Lime Legal

One small step…

Published 10 March 2024

But hardly a giant leap. A Treasury paper on how to tempt institutional investors into private renting should be bolder, says Martin Partington

The evolution of policy to enable the private rented sector to realise its full potential has been painfully slow. Since 1997 there have been legislative innovations on houses in multiple occupation and the protection of tenancy deposits. But, in general, policy makers have muddled along with minor changes here and there, rather than developing a strategic vision.

This was understandable. The deregulation of the sector in the 1980s and 1990s, combined with the property boom of the late 1990s and early 2000s, resulted in expansion – largely through buy-to-let mortgages. The combination of rental income and capital growth gave private investors a big incentive to enter the market.

From the government’s point of view, it seemed to be going so well. It also enabled the government to avoid clashes with party members who see no good in private renting.

But there were those who argued that what was missing was the long-term investment that only institutional investors could bring. The current financial crisis has made it clear that the cheap loans and unsustainable capital gains which supported private renting for the past decade must be replaced by a framework that encourages long-term investment.

The consultation paper, Investment in the UK private rented sector, published by the Treasury in February 2010, is a tentative first step on this path. There are chapters on the modern role of private renting, the impact of demographic changes on tenure choice and demand, and comparisons between renting in the UK and other European countries. The clear theme is that the sector plays an important role in the housing market, and will grow in importance.

The consultation asks whether individual or small investors will continue to invest in the private rented sector to the same extent as in the past decade. Bizarrely, it raises the question of what contribution individual homeowners can make to housing shortages by renting out rooms in their homes. It is hard to see how room-renting can make anything other than the most peripheral contribution to meeting housing need.

But the real meat asks what issues need to be addressed for institutional investors to be tempted into the market. Questions are raised about the impact of stamp duty land tax, particularly on investors seeking to build significant rental property portfolios, and about the way in which the UK Real Estate Investment Trust scheme might be developed to encourage more tax efficient investment in residential rental property.

The paper is a welcome first step, but its narrowness is a cause for concern. The authors acknowledge that it is limited to economic questions – other aspects of policy are divided between different government departments, the devolved administrations, local government and quangos such as the Homes and Communities Agency. This fragmentation of responsibility is a major reason why devising a coherent policy for the private rented sector is hard.

For investment in renting to flourish, there needs to be a sensible fiscal environment, planning laws which enable projects to go ahead, an effective regulatory framework, and partnerships between the private and social rented sectors.

It might be thought that the current consultation seeks to address the first of these items. In fact, even here the scope of its ambition is modest. If private renting is to make a full contribution, it has to offer long-term accommodation to those in housing need.

Thus, policy on housing benefit – currently the subject of a separate consultation exercise – must also be at the centre of the discussion. Housing benefit policy, devised in a context where the majority of private landlords are individual investors, may be quite inappropriate to engage institutional landlords.

As regards planning, the paper argues that recent reforms of planning law are designed to improve the speed with which decisions are taken. The jury is out on whether the problems facing developers of residential rental accommodation have been eased.

The need for an effective regulatory framework is hinted at in the paper – it notes that a lighter regulatory touch created by the Thatcher government was a key
factor in the development of private renting. And there is reference to the CLG paper published on the same day, which is taking forward the regulatory agenda arising from the Rugg review.

But if there is to be serious engagement with institutional investors, they need to know what the regulatory framework will look like. The recommendations of the Law Commission offered a serious package of reforms that would benefit to the sector as a whole – including leading institutional players, who strongly supported it. The ideas from CLG are limited to tinkering with rules that affect individual and small landlords.

The fundamental weakness in all the papers that have emerged from government in recent years is the little attention paid to the need for a holistic renting policy, which integrates the public, social and private sectors to improve the supply of accommodation and allocate it flexibly to those in housing need.

In this context, the most important development has been the private sector initiative of the Homes and Communities Agency which has set out a bold programme of incentives to encourage institutional investment. Again, this is hinted at in the consultation paper under review, but should be at the centre of new policy.

A fresh approach needs strong political leadership. It is a disgrace that the post of housing minister is seen as such a short-term appointment. Under Labour, most have not lasted more than nine months.

There must also be more intra-governmental co-operation – the Treasury can’t do this on its own. Communities and Local Government, Department of Work and Pensions, and the Ministry of Justice must be fully integrated into the process. Within government departments, teams that have not worked well together in the past – in particular the private and social sector teams in CLG – must learn co-operation.

The Treasury paper may be a step in the right direction, but it needs a bolder vision to ensure that renting is taken as seriously by government as it should be.

Martin Partington is a barrister at Arden Chambers.