A guide to developing partnership investment in new private rented homes for Londoners invest to rent

## Contents

	
foreword	
	
summary: four key steps for partnership	
01	 the housing climate in London	
	
	
02	 meeting housing need in London	
	
	
03	 practical partnership in action: 	
	
Terrace Hill Group plc	
04	 the case for institutional investment	
	05	 practical partnership in action:  
	
Argent, King's Cross Central	
	
	
06	 what institutional investors are looking for	
	
	
07	 what local authorities are looking for 08	 practical partnership in action: 
	
Evenbrook Group, Birmingham	
09	 steps for local authorities looking to foster  
	
investment in the PRS	
	10	 practical partnership in action: 
	
LetFirst, Westminster	
This publication has been jointly commissioned by London Councils and the British Property Federation (BPF) to provide London's councillors and other interested parties with a guide to institutional investment in the residential private rented sector (PRS). The content and background research is the work of London Councils and Allsop LLP with the assistance of BPF members that are experienced in residential investment and have shown a keen interest in exploring opportunities to expand the sector further. Contributors include Aviva Investors, Grainger plc, G:Res, Hometrack, Invista, Legal & General Investment Management, Orchard & Shipman and Terrace Hill Group plc.

11	 conclusion	
	
sources of further information	
	
acronyms and glossary	

## Foreword

2010 has seen the public sector enter a new era, one which will see significantly less government funding to support house building. Yet, at the same time, London's boroughs stand to gain far greater freedom and flexibility to manage their housing stock and shape housing investment in their areas.

More homes for Londoners are desperately needed. Supply in recent years, particularly of affordable housing, has not met demand. With recent higher prices and more stringent mortgage conditions, increasing numbers of households are unable to buy a property, nor access the limited supply of socially rented homes in the city. This means that the private rented sector (PRS), already a key feature of London's housing market, will only grow in importance for the capital.

Despite this difficult economic landscape there is strong potential for the private and public sectors to work closely in partnership to deliver new homes. Institutional investors have access to the scale of funding needed to develop first-rate private rented and mixed tenure schemes, and local authorities, both through their planning powers and their capacity to invest their own resources, can ensure that such schemes arrive on site. In these challenging times, those investors and boroughs that are most able to adapt and explore new ways of delivering homes will be best placed to deliver the secure, high-quality homes that Londoners need.  
Alan Collett Allsop Chair of the British Property Federation's residential committee Mayor Sir Steve Bullock London borough of Lewisham London Councils' executive member  
for housing There are a number of key points that local authorities and their partners should keep in mind when considering institutional investment schemes.

Commitment to meeting Londoners' housing needs

## 1

A flexible approach to planning contributions From their statutory duty to house homeless households to their interest in establishing thriving mixed communities, boroughs will look to work with partners that can help them meet the diverse range of housing needs in any area. These aims will chime with many institutional investors, for whom lower income or key worker tenants represent longer term customers. By providing suitable and well maintained homes, these investors will be able to ensure a low turnover rate for their properties and protect their rental income.

2
All residential developments are required through the Section 106 process to make a contribution to the delivery of affordable housing. In challenging economic times where the viability of schemes is affected, alternative contributions should be considered, including the possibility of homes being made available for below-market rents.

A deal that provides appropriate financial returns for both parties

## 3 Openness To Exploring Opportunities In Partnership

No private rented scheme will be attractive to institutional investors without it being able to deliver appropriate financial returns over the medium to long-term. Through contributions of land or investment, local authorities may be able to ensure the success of such schemes. However, just like investors, boroughs will be looking for financial returns on their investment and tangible benefits for local people and communities.

4
The current landscape of housing investment is rapidly changing, as developers adapt to the postcredit crunch environment and boroughs to the new challenges of reduced public spending and greater powers for local areas. The practical examples of partnership working outlined in this publication demonstrate that successful projects have relied on both the public and private sectors communicating effectively with each other and flexibly responding to opportunities as they arose. 

## 0 1 The Housing Climate In London

London is experiencing a housing crisis. In recent decades, the supply of new homes has not kept pace with growing demand, resulting in average house prices soaring to a high of £380,000 at the start of 2010.1 Demand for social housing has increased at a similar rate with over 350,000 families now on local authority waiting lists. These trends are unlikely to change significantly over the course of the current parliament, as announcements made as part of the recent Comprehensive Spending Review (CSR) indicate that government funding for new house building will be around only half what it had been over the previous CSR period.

New homes in all tenures are needed but the credit crunch has severely hindered the mechanisms which fuelled development before the recession. 

These included Section 106 agreements delivering affordable housing, viable mixed tenure development by housing associations, and buy-to-let landlords purchasing homes for the private rented sector (PRS). More stringent mortgage conditions for home owners (in particular for first-time buyers) and buy-to-let investors, together with uncertainty over future interest rates and house prices, have left the whole housing market facing difficult challenges. 

The PRS already represents a substantial proportion of London's housing market, providing a home to over a fifth of the city's households. For many, it offers flexible and affordable accommodation in a period before moving into owner occupation. However, with house prices out of the reach of many and with a critical shortage of social homes available, the PRS will increasingly become a longer term option for many households. 

