PRIVATE RENTAL SECTOR: ROUNDTABLE REPORT

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The Welsh Government seems to agree, setting a target of 20,000 affordable homes to be built by 2021. Building more homes seems a simple solution

but it is an ambitious target. This is leading to

conversations in the sector about collaborative

working, strategic alliances and mergers to

pool resources but this is also giving the sector

an opportunity to debate its purpose and

objectives and consider whether creating “profit

for purpose”, whereby commercial ventures

create a revenue stream to plough back into

communities, might be a viable option.

This is set against a background of an

increasingly fragmented private rented sector.

Over 98% of private rented stock is currently

owned by individual landlords and small

corporate entities, some of which is of poor

quality and badly administered.

The result is a cycle of community decline

linked to poor health and education.

Housing associations, familiar with these

challenges, seem to present a worthwhile

alternative. For those housing associations

that are interested in pursuing commercial

interests, the private rented sector (PRS)

model is a potential avenue to explore.

Geeta Nandha, Chief Executive at

Metropolitan Housing Association, was

invited by Hugh James to speak about her

experiences with this commercial venture

and open up the discussion about whether

this is a journey others should consider.

The innovative space at Resource for

London provided the perfect setting.

Run by a charity, for charities, all of the

proceeds of the venue’s activities directly

benefit the voluntary sector, in particular

to address issues of poverty in the London

area.

For its part, Hugh James is keen to ensure

opportunities for housing associations

to learn from one another, collaborate

where appropriate and help guide

the conversations to meet our clients’

objectives. We hope this report helps

provide focus to these discussions and

contribute towards the achievement of

ambitious targets.

Foreword

The housing crisis is simple; there aren’t enough affordable

homes to go around. According to the 2017 British Social

Attitudes Survey, Housing Associations have been cited as the

group most likely to help Britain out of the current housing crisis,

ahead of government, private landlords and local authorities.

20,000

98%

Welsh Government’s agreed target for affordable homes built by 2021

Over 98% of private rented stock is currently owned by individual landlords and small corporates

HOUSING ASSOCIATIONS CITED AS THE GROUPMOST LIKELY TO HELP BRITAIN OUT OF THE CURRENT HOUSING CRISIS

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Roundtable

What is the PRS model?The UK is unusual in its approach to home

ownership with the dream of owning a

home almost part of our DNA. The British

Social Attitudes Survey revealed that 86%

of us anticipate owning a home at some

point in the future. Yet percentages of home

ownership are dropping. In 2004 the UK’s

home ownership figures stood at 71%. This

has now fallen to approximately 60% and it

is predicted that only half of the millennial

generation will own their home by the time

they reach 40 and one in three will never do

so (Resolution Foundation).

Germany, Switzerland and the Netherlands

have consistently maintained home

ownership figures of approximately 40%

and have a much steadier market as a result

(OECD). Other countries such as the US and

Canada have had a strong private rental

presence as part of their housing market for

years having recognised that many families

cannot afford to buy. It is those countries’

private investors that are now taking

advantage of the opportunities for growth

available in the UK.

Housebuilders recognised this potential

and the private rented sector in the UK has

subsequently doubled in size since 2004.

There is a clear opportunity for providers

of social housing to become involved both

to address their social objectives in order

to respond to housing need but also as a

potential revenue generator to plough back

into their other community activities.

In 2018, Hugh James hosted a roundtable aimed at exploring the

opportunities of the Private Rented Sector for housing associations.

The session was chaired by Caroline O’Flaherty, Partner in Hugh

James’ Commercial Property team and attended by leaders within

the sector with expertise in finance and development. Gives you flexibility if you need to move at short notice

Means someone else is responsible for repairs and maintenence

Means you don’t have to worry about taking on a mortgage

Gives you greater choice over where to live

Is less responsibility than owning a home

Is less risky than owning a home

There are less upfront costs

Other

No advantage

Don’t know

Source: British Social Attitudes Survey

26%

24%

10%

9%

8%

7%

4%

1%

1%

9%

What are the advantages to renting?

