Planning and the private rented sector: reducing the housing deficit

5 April 2017

Tom Hyde discusses important research that could help solve the UK’s housing deficit

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The sector involves stakeholders from small-scale landlords to large-scale developers constructing purpose-built rented accommodation. In recent years, the number of large stakeholders has significantly expanded, building on the work of major established players such as Grainger, with its portfolio of around 3,600 homes.

Other ventures have included Fizzy Living, run by Thames Valley Housing, and Be: here, run by Wilmott Dixon, whose apartments have on-site teams offering amenities and additional services such as organising repairs and events for tenants. Speaking at the RESI 2016 conference, Housing and Planning Minister Gavin Barwell said:

'We need to build more homes of every type and not focus on a single tenure … a thriving PRS is an integral part of that.'

This is certainly encouraging, and with an appropriate policy direction the PRS could certainly fulfil the pledges set by the government. With the number of people renting set to increase and home ownership at such a low rate, there is a clear market for the PRS, but it seems that planning policy guidance on this sector has yet to realise its potential. As long as this remains the case, the PRS will lie largely dormant, to the detriment of thousands of people seeking an appropriate home.

Policy direction

Lack of government intervention means that it has been largely left to local authorities to address the specific planning policy needs of the PRS, and London’s boroughs have taken a definite lead. The Minor Alterations to the London Plan published in March 2016 include an updated policy on the PRS in the capital. Policy 3.8 – housing choice – states:

'The planning system provides positive and practical support to sustain the contribution of the PRS in addressing housing needs and increasing housing delivery.'

London Mayor Sadiq Khan has placed a strong emphasis on affordable housing, and boroughs will have to consider his priority of getting London to build the homes and communities it needs; he has set a target for half of all the new homes built across London to be genuinely affordable for renting or buying, as well as seeking more stability in the PRS. The updated London Plan has prompted the capital’s planning authorities to produce their own guidance and policy positions, with the initial response showing a considerable range of approaches. Nexus Planning has reviewed the planning policies of all London boroughs and the City of London to see how each is responding to the challenges and potential of the PRS. The response has been relatively mixed (see Figure 1).

• Of the 32 boroughs and the City of London, eight (24%) have recognised the role of the PRS in helping meet housing need in their area. One example is the London Borough of Wandsworth, whose policy guidance addresses this directly: 'The council supports the development of PRS housing and schemes offering a mixture of private and intermediate rented housing aimed at working households' (policy 15.5 of its core strategy, 2016).

• Five London boroughs (15%) have highlighted the importance of the PRS to their housing stock, but have not outlined their support for the sector through specific policy guidance. Westminster City Council and the London Borough of Richmond upon Thames have indicated that further updates will be needed, with the latter stating in its local plan that 'the PRS can assist in meeting a range of needs and be particularly suitable for certain locations. It could offer longer-term tenancies and more certainty over long-term availability, and ensure effective management through single ownership'.

• Surprisingly, 20 boroughs (61%) have not recognised the PRS in their development plan documents or local plans. Some have even sent a clear message on the importance of affordable housing contributions in all new developments at the expense of the PRS.
  

The London Borough of Haringey’s emerging development plan document of January 2016, for example, stipulates that:

'while the PRS may provide a cheaper alternative to owner occupation, for the purpose of planning, these units are treated as conventional market housing (use class C3) and are subject to affordable housing contributions'.

Council companies

In the past few years, some London boroughs have formed their own development companies, which are independent of, but owned by, the council. If managed correctly, these have the potential to use public land to build large-scale PRS schemes, with the rent ensuring a steady long-term revenue stream for the council. This could then be reinvested in more affordable housing projects and other essential services.

Examining all London boroughs and the City of London, Nexus’ research found that 11 authorities (33%) have established or are establishing a development company capable of building its own PRS schemes. A further 10 authorities (30%) have either started or are planning to start building their own council housing again, many for the first time in 30 years; the remaining 12 authorities (36%) are relying primarily on the private sector and housing associations to meet their residential needs.

With consistently low interest rates, now is a good time to borrow and invest. Furthermore, by creating an independent company, councils are able to borrow beyond the government-imposed caps on their debt. Such housing would also be exempt from right-to-buy policies, ensuring that boroughs retain rental stock in the long term.

Some London boroughs are investigating ways of building their own homes, which represents an encouraging development in the policy approach to housing provision. The scale of this is still small, however, with relatively few boroughs considering large-scale PRS schemes as a vital part of their long-term revenue stream. While this remains the case, the potential of the PRS will remain largely unfulfilled.

Developing debate

There has been much debate around how the planning system can better accommodate the PRS. The key message from those looking to develop and invest in the sector is that greater flexibility is needed in terms of section 106 contributions, along with more innovative design to speed up construction. Consequently, many have called for the government to provide stronger policy direction beyond its build-to-rent initiatives, with some asking for a specific use class for the PRS.

This class could allow developments to take a more flexible approach to space standards. Developers could then offer more space-efficient flats, provided the London Housing Design Guide’s minimum sizes no longer applied in their current form; in the way that student accommodation is, for example, normally exempt from these standards. Larger room sizes mean higher costs, and with communal facilities representing an important part of much of the PRS, the use class can negate the need for certain features and therefore enhance the capacity of developments.

There are a number of drawbacks to a new PRS use class, however, meaning that its introduction would not be appropriate. A use class ties a development into a specific function and makes change of use even more challenging. This would be a disadvantage for those looking at shorter-term investments, as they would not have the flexibility to navigate changing markets with confidence. It would also become increasingly difficult to encapsulate the different approaches and forms that PRS developments can take. Despite the high prices, there would appear to be little appetite for a dilution of space standards.

The policy answer

The benefits of a dedicated PRS use class are difficult to quantify, and the industry remains undecided on whether its perceived merit outweighs its potential long-term limitations. Overall, a specific PRS use class is not necessary at present, as it would represent further unwanted complexity, creating barriers to development and limiting options in challenging market conditions.

The required impetus can be achieved more effectively with a strong policy approach, led by both central government and local authorities – policy that engages with developers on the issues of design, local contributions and long-term viability, along with appropriate covenants and leases. Furthermore, flexibility in initial section 106 contributions for PRS schemes would help reduce the burden on developers at the outset and potentially return greater long-term rewards for local authorities.

A more comprehensive and consistent policy approach to developing PRS provision would be valuable to all. Managed correctly, the PRS is vital in providing much-needed housing. Robust policies must be adopted to maximise its potential to benefit local authorities and their surrounding communities.

Tom Hyde is a senior consultant at Nexus Planning

Further information

• Related competencies include Housing strategy and provision, Planning
• This feature is taken from the RICS Property journal (March/April 2017)