Institutional investors, such as large pension funds and insurance companies, are one of the few groups with the resources available to develop new homes on a significant scale. Since the impacts of the credit crunch have taken hold, the benefits of institutional investment in housing have been heralded by many, and both the Homes and Communities Agency (HCA) and various local authorities have been working with potential partners in the private sector to explore how PRS 
schemes could work in practice. Alongside a period of public spending restraint, local authorities are also entering an era of 
'localism', with the potential for them to have far greater control of their assets and revenues. 

Councils are looking imaginatively at the tools open to them, both in terms of their own assets and the planning system, to identify how they can catalyse the development of new housing that will provide secure and decent homes for Londoners living in all housing tenures.

## 02 Meeting Housing Need In London

The PRS is already a vital component of the capital's housing market, accounting for over a fifth of the city's households. The majority of people living and working in London have rented a home privately at some point. For many this was a temporary solution before moving into owner-occupation or social-rented housing. However, for a significant number of households, private renting remains the only viable option in the longer term as high property prices and a chronic shortage of social housing make other options a distant aspiration at best. 

## The Affordability Gap For First-Time Buyers

Over the past decade, London's trend of rapidly increasing house prices has meant many potential first-time buyers have been priced out of the market. In May 2010 the average price paid for a home by first-time buyers was £258,000.2 A 
potential buyer earning London's median full-time annual salary, £31,9483, would need savings of just under £52,000 for a deposit of 20 per cent, and a mortgage equivalent to 6.5 times his or her annual income. Even couples buying a home together on average incomes would find their finances stretched. The impact of increasing prices has been to push up the average age of first-time buyers to a high of 37 years-old.4 
At present over 350,000 families are on waiting lists for social housing in London, yet the total number of lettings made in a year by social landlords amounts to less than five per cent of this figure.5 With such a scarcity of homes, the overwhelming majority of allocations are made to the most vulnerable households, including those who are homeless or unemployed. This leaves many of those on low incomes unable to access either social housing or home ownership; indeed Shelter estimates that in London there are over 200,000 households which do not receive any means-tested benefits but earn too little to be able to access even the lowest cost intermediate home ownership options.6 Shared ownership models have offered a viable route into owner occupation for those earning a little more, but to date have not been developed in the numbers needed to meet growing demand for housing. 

Alongside the need for Londoners to find a secure home, the city as a whole needs to promote a flexible workforce. Despite the recent credit crunch there is no indication of London losing its position as the dominant region in the nation's economy. Short and medium-term renting options are often the most convenient on offer for those coming to London to work or study from other areas of the country or from further afield. In 2009 only two per cent of the capital's homes were bought and sold,7 
yet in the same year across the country half of all house moves were within the PRS.8 
Such strong demand for private rented homes is unlikely to reduce in the future. London's population has grown every year since 1988, and 25 to 34 year-olds account for the city's largest age cohort. Forecasts predict the capital's number of households continuing to grow by 36 per cent by 2031.9

## 03

Key lesson: A local authority and PRS landlord were able to work flexibly together to help the landlord reduce vacancies and ensure that more vulnerable households were able to access suitable accommodation.

Location: E, HA, N, NW, SE, SW, W postcodes

## Practical Partnership In Action Terrace Hill Group Plc

Scheme details: The Terrace Hill portfolio houses approximately 1,000 Londoners in the PRS. Recently Terrace Hill and Southwark council have been working together to house tenants from the authority's waiting lists in the PRS. Terrace Hill Group plc is a large, established AIM quoted property company, which holds properties for private rent across the UK. These are recognised to be of a high standard for the tenure and with the benefit of efficient management, the company has already attracted interest from an institutional partner. The portfolio as a whole includes over 1,700 dwellings in England and Scotland. Terrace Hill's London holdings extend to some 493 units and house around 1,000 Londoners on 'assured shorthold tenancy' agreements. The properties are highly suited to the PRS and whilst many comprise flats held in complete blocks, there are also a number of individual houses, ensuring that the company offers various housing options to accommodate households of all shapes and sizes. Added to this, the company is now working with the London borough of Southwark to extend their offer to tenants receiving housing benefit. In 2009, Southwark council approached Terrace Hill to discuss vacancies at the St James estate in South Bermondsey; negotiations followed and resulted in a trial agreement where the two parties agreed to work together to accommodate households eligible for housing benefit. Through Terrace Hill's centrally located asset managers ARIM (Allsop Residential Investment Management), it was arranged that a proportion of the properties vacant in the development would be let to tenants claiming housing benefit, nominated by the local authority. In return Southwark agreed No. of units: 493 units rented on assured shorthold tenancies in London. Around two thirds of the portfolio are flats, a quarter maisonettes and the remainder houses.

Scale of financial impact: To date, five previously  
empty flats have been opened up to tenants placed by the local authority.

to credit Terrace Hill with a larger non-refundable deposit than usually expected for the tenants housed and a slight premium on passing market rents. This was designed to provide better cover to the landlord, should a property be left in poor condition. The majority of the rent is covered by housing benefit and so costs to the authority were kept low. This partnership has proved successful to date  
and some of the tenants placed have now been resident at the St James estate for a year. The results of the trial are due to be reviewed following an annual inspection on behalf of the landlord in September 2010. Since the agreement was first put in place, Terrace Hill has experienced growing demand for properties in this location and so the number of new tenants placed by the council has not increased. The partnership does however remain in place and both parties are open to co-operation in the future. In addition to flexible arrangements with outside agencies, Terrace Hill has earned credibility for its good practice as a landlord, through long-term asset management and working closely with tenants. Effective property management has resulted in very low levels of vacancies of around five per cent (vacancies are actively managed to contribute to the creation of successful mixed communities), and long-term tenants recognise the benefits of having a professional landlord.