Q. What would you say is the main advantage of renting a house rather than owning it?

71%UK’s home ownership figures in 2004

60%UK’s home ownership figures in 2018

• Louise Attwood – Development Director, Linc Cymru

• Amanda Davies – Chief Executive, Pobl

• Yvonne Davies – Partner, Hugh James

• Rachel George – Development Director, Newport City Homes

• Bethan Gladwyn – Partner, Hugh James

• Nick Hampshire – Chief Executive, ATEB Group

• Kate Innes – Director of Finance, Taff Housing

• John Keegan – Chief Executive, Monmouthshire Housing Association

• Simon Levine – Partner, Hugh James

• Richard Macphail – Partner, Hugh James

• Geeta Nandha – Chief Executive, Metropolitan Housing Association

• Caroline O’Flaherty – Partner, Hugh James

• Emma Poole – Client Relationship Manager, Hugh James

• Scott Rooks – Commercial Director, Candleston

• Hayley Sewley – Executive Director, Taff Housing

• Steve Tucker – Interim Director of Assets, Tai Tarian

• Linda Whittaker – Chief Executive, Tai Tarian

• Matthew Worton – Development Manager, Rhondda Housing Association

The opportunity

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The Regulator is alive to the fact that there

may be housing associations who have

maintained their “not for profit” status, yet

generate returns that suggest otherwise.

The issue is therefore not only a matter of

ethics but also risk and regulation. In any

event, the level of involvement in this new

market in the UK and the current pressures

to increase housing supply are unlikely to

see interest in the sector diminish in the

near future.

Natfed’s retiring Chief Executive, David Orr,

spoke out earlier this year in no uncertain

terms:

“In recent months, a number of

organisations have appeared describing

themselves as ‘for-profit housing

associations.’ This is an oxymoron. If

they are for-profit they are not housing

associations. If they are housing

associations, they are not for-profit.

This matters. Our reputation, built over

150 years, is hard won and critical to our

present and future success. We cannot

allow that reputation to be borrowed and

worn like a cloak around the shoulders

of organisations which are not housing

associations. To do so is knowingly to

mislead the public… Housing associations

reinvest all their surpluses in delivering their

social purpose, and do so exclusively for

the benefit of the community. We have to

protect this distinction.”

Using commerciality to deliver social

purpose by reinvesting all profits in the

communities that are the focus of a housing

association’s core values seems to be an

option that strikes the right balance.

How is it funded?Investment in the UK’s build-to-rent sector hit

a record £2.4bn in 2017 with US and Canadian

investors eager to secure a slice of the growing

market. This was the first time that the total

amount of capital committed had exceeded

£2bn, according to CBRE, and represents a 33%

year-on-year increase.

In 2013 the Government made £1bn available

in loans to developers in an effort to reach their

target of one million new homes by 2020. Take

up was gradual but Theresa May’s housing white

paper from last year emphasised the need for

longer-term, more affordable tenancy options

and made it easier to get planning permission

for these ventures.

With Government contributions falling, a funding

gap has been created leading to a unique

market opportunity for investment funds. Social

housing is seen as a highly secure investment

with assured returns and low risk of default.

There are a variety of models available, one

example is where the investment funds buy

the land and the homes on it from the local

authority or housing association, and leases the

properties back to them. The housing association

continues to manage the property interface,

including administration, rent collection, upkeep

and so on. Revenue is raised directly through

rents on the properties.

Are social value and commercial gains mutually exclusive?The announcement last year that the UK’s

housing associations made record operating

profits of £3.5bn was met with both praise

and censure. Some argued that this was

further evidence that housing associations

had drifted too far from their philanthropic

roots while others make a persuasive case

that diversification is an essential strategy

for delivering a housing association’s social

objectives without relying on Government

handouts. The recent media interest in the

salaries of chief executives seems a bit of a

red herring as those senior roles in the private

sector would command far higher levels of

pay and in order for housing to attract the

calibre of candidate that is needed, there is

an inevitable price for doing so.

In England there has been significant growth

in the number of “for profits” entering the

market. Interest from private investors has

been growing rapidly and many welcome

this influx of funding to the sector. Yet many

institutional investors have acquired homes

through Section 106. This is an important

public policy tool, designed to provide social

housing and wider community benefits.

Understandably, questions are certainly

being asked as to whether using Section 106

to generate profit and shareholder return is a

desirable public policy outcome.

£1bnIn 2013 the Government made £1bn available in loans to developers

£2.4bnIn 2017 investment in the UK’s build-to-rent sector hit a record £2.4bn

If they are housing associations, they are not for-profit. This matters. Our reputation, built over 150 years, is hard won and critical to our present and future success. We cannot allow that reputation to be borrowed and worn like a cloak around the shoulders of organisations which are not housing associations.

