All tied up

Regenerate’s investigation into how the unregulated activity of buy-to-let-landlords fuelled a showpiece Thames Gateway development’s descent into near-anarchy has set alarm bells ringing throughout the industry and beyond (January, page 14-21). Within days, the BBC had sent TV cameras to the estate to check out the problem for itself.

The question remains: what can be done to prevent or manage the kind of problems that have made life hell on the Thames Walk estate? The worry is that the cure could prove worse than the complaint if it leads to housing supply drying up.

Most recent reports indicate no let-up in the buy-to-let boom. Statistics published by the Council of Mortgage Lenders in January show that the number of home loans taken out by buy-to-let investors soared by 48% last year to 330,000, worth a total of £38.4bn. And the pace of growth stepped up significantly in the second half of last year, when 178,000 loans worth a total of £21bn were taken out. The total number of buy-to-let mortgages now stands at about 850,000, worth £94.8bn, or just under a 10th of the total UK housing market. To put this sum into some context, it is nearly twice as much as the estimated £50bn raised by housing associations since they were given the powers

to borrow private money in the 1988 Housing Act. And buy-to-let investors are looking further afield for properties, according to recently published research from Landlord Mortgages, which shows that 22% of such home loans are being taken out by landlords who live more than 100 miles from their properties.

Perhaps the most dramatic statistic was contained in a recent report published by the Greater London Authority (GLA), showing that a staggering 70% of homes built in London last year were bought by investors.

Kevin Murray, former president of the Royal Town Planning Institute, says councils up and down the country are worried about this seismic shift in the housing and development markets. “In a lot of these areas, we are not creating communities because these are not homes. They are crash pads, one beds or studios.”

Housing associations, too, are worried. Berwyn Kinsey, director of the London Housing Federation, says: “It’s hampering people’s desire to build sustainable communities. The fact is, in the private rented sector, there’s a lot of churn. This is a significant concern and an increasing one from our members, particularly where there are large numbers of apartments at high densities.”

We are not creating communities because these are not homes. They are crash pads, one beds or studios

Kevin Murray, former president, RTPI

Stopping the buy-to-let ghetto

Many London councils are exploring how they can use their planning powers to restrict sales of new-build homes to investors. Haringey council has been investigating how ambitious plans to redevelop the area around Tottenham Hale station can be prevented from becoming another buy-to-let ghetto. Officers at Barking and Dagenham, having seen Thames Walk unravel so rapidly, are understandably anxious about the fate of their own much larger riverside development being developed by Bellway and English Partnerships (EP) at Barking Riverside.

Sid Kaller, the council’s cabinet member for regeneration, says: “You don’t build communities because people just come and go and they don’t get involved in the community.”

But while London councils are still talking about tightening up on the buy-to-let market, authorities in harder-pressed parts of the country have already put curbs in place. In Liverpool’s New Heartlands market renewal pathfinder (see Liverpool box, page 30), developers have signed up to a move to limit the sales of homes to investors. In east Manchester, the council has been using its influence as a landowner to limit the spread of buy-to-let activity (see Manchester box).

shares the widespread concerns about the impact of the unregulated buy-to-let market. The agency’s research director Steve Carr says: “Particularly where they [buy-to-let properties] are being held for capital growth, we are most concerned. We are trying to tackle that upfront through negotiations with developers about their selling intentions.”

He says EP is using the influence it exercises via profit-share arrangements with its development partners. The widespread practice of selling off plan at a discount to investors means that developments generate less cash flow, which means less cash is available for EP.

Carr says the quango is looking at changing these clawback arrangements and adds: “Maybe other public sector landowners should think about this. We don’t sell the freehold upfront and therefore we have some control if they are not selling to the right market. The public sector can do more by retaining an interest.”

Particularly where buy-to-let properties are being held for capital growth, we are most concerned

Steve Carr, English Partnerships

He says the government’s recently introduced but barely used commonhold legislation, a halfway house between freehold and leasehold, could give public landowners another mechanism for exercising control.