## 04 The Case For Institutional Investment Past Reliance On The Buy-To-Let Model

Since the 1990s, buy-to-let investors have dominated the PRS. Around one million homes entered the market across the country between 2000 and 2008/09,10 an expansion made possible by the easy availability of buy-to-let mortgages, relatively low interest rates and rising house prices. The majority of those entering the sector were small-scale landlords, owning just a few properties. 

The credit crunch in 2008 saw a rapid end to this expansion. The number of buy-to-let mortgages available dropped dramatically from a high of 3,662 
in autumn 2007 to just 304 by spring 2010.11 Where finance has remained available, lending terms are now typically tougher and with future interest rates and house prices far less certain, buy-to-let has ceased to be the attractive investment opportunity it once was. 

The buy-to-let model made an important contribution to the supply of new housing in many areas, and in particular the purchase of more modern homes helped to raise the overall quality of housing stock in the PRS. However, the growth of buy-to-let also led to difficulties in some communities, where blocks of apartments were, and are, overseen by a complex hierarchy of agents, including a managing agent, several letting agents acting for different landlords and landlords acting for themselves. This has made tackling issues like anti-social behaviour and co-ordinating improvement works, such as increasing the energy efficiency of buildings, much more challenging. Buy-to-let investors have not been the only players in the PRS over the past two decades. There are also a number of long-standing and larger scale property companies with significant property portfolios in London. Their contribution to the sector will continue, but these companies at present do not have access to financial borrowing on the scale required to provide the number of homes London needs and traditionally, as a group, they have tended towards a more measured approach to expansion. 

## The Spending Review, October 2010

In the October 2010 publication of the Spending Review, government outlined the amount of funding available to each department over the period of the current parliament 2010/11 to 2014/15. When combined with the £6.2 billion of cuts previously revealed in the June budget, the total reduction in public spending amounts to £99 billion a year.12 
Grant funding for new affordable housing has been significantly affected, and will be around only half what it was in previous years. Despite this, the government has stated its ambition to build 150,000 affordable homes over the four-year period. 

However, alongside these reductions in funding the government has announced a range of reforms which should allow local authorities greater control and flexibility to manage their existing housing stock and other assets. These include: •	 reform of the existing system of council house 

finance, which is likely to allow local authorities to 
keep the rents they collect from their tenants and determine locally how best to invest this income
•	 a proposed new homes bonus, where central 
government will match the council tax receipts for new homes for six years
•	 the option for social landlords to offer new 
tenancies on a time-limited basis, as opposed to the existing 'tenancy for life', and to charge social rents of up to 80 per cent of the market rate.

## Future Possibilities Of Institutional Investment

Clearly, in the present economic climate the buyto-let model is not able to provide the number of homes needed to meet housing demand in London. In reality, there are now few bodies with the funding available to build to this scale and government, with its focus on deficit reduction, is unlikely to step in to fill this gap. 

Since the advent of the credit crunch, new mechanisms for funding the delivery of housing have been actively sought by central and local governments. Institutional investors have been identified as one of the few groups of organisations with access to the level of funding needed to provide significant numbers of new homes. 

Institutional investment in housing offers particular benefits at this time, including:

- 	 **Scale:** Institutional investors are typically 
looking to invest between £50 million and  
£1 billion. Assuming an average purchase price of £200,000 per unit, this scale of funding could deliver between 250 and 5,000 homes per residential fund.

- 	 **Funding to developers:** Institutional investors 
have financial resources available on a scale significant enough to replace banks and developers' previous reliance on buy-to-let pre-sales to fund new developments.
- 	 **Long-term focus:** Institutional investors usually 
look to invest over a timeframe of seven to 10 years, with the potential to continue beyond 
that period if assets perform well.
- 	 **High-quality accommodation:** High 
specification, durable, environmentally-friendly homes are attractive to institutions as these 
properties are most likely to maintain their value over the investment period and will be most appealing to potential tenants. 
- 	 **Professional management:** High-quality 
management is valued by tenants. Minimising the time homes are empty is key to ensuring healthy returns on investment, and therefore there is a strong incentive for institutional 
investors to protect their reputations by 
providing a good service to tenants.

## The Hca'S Private Rental Sector Initiative

In May 2009, the HCA launched its Private Rental Sector Initiative (PRSI)13 which is looking to support institutional investment in housing delivery. Institutions were publicly earmarked as funding partners to assist developers and other stakeholders to relieve the pressure of limited supply within the housing market.

The initial expression of interest process, enthusiastically supported by the British Property Federation, was met with 64 responses coming from a wide range of interested parties including household name UK pension funds and other investors, property developers, fund managers, housing associations and property managers. 

In September 2010 the Berkeley Group became the first investor to commit to a joint venture as part of the HCA's PRSI. The deal will see the HCA invest £45.6 million in the scheme which will result in 1,887 new homes built across Berkeley developments in the South West and South East. Of these, 555 will be retained for private rent  
by a private rental fund. The HCA will retain a 20 per cent interest in the fund with the option to withdraw at a later date. 

