Being a registered social landlord doesn't mean you're limited to social housing: RSLs are increasingly moving into other areas of the market. Diversifying brings new risks but Housing Today's series of practical guides should make the change easier. The next two issues will cover shared ownership and selling homes on the open market but this week, Victoria Madine kicks off with a four-step guide to renting at market rates

This one went to market …

There are 2.5 million private rented properties in the UK – a total market of about £250bn. If you count the student market and life tenancies, this is even higher. So there's clearly money to be made, and housing associations are in an ideal position to make it. Many medium-sized and large associations have already dipped a toe in the water, or at least sized up the opportunities.

Now, changes to Housing Corporation rules on development, diversification and borrowing are making it easier for RSLs to move into new markets and to undertake larger, more diverse developments into which a market-renting portfolio will help mix tenures as well as generating cash.

Of course, there are risks, particularly with the property market as volatile as it is. Also, for social housing providers, the private rented market means competing in a new arena, serving a new group of tenants with different expectations. But if you go about it the right way, the benefits can outweigh the difficulties.

1. Do your research

Identify and research your market – it’s the mantra of every successful entrepreneur. When Places for People set up Blueroom Properties, its market renting arm, in 2000, its first consideration was: who are we aiming at? The housing group wanted any market rent properties to fit into its wider plan of creating mixed-tenure communities, so it was keen to attract professionals with a relatively good income. To be interested in renting, these people would most likely be young and single. Blueroom’s managing director, Damian Southworth, says: “It was very important to get this client focus at an early stage so we could direct our efforts and cater to a specific market.” Having identified the client group, the next job was to work out the group’s preferences. The Joseph Rowntree Trust has done a lot of research into this market, using market research company Oakes McKee to identify the priorities of the potential occupiers of its two “city-centre apartments for single people at affordable rents” projects, or CASPARs. Everything from the type of building desired by the group to location, preferred room size, affordability of rent and the importance of car parking was considered for the schemes, which provide a total of 91 flats, in Birmingham and Leeds. The key features the client group wanted in a new-build development included:
  • a central location
  • light, bright, contemporary-looking apartments
  • secure parking – important for men
  • personal security – more important to women
  • white goods, curtains and carpets included
  • rents of about £100 a week, although sharers should pay more for their flat and those on their own less.

2. Raise the finance

As with any business venture, you need capital to make a start. Because market rent developments are aimed at the private sector, no public funds can be used to build or run them, so you will have to borrow from banks. To apply for bank loans you need to show a business plan detailing the anticipated costs of setting up and running the venture and its expected returns. “Lenders are nervous about registered social landlords going into things that are intrinsically a good idea but where they don’t have the skills to carry it through,” warns Andrew Heywood, senior policy adviser at the Council of Mortgage Lenders. If you want to convince lenders your business plan is watertight, you must show that:
  • your balance sheet is strong enough to sustain borrowing
  • your organisation has a track record in the market renting area or, if not, that it has people with the skills and experience to do it
  • you’ve taken political as well as market-related risks into account. For example, plans to reform housing benefit and pay it direct to tenants
  • you’ve done real assessments of demand and tested sensitivities in your plan. For example, the Association of Residential Letting Agents has evidence that rent levels are falling. How much further can they fall before they put your plan in danger?
Any scheme that does not receive public money and relies on the vagaries of the market will be subject to considerable risks. “House prices have risen massively over the last five or six years, but rents have only risen in line with earnings,” says Richard Donnell, head of residential research at chartered surveyor FPD Savills. “It’s hard to develop a portfolio of properties that give you a good cashflow at the moment.” Donnell says net yields are just 5%, so if your finance costs are 4-5%, it can be hard to make a surplus. Be prepared to be flexible about your business plan because unexpected costs – and revenues – can soon crop up, particularly in such an erratic property market. Blueroom originally planned to buy properties that were ready to let but soon changed tack. Southworth explains: “Shortly after entering the market, property values went skywards while rents remained fairly static. This meant rent yields began to slide quite dramatically. Our response was to create our own development capability to drive down our investment costs by harnessing the developer margin.” Blueroom now manages more than 650 properties and has another 300 units under development. Unlike most other market rent companies affiliated to a social housing provider, Blueroom has decided not to rely just on rents to make a return; it also sells properties it develops. According to Donnell, when to sell up is one of the most important questions RSLs should ask themselves. “You say you’re doing it to create a surplus to subsidise the business. If you think housing price growth is going to slow and you’ve seen 70% growth, why don’t you sell it now?” blueroom’s balance sheet
  • Started with £15m in equity shares, a £15m loan from North British Housing, a subsidiary of Places for People Group, and £70m in loans from banks
  • Now has reserves worth £20m and profit revenues of £3m. Its properties have increased in value by a total of £17m
  • But Places for People is yet to receive a return. Blueroom’s single shareholder North British Housing (NBH) has so far forgone any dividends so that Southworth can continue to grow the business. The first dividend payment will be made in September this year. Southworth says: “It will be up to the NBH board to decide how to use the money, but it will be something that fits the group’s wider social objective of creating communities where people want to live by choice.”

