Montague calls for 10 to 20-year rental agreements

Montague calls for 10 to 20-year rental agreements

Councils should be able to “waive affordable housing requirements” on schemes specifically for private rent and ensure new homes remain in the rental sector for up to 21 years, a new report has recommended.

Sir Adrian Montague – the non-executive chair of private equity firm 3i – has published his long-awaited review of the barriers to institutional investment into private rented homes after it was commissioned by housing minister Grant Shapps last year.

Above all, the report highlights the “real potential” for investment in large-scale development of homes built specifically for private rent.

As well as giving councils greater flexibility to specify private rental homes in planning agreements, it also wants a task force set up – run by a private sector chief executive – to encourage and support build-to-let development investment from the private sector and to develop voluntary standards that future landlords would meet and tenants could expect.

The private rental sector now houses 3.6 million households, compared to some 2 million in the early 1980s – with further increases expected as households fall between homeownership and social housing.

One of the well-trailed recommendations of the report was to relax affordable housing requirements as part of section 106 agreements – something the Government is already consulting on in a bid to unlock stalled schemes.

The review says: “Land values based on rental tenure will often not be strong enough to support the imposition of extensive affordable housing obligations. So, whilst desirability of affordable housing should not be ruled out, it should be weighed against the benefits already built into market rent developments, in the context of an accurate assessment of the economics of building homes to rent. In many cases, it will be appropriate for authorities to waive affordable housing requirements in relation to schemes for private rental, or to the private rental component of larger schemes also including an owner occupier component.”

In addition it believes councils should use planning conditions to ensure new homes remain in the rental sector for a fixed period of years.

The review says: “By analogy with the commercial market, a term of 10-21 years seems a sensible benchmark for authorities to aim at. Whatever the period selected, this should mean that land values used in calculating developers’ and investors’ business plans would reflect the land values based on rental tenure rather than theoretical valuations based on sale.”

Housing associations also come in for special mention – with Thames Valley Housing subsidiary FizzyLiving (pictured) featured. It has been established to procure a substantial portfolio of new apartments which will be rented to young professionals.

Also highlighted as best practice was the Manchester City Council and Greater Manchester Pension Fund scheme. This sees the council put in the land, the pension fund the cash, and both jointly procuring a housebuilder and managing agent which delivers a mix of sales and rental income to cover returns for the investor and land values for the local authority. 

The report said the larger housing associations have the potential to become “key players” in the development of bespoke private rented schemes, as their balance sheets will support standalone capital raising to finance developments. It adds their existing affordable housing portfolios give them both “asset management expertise” and a “strong platform” to offer a professional service to tenants.

In terms of barriers to private investment in residential schemes, the report found that some investors don’t want the “development risk” of commissioning new build homes – but there is greater appetite in completed and stabilised developments.

As such, Montague wants councils to be more innovative with the use of public land – rather than holding onto it for the ‘best price’. It has also urged the Government to look at equity or debt funding to support schemes that can be sold to investors with pubic capital recycled once the development is complete.

It also found that the strength of the owner-occupier market, the lack of developments of scale, and the challenges to net yields have “constrained the range of opportunities available to investors” to invest in new schemes.

Housing minister Grant Shapps said: “A major part of this is to attract and encourage new players to the market, while at the same time avoiding the excessive regulation that would force up rents and reduce choice for tenants.

“Sir Adrian Montague’s findings offer both a blueprint for achieving this goal, and for setting the standards of accommodation that people should expect.  I will be considering his recommendations very carefully.”

The Chartered Institute of Housing said the recommendations could help kick start economic growth but wants the revised approach to planning trialled for a time-limited period. It said planning gain has been a “very important mechanism for providing new affordable homes and should not be easily discarded”.

The National Housing Federation also backed the report’s call for reform. It said housing associations already own and manage thousands of homes for private market rent and want to do more. However, it warned the delivery of market rented homes “shouldn’t be at the expense of affordable homes”.

The Government said it would issue a formal response later this year.

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