## Building Momentum In The Institutional Investment Sector

A compelling argument is needed to tackle the existing perception that residential property cannot provide financial returns significantly above existing investments such as those in commercial property, gilts and equities. The now established Investment Property Databank (IPD) Residential Index of the UK (which started reporting annually in 2001) tracks the overall return (net rental income plus capital growth) of nearly 2,400 residential market let dwellings owned by long-term investors across the UK each year. In 2009, the total return from investment grade stock was 11 per cent against a comparable commercial property return of 3.5 per cent. The graph opposite shows how residential property in London has also outperformed all commercial property sectors over the last nine years.

Many expect that once one major institution commits to a significant level of investment in residential property others will follow. Institutions such as Aviva and Aegon have publicly declared interest in the sector and are pursuing opportunities with their property industry partners, but continuing support from the public sector may be the stimulus required to encourage others to follow their lead into the PRS. 

The 'Noughties' - property winners14
Annual total return 2000-2009, % pa

## Cash Return On December 2000 £100 Investment Argent, King'S Cross Central

King's Cross Central is the largest capital city centre urban regeneration scheme in Europe, with 67 acres of brownfield development. The scheme, when complete, will create eight million square feet of mixed use properties. The first offices and homes are expected in 2012, with the University of the Arts London's new campus opening in September 2011. A total of 2,000 homes are planned with 950 
available for open market sale or rent. These will include a mix of studios and one, two, three and four bed family homes. Argent, the developer and asset manager of the site, has plans to rent about 150 homes as private rented housing, working in joint venture with a major institutional investor. Offering some units for private renting by an institutional investor is a helpful strategy for the project as a whole, as it strives to establish its own sense of 'place'. A mix of different tenure units supports the creation of a mixed community and more rapid demand for diverse local services. The project includes plans for co-ordinated management which should provide fewer opportunities for problems than disjointed ownership. 

The financial implications for the investor are also beneficial. As it will take time for a sense of place to develop in a major multi-phase scheme, 'holding the sale back' of some homes, completed in the earlier stages and let privately in the interim, will produce better returns when it comes to their eventual sale. The two local authorities, Camden and Islington, within whose boundaries the scheme sits, have both been very supportive of the development and of plans for some institutionally-held private rented property. They have been working with Argent to define the development and ensure that it benefits the existing local community. One result of this, as an example, is the new Construction Skills Centre which is now offering 150 construction apprenticeships each year to young people from Camden and Islington.

Investor: King's Cross Central Limited Partnership Scheme details: Various sized flats to be completed from 
2012, part of a mixed use, major regeneration project.

Key lesson: Including a proportion of private rented homes in larger schemes can help the overall development of a 'sense of place', and help both the investor and the local authority develop a mixed and balanced community.

Location: Camden and Islington No. of units: 150 properties will be developed in joint venture with an investor out of a total of 950 market properties.

## 06 What Institutional Investors Are Looking For

Despite great interest in promoting institutional investment in housing, both from the public sector and investors themselves, deals have been slow to come forward. Ultimately institutional investors will only be willing to commit to residential development where it offers a financial rate of return that can compete favourably with the other investment opportunities open to them.

Some of the key financial and property elements that institutional investors will look for in any proposed scheme are:

- 	 **A benchmark net income return:** Institutions 
each have individual expectations in terms of returns from annual rental income; however, a return after all costs of around five to six per cent would generally be considered acceptable. 
This rate of return may be lower for higher value 
London stock whose capital value would be expected to rise more quickly. 
- 	 An average return of eight to 10 per cent per 
annum over the duration of the investment period: The internal rate of return (IRR), 
combining both rental income and profit from the eventual sale of the home generally needs 
to average between eight to 10 per cent over the lifetime of the investment period to make a 
potential scheme attractive. 
- 	 The potential to sell individual dwellings at 
some point: Whilst rental income is attractive to institutions, returns will only be maximised if they can sell each property individually at some point in the future, either to individual homeowners or to other investors. This presents the danger of disruption for tenants as they may need to leave a property once it has been sold. However, fundamentally the priority for institutions is to have the ability to sell rather than looking to trade dwellings regularly. In practice it is far more likely that institutions would look to sell units only when tenants had chosen to leave of their own accord. 

- 	 **Professional asset management:** Institutions 
recognise that effective and efficient management of their properties will help to minimise the periods of void between tenancies. 

Ensuring customers' needs are met and that schemes remain attractive places are the key factors in encouraging tenants to remain living in their rented homes. 

- 	 **Economies of scale:** Institutional investors tend 
to favour blocks of freehold properties as these offer both larger numbers of homes and a greater ability to effectively manage the homes and wider scheme. 
- 	 **Granularity:** Granularity, or variety, is a key 
investment requirement for any substantial portfolio in order to gain exposure to different rental markets. Tenants looking for rented properties may look for different features than potential home owners, for example, different sized bedrooms or perhaps different types of outside space that may require less maintenance. Many households currently renting privately in London are house sharers, and for these tenants, larger three or four bedroom properties may be preferred to ensure that as one sharer moves on it is easier for the household to find a replacement tenant, resulting in fewer void periods overall. Investors will be interested in ensuring that the properties in their portfolios reflect this diversity of tenant expectations.