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How did you approach funding?We started by speaking to various banks

who were holding land but many of the best

sites had gone to another provider. We spoke

to some large UK institutional investors but

they were either not ready to commit to the

1000 units we felt were necessary or wanted

to develop their own model. At that point

we explored the options of investment from

overseas. We looked at Canada, the US and

the Middle East where investors saw market

rent as an investment class in its own right and

could see the gap in the UK market. Some of

the organisations we spoke to were completely

unfamiliar with the concept of housing

associations because that model simply does

not exist in those countries.

The US models also seemed to have too much

communal space which was unlikely to deliver

the affordability we needed in London. ADIA

had placed money in different countries in

market rent, were a very willing partner and

wanted to bring some debt into the vehicle

to make the most efficient use of their

money. Thames Valley Group had reserves,

£26m of those which were used to fund

the process and the social housing assets

of Thames Valley Group were ringfenced

which helped in terms of the UK regulator’s

requirements.

The £26m was applied across the

buildings but there would be different

amounts in each building. We found we

needed advice on how to pitch ourselves

to private investors so we involved

external consultants to enable us to do

that effectively. Government funding for

this kind of development later became

available to allow expansion of the sector,

however the rates we had arranged

were more advantageous and the

process was much more straightforward

administratively.

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Lessons to be learned

What started as a pioneering initiative in 2012 has now grown to a highly successful venture, Fizzy Living. With nearly 1000 apartments

in its portfolio across eight sites in London,

Fizzy Living and Thames Valley Housing

have been in talks to sell its 16% stake in

the company. The venture was funded

with £26m from Thames Valley Group and

£400m from joint venture partner Abu Dhabi

Pension and Investment Authority (ADIA).

How did it start?Thames Valley Group looked at the

opportunities of market rent and student

housing. Given that there were already

some large operators in the student housing

market, markets rents seemed like the better

option. We felt that we would need 1,000

units for the business stream to work and

that would require a limited amount of

investment.

Geeta Nanda was Chief Executive of Thames Valley Group

when they started to discuss the opportunities available in

the private rental sector. As part of the roundtable, Geeta

shared the lessons she had learned that might impact

others embarking on the process.

What is the likely impact in Wales?Many of the early adopters of the PRS model from the social

housing sector have been based in London where the housing

market is acknowledged to be rather a rare beast. At Fizzy Living

a tenants’ average wage is £42,000, far higher than the £27,000

UK average and £34,000 in London. In Wales the average salary

stands at approximately £19,000. This actually highlights a

gap in the market across the UK for mid-market rentals which

would provide an ideal space for social housing providers. Well

accustomed to a focus on affordability, a housing association is

particularly well placed to provide budget-friendly accommodation,

longer lease terms, permitting tenants to “personalise” their homes

and to become invested in their area and community. If the pattern

of growth in the rest of the UK continues at its current rate, it seems

inevitable that Wales will become more heavily involved in the

private rented sector. Key to success is undoubtedly finding the

right demographic to target in the right location and carrying out

the data gathering exercise to ensure that the offering is ideally

suited to their needs.

£34,000 £19,000Average salary in London Average salary in Wales

Geeta NandaChief ExecutiveThames Valley Group

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How was the venture structured?A separate LLP was set up with each

building. ADIA took the development risk

on each building. Thames Valley owned the

Fizzy Living brand so that it could be sold

on as a franchise in the future. We didn’t

realise the value of that at the time but the

advice we received made it clear that the

brand itself was important and in hindsight

we were very glad we heeded that advice.

The investor pays the employees (the “Bobs”

as well as the lettings/marketing and rent

review teams) and Thames Valley provides

the IT, HR and finance support. Fizzy’s board

is made up of five people, three from the

investor and two from Thames Valley who

then report to the internal board.

Were there any surprises along the way?We needed to invest significantly in

developing management IT platforms in the

early days and a great deal of time was spent

collecting data about our target market which

proved to be invaluable. The market was very

different in different streets and on different

floors so we developed bespoke products

taking that into account. For example, being

able to own a pet was very important to the

target market and we could charge a one-off

fee for that. An aspect that was really unique

and proved essential was the introduction of

a building manager, or “Bob” as we call them,

at each site.

