’t creating taxes or go to war. But finance is the key one and we will come back to it!

The other was wider devolution- multiple authorities working together to create a combined authority. This is especially true as this often meant taking responsibility for central government functions and delivering them locally. The list of potential responsibilities is long, but let’s for the sake of brevity state that anything apart from taxing and warring was on the table. Everything was up for grabs, but that’s where the deal comes in. Each different set of authorities taking part had to come to an agreement first with each other and then secondly with central government about what they would like to control and how they were going to be measured on whether they have succeeded.

This means, especially as more areas catch up with the outriders on devolution, that different places have different deals. One place may have a deal to look after health and social care funding, whilst another may not. One may put the oversight of Police into the metro mayor’s hands, another may stick with a police and crime commissioner (for as long as they last). One may have an intricate deal on new housing delivery, another may have just received a cash amount to unlock housing sites. A third may not have considered housing at all in their deal. Many may soon try to franchise bus services, but others may choose to leave that alone.

All this means policy making at the national level will have to become a lot more cautious about what and where central government can make changes- law and guidance will have to be clear about where it applies- which probably means exemptions coming out of your ears. It also means people moving from one devolved area to another will not necessarily have the same entitlements, support or interactions with their local representatives.

Areas that do not have a deal will still be covered by policy decisions made at Westminster, but with fewer and fewer areas covered (particularly populated areas) this is going to mean a very different type of policy making. It could, over time, mean that some Westminster policies and debates become quite tailored to the needs of some of those areas. Assuming it will mostly be rural and semi-rural areas left un-devolved it may mean that some debates in Westminster become focused on those areas.

Indeed, this could even mean that smaller urban areas not in devolution deals will be ignored because the “non devolved areas” are seemingly represented by the views of rural and semi-rural areas. It may also lead to some strange variant of the West Lothian Question- why should Greater Manchester MPs vote on a topic that doesn’t affect their area?

Those on the outside of devolved areas may well look at the extra funding being received with envious eyes. Indeed, this is arguably one of the reasons the Leeds City Region has ended up in the quagmire it has. Those who want to say “me too!” or “me as well!” need to have their cases looked at, but there needs to be some clear and consistent direction from government about who can be involved in devolution and who cannot.

In whatever scheme there will be places outside of devolution. Jonn Elledge’s piece on Herefordshire neatly illustrates that they can and probably will feel left out and something may need to be created for them- I’m suggesting calling it devo-min.

To put that another way, if devolution isn’t for everybody (and that is the mood music out of the government) then the government does have to be clear how the world will work for those left outside the devolved areas as well as accept that their decision making power has been reduced for large parts of the country. Politically, it would be better if this looked like an offer rather than telling them “things will stay the same”, but that’s for the politicians to decide.

I want to come back to finances, because it is clear that the next step for devolution is going to be fiscal. Metro mayors are not going to be happy with a begging bowl approach for long- they are going to want to set taxes. Given the rather terrible state of council tax this isn’t exactly unreasonable; practically anything save a poll tax would be better than further tinkering with council tax.

So we may see different tax rates and indeed different tax styles in different areas. Maybe a land value tax somewhere and an additional income tax somewhere else. This doesn’t necessarily mean the overall tax burden will increase, but there will be pressure to allow metro mayors to levy their own funds to pay for the services they feel people want.

I can imagine the Treasury in particular will try hard not to accept this, but past a certain point it is going to be hard to resist. It will be fiscally hard to control (isn’t that the point?) but could lead to significant buy-in if people recognise the links between their payments and the services they receive. I suspect as a final statement, the Treasury will argue that any authority with fiscal powers should be allowed to fail.

So a system where devolution has reached its apex will be characterised by diversity, but we have to remember that we had a diverse system to begin with. We’ve coped with it well enough so far. Policies in one place may simply not apply in another- I think we can probably cope with that, although newspapers will no doubt be up in arms about postcode lotteries. It certainly won’t look federal, because there will be swathes of the country where devolution doesn’t apply. Those areas may feel hard done by unless they have some individual offer-whether it is a form of control or a guarantee of only their MPs setting the rules for those areas.

If the government doesn’t like the look of that they could try and put the genie back in the bottle by limiting the ambitions of devolved areas. If that’s the case, we could see something much more like the old metropolitan county councils, which would be a crying shame. This would be a two-tier system, with perhaps limited additional powers (the current agreements plus a few more, if they’re lucky), but mostly just conglomerated powers from the existing councils underneath them.

Diversity is not a bad thing, it can lead to experimentation and finding out what works. Areas that are not the same shouldn’t be treated the same (that would be an oversimplification). Some slight form of competition might be beneficial.

But we do need to have a sensible discussion about where we want to set the limits and what we need to do with the areas where devolution doesn’t apply. If nothing else, that will let the areas ripe for devolution go for it without being held back by a small number of interested parties.