- 	 **Suitability and quality of location:** Institutions 
naturally want to hold properties in locations which are popular with tenants and owneroccupiers. Close proximity to public transport, local facilities and sufficient employment and education opportunities are key to ensuring homes remain popular with tenants over the long-term. It will not be just high value prime London properties that will be on institutions' 
radars, but also homes suitable for those on 
lower incomes or in key worker occupations. 
- 	 **Build quality:** Properties built to high 
specifications are more likely to remain attractive to tenants in the long-term and 
attract a higher market price at any future point of sale. Institutions are interested in schemes constructed to and above government 
recomended sustainability codes, including those for space standards, energy efficiency  
and micro-generation of energy.

## 07 What Local Authorities Are Looking For

Local authorities, as 'place-shapers' for their area, have a keen interest in supporting the delivery of services, infrastructure and housing that meet the needs of local people. In the face of the current economic difficulties, many local authorities are actively exploring new models of housing delivery. However, their involvement, particularly where this may include publicly owned land or less conventional Section 106 agreements, will only be considered if an authority's key requirements can be met. These include:

•	 **Housing need:** All local authorities will 
prioritise their statutory duties towards homeless households, and will look to maximise Section 
106 agreements to provide housing for social rent to allow them to do this. However, residents 
in many areas of London have a range of housing needs, from those experiencing homelessness 
to others on low incomes struggling to find appropriate rented accommodation at a rate they can afford. Many of these households currently receive some level of housing benefit. With the 
forthcoming reductions in benefit provision from 
central government, boroughs will be open to exploring proposed schemes that are able to offer decent homes for households with various forms of housing need.
•	 **Creating mixed communities:** Both local and 
central government aspire to create mixed communities where no single tenure dominates. Boroughs may be particularly interested in encouraging development of private rented housing in areas with high levels of social 

housing to encourage greater social mobility, or 
areas of high owner occupation where lack of 
flexible accommodation may be impacting on the local economy. They may also be interested 
in supporting an intermediate rented sector to provide a stepping stone for residents aspiring to home ownership. Such schemes may include 
an element of subsidy to enable households to save for a deposit or build up an equity stake in a property.
•	 **Appropriate types of housing:** There is a 
shortage of particular residential property types in London, especially family-sized units and units adapted to meet the needs of older or disabled residents. Private rented schemes offering these types of homes may be strongly encouraged in boroughs where existing provision falls short of demand. 

•	 **Scheme viability:** Boroughs recognise that  
since the credit crunch many housing schemes have not been able to progress. Ultimately, with such high demand for housing in London, development of all housing tenures is welcome, provided schemes are appropriate for their location. Where development in an area is  
stifled by economic conditions, councils may consider proposals to substitute a social housing contribution as part of a Section 106 
agreement for low-cost rented accommodation to support development going ahead. This approach was taken at Evenbrook Group's development in Birmingham (see page 22), which included an element of intermediate rented accommodation. 

•	 **Value for money:** Any disposal of assets, 
particularly land, will only be considered where a local authority can be satisfied it has secured the best possible value for it. Deals involving the public sector contributing land without receiving the full market value in return have frequently failed to pass this best value test in the past. However, legislation introduced by CLG since 2000 has given local authorities the freedom  
to promote the economic, social and environmental well-being of their area. This 
power allows local authorities to contribute 
assets to a scheme at below market value where a compelling argument exists that this is the 
best use of the asset to promote community well-being. Some local authorities may therefore regard an 'in-kind' contribution of land to a development scheme appropriate where housing 
need is particularly acute. 
•	 **Community development:** Mixed-use schemes 
that offer local communities particular resources that they currently lack, such as employment 
or leisure facilities, community resources such 
as parks or allotments or schemes with specific features, for example, warden schemes to tackle any potential anti-social behaviour will be of 
particular interest to local authorities. 

## 08

Key lesson: Where a scheme was unable to go ahead for viability reasons, a local authority was able to negotiate a PRS Section 106 contribution, allowing development to proceed and ensuring intermediate rent housing was provided.

## Practical Partnership In Action Evenbrook Group, Birmingham

Location: Browns Green, Handsworth Wood, Birmingham  
Investor: Evenbrook Group Scheme details: Low rise development of flats Birmingham City Council has recently approved a pioneering planning application from private landlord, the Evenbrook Group (a large scale provider of PRS property in the West Midlands). This included a more flexible interpretation of affordable housing obligations and resulted in some 155 homes being constructed and committed for private rent for the long-term.

Evenbrook was interested in expanding one of its existing developments, and following negotiations with Birmingham City Council over viability concerns and affordable housing contributions, the scheme was awarded planning permission on the condition that 40 homes be let at intermediate rents. This has been defined as 80 per cent of the full market rent. No housing grant was used to fund the development, and the units must remain let on intermediate rents for 21 years. After this date Evenbrook will be free to let these units at full market rent. The cost to Evenbrook of constructing these intermediate rental units is estimated to be around £1.5 million. However, the key difference of this arrangement for the developer was the council's acceptance of a defined term through which to serve its obligations for providing affordable homes 'in perpetuity'. The council has been pragmatic in agreeing these conditions. The result both supports the provision of affordable housing through intermediate rents in the city and has helped to ensure the viability of the scheme for the developer No. of units: 155 new homes for rent as part of a 10 acre residential community of 377 privately rented properties. 