Some developers are already managing their investor-buyers. Crest Nicholson is limiting the proportion of homes it is selling to investors on its Park Central scheme in Birmingham following problems with private tenants living in buy-to-let properties.

Countryside Properties takes a proactive stance, says chairman Alan Cherry: “Our general policy is that we discourage sales of large blocks of homes to one buyer when we develop the project because we are trying to create sustainable communities so we try to start off with a balance of tenures. We don’t discourage private investors because we want a proportion of the homes to be for private renting.” He says the company would be “very reluctant” to sell large number of units to investors even in the event of a market crash.

Tim Craine, director of London Development Research and the author of the GLA study, says he does not see a problem in developers controlling sales to investors. But he is deeply sceptical about any moves by local councils to take matters into their own hands, saying: “When government gets involved, you very often end up with the law of unintended consequences. It should be avoided as much as possible.”

There is a widespread belief in the industry that it would be difficult for local authorities to use the planning system to clamp down on buy to let. Richard Donnell, director of research at Hometrack, believes it would be “very, very hard” for councils to enforce restrictions on sales. “You can put restrictions on the lease, but it will be unpoliceable,” he says, pointing to the London borough of Hackney’s unsuccessful attempt to crack down on live/work development. He believes restrictions could be more easily applied if there were a special planning use class, stipulating which homes are for rental only.

Designer Wayne Hemingway admits that investors were able to circumvent George Wimpey’s attempt to curb their activity on its much lauded Staiths South Bank scheme in Gateshead, which he worked on, although he says the bulk of houses on the estate have now been sold on to owner occupiers.

The RTPI’s Murray agrees. “People could apply covenants, but I don’t see them doing it through the planning legislation. It would significantly reduce the value of the flats, and clearly developers are not going to want to do that.”

You can put restrictions on the lease, but it will be unpoliceable

Richard Donnell, Hometrack

Impact on development is bound to be the key concern for developers. The GLA study is unequivocal on the issue. “Without investors, many schemes would not start construction, so it does not necessarily follow that fewer investment purchases would lead to more availability for first-time buyers … There is a real danger that total housing development would fall and nobody would benefit.”

Craine says: “If the majority of private sales are going to investors, then investors have led to more affordable housing being built in London.”

An Association of Residential Landlords spokesman says: “We were losing properties hand over fist until buy to let came in. Without buy to let, the private rented sector would be a lot smaller.” Donnell adds: “We haven’t been building enough affordable housing and the private rented sector is taking a large amount of the pressure.”

One local authority source says such concerns are shared at London’s City Hall: “The GLA is keen on supply and would see buy to let as a big driver and if you restrict buy to let, the development pipeline would slow down.”

Better management may be a solution

The LHF’s Kinsey argues that rather than seeking to cut off the supply of new property, securing better management arrangements offers a better solution. Greenwich council, which shares responsibility for Thames Walk with neighbouring Bexley, is exploring whether the planning system can be used to establish robust management arrangements.

Kinsey says housing associations could meet that need: “Developers could let the contract for the management of the estate to a housing association that is responsible for the affordable housing. Where you have buy to let, you should have rigorous management arrangements provided by people with a long-term interest in maintaining good standards. This is another reason to look at housing associations taking a leading role in development.”

But such management structures could mean higher service charges, which may deter purchasers. Kinsey defends these costs, saying: “We don’t think it should cost a lot more in the long term. There are costs from damage being done to badly managed buy-to-let property.”

But what the market delivers, it can also take away. Donnell suggests the factors underpinning the recent buy-to-let boom are weakening. He says only in very few low-value areas, such as Barrow-in-Furness or Co Durham, is it possible to generate a 5% yield on a buy-to-let property. He predicts steady but unspectacular growth in house values over the next two years, while mortgage costs are already outstripping returns available from rents.