This meant there was always someone

to take in parcels, have around to report

any issues, let in maintenance men etc so

this didn’t need to interfere with tenants’

working life. We found that tenants weren’t

particularly concerned with having long

leases, they just wanted to know that they

could renew at the end of it. We introduced

the annual deep clean which was a useful

opportunity to speak to the tenant face

to face about their satisfaction levels and

any rent increases that were required. The

data we collected at that early stage was

very helpful and continues to be helpful in

determining where we need to focus our

efforts.

Most of the people that leave one of our

properties find that it is due to a change in

circumstances but the brand has become

so strong that we often find people move

from one Fizzy development to another in

a different part of London.

Brexit is having an impact as that has

resulted in more people choosing to

rent and the London market has been

overheated at times but having an

investor that understood the markets was

helpful. We were surprised that there was

no standard valuation methodology for

market rental so we had to develop this

for ourselves. We needed flexible returns

for different schemes and as things

progressed our investor became willing to

adapt to this. We started cautiously with

60 units and gradually increased this to

developments of 300 units.

Another surprise was that 3 bedrooms

tended to work best, whereas we had

anticipated 2 bedrooms would be most

popular. The third bedroom seems to

provide a degree of flexibility that people

are looking for giving the option to have a

study/guest bedroom when needed.

WHAT STARTED AS A PIONEERING INITIATIVE IN 2012 HAS NOW GROWN TO A HIGHLY SUCCESSFUL VENTURE, FIZZY LIVING

The brand has become so strong that we often find people move from one Fizzy development to another in a different part of London.

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How have you created a sense of community in your developments?Safety was an important part of the Fizzy

Living brand so we have found that our

developments appeal to single women

in particular. We also have a welcome

party and then seasonal parties as well

as football challenges and easter egg

hunts. The tenants really value these and

want the opportunity to get to know each

other. We found that these aspects were

more important to them than having a

laundry or on-site gym. There is a closed

Facebook group for each development

so that offers another way for people to

build connections and the face to face

interaction with “Bob” is one of the things

that really distinguishes us. There are

communal areas – either a rooftop or a

room to meet where they can do yoga or

other pre-arranged activities. Reception

needs to have a “wow” factor so people

are happy to bring friends back too. We

find that the Fizzy properties have very

few social problems as there is a lot of

“self-regulation”. The building manager

may cover two buildings but can ensure

repairs are done quickly and because of

their presence, as well as the annual deep-

clean, it would become apparent quite

quickly if there was an issue.

What other things did you find that renters wanted?Many of the things that we discovered

that our demographic wanted would be

different outside London. Our tenants’

income ranges from £16,000 to £100,000,

the average age is about 35 and they are

professional people who can’t afford to buy.

We often find we have two couples sharing

our apartments. The data at one stage

showed that about 30% of their income was

the amount they could afford to spend on

rent and that was a relevant factor for us to

consider. We discovered people place a lot

of importance on customer service as well

as transparency of a single rent figure that

£16k-£100kFizzy Living tenants’ income ranges

from £16,000 to £100,000,

The Private Rented Sector is challenging. The Fizzy Living model is an exemplar of how housing associations can use their skills and values to deliver safe homes of a high standard to meet growing demand. Hugh James has welcomed this opportunity to discuss with our clients the possibilities it raises for the sector and to explore the differences between the English and Welsh markets.Caroline O’Flaherty, Partner

WE FIND THAT THE FIZZY PROPERTIES HAVE VERY FEW SOCIAL PROBLEMS AS THERE IS A LOT OF “SELF-REGULATION”

covered wifi, utility bills and agency fees,

etc. Pets were definitely a deal breaker,

availability of storage and the ability for

people to pay for their furniture so that they

can take it with them after two years.

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The roundtable highlighted many of our clients’ interest in

diversification to deliver profits that can be directly reinvested into

their social purpose. When navigating unchartered territory in this

respect, key to a successful outcome seems to be learning from each

other, pooling resources and expertise where possible and planning

funding arrangements to allow for long term returns. This would help

the sector to meet their targets for house-building and also provide

funding for regeneration activities, ensuring that these organisations

never stray far from their philanthropic roots.

What’s Next?Following the success of the roundtable event, Hugh James will

be hosting a series of thought leadership discussions bringing the

sector together to discuss issues such as funding arrangements,

sustainable design and offsite manufacturing, restorative practices

in housing management and collaborative working. For more advice

on the opportunities of the private rental sector, please contact

caroline.o’flaherty@hughjames.com

Conclusion

Emma PooleClient Relationship ManagerHugh James

Caroline O’FlahertyPartnerHugh James

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