Scale of financial impact: The cost to Evenbrook of providing 40 dwellings for intermediate rent is thought to be £1.5 million. 

and that construction was able to go ahead. As a result, the additional 155 new homes in Birmingham will serve to make a real difference to the housing options in the locality without the need for public subsidy. Without the City council's flexibility, the development would not have been able to proceed. At the various stages of negotiations, the council has been helpful and approachable, and has demonstrated an understanding of viability issues for developers. Evenbrook has also provided the council with a solid and reputable partner to retain and manage this vital resource. The company's existing market rents are often below the levels of local housing allowance rates, and even the 'full market rented' properties in this location could be arguably deemed 'affordable' for a wide cross section of the local population. Evenbrook is a long-established and well-regarded landlord. In addition to the services available to tenants through its property management teams, it also voluntarily provides tenants with access to independent redress through membership of the Housing Ombudsman Service and complies with the various management codes in the industry. To provide the local council with additional peace of mind, the management standards within the 'affordable' units will also be audited by an independent third party, which could be expected to be an established housing association.

## 09 Steps For Local Authorities Looking To Foster Investment In The Prs

Local authority councillors and officers interested in exploring how institutional investment could support the delivery of private rented homes in their area will need to consider what, if any, contribution of funding or assets the public sector may be able to make, and how a scheme can be structured to support the housing needs of specific, more vulnerable local households.

Local authorities can support institutional investment in the PRS by:

•	 Recognising the value of the PRS as an 
important housing tenure: There is an 
extremely important role for the PRS to provide 
good quality and flexible homes for people unable to access other tenures either in the 
short or longer term. Demand for rented accommodation is high in London and the sector already helps to fulfil housing needs for many 
types of household. 
•	 By being prepared to look at new and 
innovative ways of delivering housing to those who need it: In the current economic climate, existing mechanisms for delivering affordable housing may no longer be effective. To catalyse housing development and target it to those most in need, new and pragmatic strategies may be required from councils. 

•	 Providing access to land in public ownership: 
The availability of land suitable for large scale development is restricted in London and the 
private rented sector has to compete with other possible uses for each site, such as new schools or health care facilities. Local authorities may consider making land assets available for housing development in return for either a future share of sales or rental proceeds, or as a full joint venture partner in developments. Provided all partners are satisfied that adequate governance arrangements are in place, a variety of financial structures could conceivably work.

•	 **Undertaking a brokering role:** A large 
proportion of public sector land is not owned 
by local authorities, but by the health service and central government departments such as the Ministry of Defence. Local authorities may wish 
to work in partnership with investors to make the case for such land being made available for 
private rented housing above other competing demands.
•	 Considering flexible affordable housing 
requirements: Where affordable housing 
requirements through Section 106 agreements affect overall scheme viability, meaning 
no housing comes forward on a site, local authorities may wish to explore how less conventional agreements could bring development forward. This could, for example, include a proportion of homes made available for below market rent for a fixed period of time, or specific housing nomination rights for councils. 

•	 By entering into partnership with the private 
sector to house those on low incomes requiring support: Local authorities will not be in a position to offer rental guarantees to attract institutional investors, but it is feasible for boroughs to work with the private sector in other ways, which could include schemes where local authorities support tenants to pay upfront costs. This could potentially prove attractive to institutions, for whom lower income households can represent long-term tenants and therefore offer greater reassurance about the long-term market for the property.

## Changes To Housing Benefit

The coalition government has embarked on a programme of significant reform to the welfare state. Some of the earliest changes to be announced involve reductions to the rates of local housing allowance (LHA) used to calculate the level of housing benefit tenants in the private sector are able to apply for. 

In April there will be a change in the method used to calculate LHA rates. At present they are based on median rents (rents at the 50th percentile) in each market area. From April LHA rates will based on the 30th percentile. At the same time the total amount of LHA will be subject to a cap of £250 a week for a one bed, £290 for a two bed, £340 for a three bed and £400 for a four bed property. These changes will come into effect for new claimants from April, but existing claimants will not be affected until nine months after their review date or unless they move.15 With some of the country's highest rents, London will be particularly severely affected by these changes. Around 250,000 out of the 630,000 private renting households in London currently receive housing benefit. These reductions in support could see over 82,000 households no longer able to cover the cost of their rent. Such circumstances may lead to many families moving to outer London and outside the capital. However, it is not clear if the PRS sector in some of these areas has enough capacity to accommodate everyone who will want to move. The case studies of partnership working included in this publication demonstrate examples where local authorities and the private sector have worked together to find practical solutions that benefit both parties and help provide suitable accommodation for lower income and more vulnerable households. In such a fast-changing landscape, it may be similar partnership approaches which are best able to respond to the needs of households in London affected by these changes. 

## Practical Partnership In Action Letfirst, Westminster

Institutional investors are driven as much by income as any capital appreciation of their rented housing. The LetFirst model has been developed to play an important intermediary role between councils looking to place tenants and private landlords looking for long-term and reliable tenancies. The model is to the benefit of both parties and more crucially, to vulnerable individuals in need of stable accommodation. The LetFirst scheme is based on the principle of offering those urgently requiring housing access to the private rented sector where, without assistance, they would be likely to become homeless. 

 
So far, LetFirst is in place in the borough of Westminster and City of Edinburgh. To date, in London, 50 properties have been let through the scheme and a further 75 have been committed by landlords for release shortly. Due to the nature of the scheme, the properties are widely located across the borough, including the Pimlico, Victoria and Westbourne areas.