3. Let your properties

Most fledgling market rent companies use local estate agents to let their properties. The agent is responsible for finding suitable tenants, but it’s up to you to set the criteria and decide the agent’s decision-making powers. For example, Edinburgh-based Lothian Housing Group, which owns and manages 200 properties, insists that prospective tenants earn at least £1500 a month after tax to qualify for its market rent service. But you can also do it yourself. All tenants should usually be able to provide:
  • a credit check or reference from their bank
  • a reference from their employer
  • six weeks’ rent as a deposit
  • one month’s rent in advance.
Irene Lathbury is operations manager of Cygnet, which owns 114 properties and is the market renting arm of Coventry-based Keynote Housing Group. She prefers her team, rather than the agent, to sign up new tenants. “It’s usually us who goes to a property and walks around with the new tenant to do the inventory and talk about any concerns they may have. A personal relationship is very important; after all, the tenant is ultimately your client rather than the agent’s,” she says. In Cygnet’s case, good client service is taking on a new level of importance – this March, the company is opening its own estate agent shop in Coventry. As well as managing its own properties, its services will be offered to private landlords. cygnet’s figures
  • The market renting arm of Keynote Housing Group, it started with 60 properties acquired under the government’s business expansion scheme and a £5m bank loan
  • Last year the company made a profit of £152,000
  • It gave parent group Keynote £60,000 to help fund its regeneration projects and will use the rest to grow the market rent business
  • Over the next five years it hopes to provide Keynote with £500,000.
A cautionary tale
Even with thorough checks on tenants, you may find that a bad apple gets through. Cygnet, for example, once took on a very respectable-looking tenant who had excellent credentials. After a few months in the property, he started missing rent payments. Staff went round to the flat to help him sort his finances but found it empty of both tenant and furniture. He had stolen the lot. “It turned out he was a wicked man who had also stolen someone’s identity,” says Irene Lathbury. “You can’t always know who will make a good tenant.”

4. Manage the business

Management styles differ greatly across the market rent sector. For the Joseph Rowntree Trust, managing the business is about overseeing the companies that deal with the day-to-day running of its properties. Blueroom works in a similar way. The company has outsourced its maintenance services to property management services provider Countrywide, which does all Blueroom’s local marketing, maintains and repairs the properties and collects rents. Blueroom went this way because the team were concerned that their private clients wouldn’t be happy to have their homes serviced by a social housing provider; there were fears there could be some stigma attached to it. But times have changed. “The group is now seen as a professional property manager. If we were to set up Blueroom again now, we’d think about using Places for People’s services,” he says. Cygnet takes a more direct approach. Its properties are maintained by its parent group, Keynote. When Cygnet tenants have a problem or need a repair or maintenance, they phone Keynote’s call centre. A computer flags up the caller as a Cygnet tenant and the tenant receives Keynote services, though these are billed to Cygnet. In theory, the service standards should be the same for both private and public sector clients, but in practice things are different. “A higher rent means higher expectations and demands. One man called saying his washing machine was broken; it wasn’t – he’d just put too many clothes into it,” says Cygnet’s Lathbury. Another customer said his phone line connection was “on the wrong side of the bed”. Cygnet’s response: a sympathetic ear. The extra mile, cygnet-style
One winter evening in Cygnet’s early days, Irene Lathbury, operations manager for the company, received a call on her mobile from a distressed tenant. The tenant explained that she had just been dropped off by a taxi outside her flat and that the taxi driver was now trapped inside the grounds, because the entrance barrier had come down and she didn’t know how to open it because she hadn’t read the welcome pack when she moved into the flat. The taxi’s meter was still running. Although the block of flats was run by a different company, Lathbury jumped into her car and went to rescue the taxi driver. “It wasn’t our responsibility, but sometimes you just have to go the extra mile to give good customer service,” she says.

Tricks of the trade

  • “Bad communication can be a problem. Tenants don’t always give you enough information when they want something fixed. We had someone phone us up and say the fridge was broken, so we ordered a new one, but when they delivered it, it was completely the wrong size. Now we always get one of our agents to go round and check.” Phil Wright, sales and lettings negotiator, Oakwood estate agents, north London
  • “When you’re dealing with 400 or 500 people, a handful of them are going to be awkward. Some people phone us up when a lightbulb goes. I can’t be bothered to argue – I just tell them to buy a new one and send us the receipt. When they see it’s only 29p, they usually don’t bother.” Mux Baig, project coordinator, Britannia property services, Birmingham
  • “We do an inventory when tenants move in, listing everything that’s in the property and what condition it’s in. Then we visit or write to the tenants every three months to make sure everything’s going OK.”

Source

Housing Today