At home with Melanie Leech
The Autumn Statement wasn’t as shiny as it might have been for the build-to-rent sector. As British Property Federation chief Melanie Leech tells Mark Cantrell – it’s not a good idea to be discouraging institutional investors from putting their money into housing
THERE'S always a downside. The Autumn Statement may have contained a “hidden gem” as British Property Federation (BPF) chief executive Melanie Leech put it, but for the emergent build-to-rent sector her organisation represents, the Chancellor’s offering wasn’t quite as lustrous as it could have been.
The nuggets of good news, of course, were Philip Hammond’s announcement of a £2.3bn housing infrastructure fund to pay for things like roads and water connections, which it is claimed will support the construction of up to 100,000 new homes.
Then there was the £1.4bn to provide 40,000 new “affordable” homes, with a further £1.7bn earmarked to speed up the construction of new homes on public land; the gemstone that caught Leech’s eye. Indeed, she added at the time: “Infrastructure spending is housing delivery’s silver bullet.”
A shift from demand-side subsidy to supply-side investment, as indicated by these infrastructure commitments, is all positive in Leech’s consideration, and fits the shift in emphasis we’ve seen since Theresa May became Prime Minister. However, for the build-to-rent sector, there’s the inevitable ‘but’ – and that’s the stamp duty hike imposed by Hammond’s predecessor, George Osborne.
“The very clear signal that the rental sector is seeing, the build-to-rent sector particularly, is positive – but we need to see some follow-through on that,” said Leech. “We need to keep the momentum going because we’ve seen land being made available, we’ve seen our push for affordable housing to be considered as discounted market rent, rather than Starter Homes [for sale]. Those points have been taken on board and that’s really encouraging. The biggest hurdle we wanted to leap over – and haven’t yet – is the 3% stamp duty surcharge.”
While the surcharge may not be a deal-breaker, as it were, it certainly has the potential to cause investors pause for thought, Leech points out, and that’s not something the BPF considers wise.
“We know there’s about £50bn of institutional money wanting to get into this sector,” said Leech. “Whilst we are seeing the sector start to gather momentum, it only takes one careless word from a politician, let alone a lack of policy impetus and commitment, for that investment to be very cautious.
“We lobbied quite hard for the reversal of the 3% surcharge on rental properties or second homes, which we think has been a significant disincentive to potential build-to-rent investors. We didn’t get that. But we won’t give up. We will continue to argue that it is a significant disincentive, and it also skews the valuation conundrum further in favour of build-for-sale rather than built-to-rent.”
The ramifications demand no let-up in the lobbying efforts, as far as she is concerned. “I think it is hugely damaging,” said Leech. “Partly because of the immediate impact, but also because it sends a signal to cautious investors that the Government may not be wanting to encourage that particular type of investment... It doesn’t take much to frighten off an investor.
“It also has an impact on viability. Yes, anything can ultimately be priced in, but if you are working with quite tight parameters around viability, as a lot of these rental schemes currently are, the [stamp duty surcharge] might be enough to stop development going ahead.”
It matters not just in terms of the ongoing under-supply in housing of all tenures, but also their shifting fortunes relative to each other.
“Private renting is now the second largest tenure in the UK and growing. It’s here to stay and it’s going to be a more significant part of the housing mix, but the kind of rental properties that we’re advocating are quite different to the traditional views of renting,” said Leech.
“They are at-scale, professionally managed, with a focus on customers and customer service, because the kinds of investors joining are the institutions, the pension funds: they are people with a long-term view, and a commitment not only to long-term investment but also to social capital... It’s a very different kind of approach coming in, which we think needs to be encouraged.”
That may be so. In a sense, however, it all sounds so very familiar; Leech could almost be describing what some housing associations aspire to become, as they seek a more commercial future, albeit without their growing enthusiasm with developing properties for sale as much as rent. Put another way, the build-to-rent sector isn’t the only one vying to secure this capital influx.
It’s easy to see why they’re interested in the colour of institutional investors’ money. Pension funds, as one example, are not looking for quick capital gains: they’re looking for secure, stable income returns on investment over the long-term.
“The kind of investment that is waiting to come into the rental sector won’t be there to build houses for sale: it’s not an attractive option for pension funds and the like,” said Leech.
“So if you turn off that tap, or you don’t encourage those people and create the conditions where they can come into the rental market, then that [money] is not going to be there full stop.”
In other words, this institutional investment capital can be put to work in delivering more homes for the rental market – or it can be lost to housing all together.
Ministers, meanwhile, have made it clear they want to encourage greater use of such capital sources to boost the delivery of new homes. For Leech and the BPF, that only makes the continuance of the stamp duty surcharge all the more curious; indeed infuriating.
The Government needs to clean up its signal, then, because the housing crisis isn’t getting any easier, and build-to-rent’s adherents argue it has the capability to make a significant contribution to a solution.
“Ultimately, the challenge is lack of supply. We don’t have enough houses, so anything that can be done to increase supply at all price points is to be welcomed,” said Leech.
“[Build-to-rent] can be hugely significant because it’s not a question of either ownership or rental. It’s a question of we need to increase supply across all tenures and we know there is a significant new group of investors who want to become part of the housing solution. We need to drive that investment as hard as we can into the sector.”
This article first appeared in the December 2016/January 2017 print edition of Housing magazine