Key lesson: A local authority has worked with the private sector to develop a scheme that offers confidence for landlords and ensures that lower income households can find suitable local accommodation. 

Location: Westminster Investor: Orchard & Shipman The local authority is able to refer candidates requiring housing in the PRS to LetFirst, which in turn, offers to place these people in accommodation without the traditional need for a deposit and first month's rent in advance. LetFirst then contacts its enlisted landlords, offering them the opportunity to house the prospective tenant. Landlords then enter an agreement where they benefit from the full rent for the property, guaranteed for a period  
of 12 months (underwritten by Orchard & Shipman), with two months of property management provided at no cost and no administration fees. The housing benefit support for tenants is provided by central government, while the rental guarantee is an independent assurance provided by Orchard & Shipman at its own cost. Although LetFirst is a new concept for investors, it has been welcomed by many as an effective way for landlords to secure tenants. It has also gone a long way in changing attitudes to tenants receiving housing benefit. Reassured by the guarantees in place by Orchard & Shipman and its active asset and property management that encourages tenants to maintain the upkeep and condition of their rental properties, more landlords are committing to join the scheme. For tenants, LetFirst has enabled them to remain within the Westminster area, where they can enjoy secure and good quality accommodation. 

Scheme details: LetFirst is a local letting agency that rents mainly one and two bedroom flats across the borough of Westminster.

No. of units: 50 properties introduced to the scheme in 2010 with a further 75 properties in the pipeline to be included shortly.

Once brought together through the LetFirst scheme, landlords are able to minimise vacancies in their properties and maximise their net returns. The local authority benefits from the efficiency of the tenant placement scheme, helping it to meet its housing obligations in a cost efficient manner, in what is a high value property area. The efficiency savings achieved in Westminster have in fact been very impressive. The local authority has reduced its costs by around two thirds when compared to the previous letting agency scheme which was in place. It is important to note that the government's proposed changes to housing benefit are likely to have very significant effects on the numbers of housing benefit recipients that will be able to rent privately in Westminster in the future. However, the LetFirst scheme does demonstrate how local authorities and the private sector have been able to work effectively in partnership to provide accommodation to lower income tenants, in a scheme that provides better outcomes to both landlords and the local authority. 

No. of units: The introduction of this scheme has saved the local authority 66 per cent on the cost of housing those perceived to be at risk of homelessness or in unsuitable housing against the cost of their previous financial incentive scheme for landlords. The investors involved in this scheme expect to achieve a gross yield of five per cent.

## 11 Conclusion

Institutional investors require sound investment opportunities that can deliver a level of return able to compete favourably with other investment options. Positively this does not necessarily mean investors will look only to the higher end of the residential market as diversification and good asset management requires a spread of homes at different rental levels to minimise vacancy rates.

All boroughs aim to support the development of housing that will contribute to sustainable and vibrant local communities. Councils have a range of assets and planning powers at their disposal, and with many of the existing models of housing delivery proving ineffective since the recent economic downturn, many are now considering new mechanisms and partnerships to encourage institutional investment in private rented housing. Such schemes have been discussed in earnest within the housing industry since the downturn but, to date, few schemes have been delivered. The HCA's recent announcement of a joint investment venture with the Berkeley Group may help to establish such schemes in the mainstream of housing delivery from this point onwards. 

The examples of partnership working included here explore a range of situations both in and outside  
of London, where investors and local authorities have been able to work closely together. In Birmingham this has enabled Section 106 
contributions to be met by low cost private rented accommodation, whereas in Southwark, institutional landlords have worked with the council to offer a home to vulnerable households, an arrangement that is proving successful. Ultimately these examples demonstrate that effective partnership between the public and private sectors can offer London a practical way to deliver much needed homes in difficult economic circumstances. The city's growing population, both today and in the future, will require greater numbers of homes available across all tenures, giving Londoners the choice of a home that is secure, decent and affordable.

## Further Sources Of Information

British Property Federation The BPF's website includes research publications on the PRS and policy and planning discussions www.bpf.org.uk
	
EGi Estates Gazette online magazine reports current events and research on the property market (some services are subscription only)
www.egi.co.uk GLA London housing strategy The Mayor's vision for housing in London www.london.gov.uk/publication/london-housingstrategy Homes and Communities Agency Reports on current government policy and action including the PRSI
www.homesandcommunities.co.uk Joseph Rowntree Foundation Access to current and historic research on many aspects of housing www.jrf.org.uk London Councils The latest information on London Councils' housing policy work www.londoncouncils.gov.uk/housing The Rugg Review  
The 2008 review of the scope and future of the private rented housing sector for government www.york.ac.uk/inst/chp/publications/PDF/ prsreviewweb.pdf Shelter Charitable organisation campaigning on housing issues www.shelter.org.uk For statistics and information on the housing market: Council of Mortgage Lenders www.cml.org.uk CLG's English Housing Survey www.communities.gov.uk International Property Databank www.ipd.com Hometrack www.hometrack.co.uk Land Registry www.landregistry.gov.uk

## Acronyms And Glossary

BPF 	 - British Property Federation CLG 	 - Communities and Local Government 
	
  (central government department)
GLA 	 - Greater London Authority HCA 	 - Homes and Communities Agency IPD 	 - Investment Property Databank PRS 	 - Private Rented Sector PRSI 	- Private Rental Sector Initiative RSL 	 - Registered Social Landlord SDLT 	-	Stamp Duty Land Tax VAT 	 - Value Added Tax
Buy-to-let: Refers to small-scale landlords purchasing properties to let out for investment purposes. The sector is characterised by people buying properties to benefit from longer term capital growth to subsidise pensions. Many of these landlords choose to manage the properties themselves.

Section 106: Sestion 106 agreements are negotiated between local authorities and developers in connection with the granting of planning permission for major developments. They often include the provision of affordable housing as well as local infrastructure improvements and other measures needed to ensure the development is acceptable in planning terms.

Affordable housing: Affordable housing refers to dwellings typically owned by registered social landlords (RSL). Homes split into three general categories - social rent, where the rent is set in line with government policy rather than the prevailing market rent and homes are allocated to tenants by the local authority and landlords; low cost home ownership products such as shared ownership; and intermediate rents (for example, for key workers) where rent levels are capped at a percentage of local market rents.

Comprehensive Spending Review: Following the change of government in May 2010, the Conservative/ Liberal Democrat coalition announced an immediate comprehensive review of all public spending. The results of this were announced in October 2010 and outlined how much government funding was available to each government department between 2010/11 and 2014/15.

Institutional investor: Those such as pension funds, endowment funds, insurance companies, banks or hedge funds that have substantial assets and experience in investments and invest capital in a wide range of investment classes on behalf of companies or private individuals.

Internal rate of return: This is a mathematical calculation that assists investors to compare the likely returns of different investment choices. Technically, the internal rate of return is the rate that would make the present value of future cash flows plus the final market value of an investment or business opportunity equal the current market price of the investment or opportunity. 

Localism: Refers to a political trend to ensure that a greater degree of decision-making is made at a local level, in most cases by local authorities. In some areas such decision-making powers may be further devolved to other local organisations such as parish councils or community-based organisations. 

Place-shaping: This is now widely understood to describe the ways in which local players collectively use their influence, powers, creativity and abilities to create attractive, prosperous and safe communities - places where people want to live, work and do business. Local authorities are recognised in legislation as being the bodies responsible for 'placeshaping' in their areas.

## Endnotes

7	 ONS, Household numbers and projections: regional 
1	 CLG, 'Table 514 Housing market: simple average house prices, 
mortgage advances and incomes of borrowers, by new/other dwellings, type of buyer and region, United Kingdom, from 1992 (quarterly)', (live table) available at: http://www.
communities.gov.uk/documents/housing/xls/140993.xls
trends 38 at: www.statistics.gov.uk/STATBASE/ssdataset. asp?vlnk=7678&More=Y; and Land Registry (2010), House Price Index - Greater London Council number of sales January 
to December 2009 www.landreg.gov.uk/houseprices
2	 CLG, 'Table 592: Housing market: mix-adjusted house prices, 
8	 CLG (2009), 'English Housing Survey Headline Report  
(2008-09), Recent Movers (page 20/21) www.communities. gov.uk/documents/statistics/pdf/1479789.pdf
by new/pre-owned dwellings, type of buyer and region', (live table) available at: www.communities.gov.uk/documents/ housing/xls/1638330.xls 
 
9	 CLG, from 2006 levels
3	 Office for National Statistics (2009),  2009 Annual Survey of 
10	 CLG (2009), 'English Housing Survey Headline Report (2008-
Hours and Earnings (ASHE): Analysis by place of residence by Local Authority (London), Table 8.7a: Annual Pay: Gross
09), Table 1 www.communities.gov.uk/documents/statistics/ pdf/1479789.pdf 
	
www.statistics.gov.uk/downloads/theme_labour/ASHE- 2009/2009_res_la.pdf 
11	 moneyfacts.co.uk (2010) cited in Reuters (2010), 'Buy-to-let 
4	 CML (2010) cited in British Property Federation Consultation 
market shows signs of life' (4 June 2010)
	
http://uk.reuters.com/article/idUKLNE65303K20100604 
Paper to HM Treasury on Investment in the UK Private Rented Sector (April 2010)
12	 A more detailed briefing on the CSR can be found at:  
5	 CLG, 'Table 600 Rents, lettings and tenancies: numbers of 
www.londoncouncils.gov.uk/policylobbying/ localgovernmentfinance 
13	 More information on the HCA Private Rental Sector Initiative 
households on local authorities' housing waiting lists1, by district2: England 1997-2009' (live table), available at: www.communities.gov.uk/housing/housingresearch/ housingstatistics/housingstatisticsby/rentslettings/livetables 
is available on the HCA website: www.homesandcommunities. co.uk/Private-Rental-Sector-Initiative 
14	 Investment Property Databank 
	
CORE data on lettings demonstrate that in 2009, local authorities made 7,559 lettings and housing associations made 14,861 lettings in London. See: https://core. tenantservicesauthority.org/AnalyseCOREdataMain.aspx 
15	 A more detailed briefing on the changes to housing benefit 
6	 Shelter (2010) 'The Forgotten Households', Policy discussion 
can be found at: www.londoncouncils.gov.uk/housing
paper available at: http://england.shelter.org.uk/__data/ assets/pdf_file/0003/279651/The_forgotten_households_ policy_discussion_paper.pdf 
London Councils
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