Comparative Studies of the Private Rented Sector in Europe

Christine WhiteheadLSE and CCHPR University of Cambridge

City Future Research CentreUniversity of New South Wales

August 29th 2012

Two Research Projects

• ‘The UK private rented sector – lessons from abroad’ – starting from the UK policy makers’ view that institutional investment is the only way to generate a sustainable private rented sector

• ‘The role of regulation in the private rented sector – a comparative study’ – starting from the Danish government’s view that deregulation is necessary to ensure sustainability

• Both wrong! – as are most other starting points.

Project 1: Lessons from Abroad

• A series of seminars in 2011 looking at issues in the UK, experience in other countries and what might be transferred

• Covering Western Europe, Australia and the USA• Bringing together academics and professionals • Policy environment – (i) should the private rented sector

be incentivised to offset the decline in owner-occupation; (ii) does this imply institutional investment rather than debt based individual investment through Buy to Let mortgages; (iii) should the emphasis be on build to let –filling the supply gap.

Background• The private rented sector (PRS) now accounts for 17% of English

housing stock, growing faster than other countries

• Issue not really size but sustainability and stability – and meeting the range of demands

• Growth of PRS has reflected decline in owner-occupation; social renting at best stable

• Push’ factors dominate: private renting second or third choice for many tenants and some landlords there by default

• ‘Pull’ factors more obvious in other countries: government support but also ease of access, flexibility, and portfolio and risk management for both landlords and tenants

What are the UK’s problems in light of experience abroad?

• Sector growing but rents still rising

• Quality has increased but uneven and lack of professionalism in management

• Little new build for buy to let

• Fragmented ownership of multi-family apartment blocks

• Limited security of tenure even for households that want long-term homes (although long term leases possible not attractive to either side?)

Learning from abroad: correcting some assumptions

1. Institutional investment does not dominate private rented sectors in other countries.

2. Regulation is not inherently associated with smaller poorly operating private rented sectors.

3. Private renting is not just for the young and mobile but can be a tenure of choice for older, better off, more stable households

4. Private renting is not inherently unsuitable for more vulnerable households

5. Bigger does not always equal better.

Individuals Institutional landlords OtherAustralia most very fewAustria very few most (municipal bodies, corporations)Belgium 86 14Denmark 8 10 >50 professional landlordsFinland 60 37 3France 95.1 3.3 1.6Germany 61 17 10 (including cooperatives)Netherlands 44 37 19 (including renting from family)Norway 78 22

Republic of Ireland most very fewSpain 86 6.7 7.2 state-owned bodiesSweden very few most (including personal companies)Switzerland 63 23 12UK 75 25USA 78 13 (including REITs) 9 (including cooperatives)

Percentage of PRS dwellings owned by various types of landlordSource: Scanlon and Kochan (2011) Towards a sustainable private rented sector: The lessons from other countries, LSE London, Table 3.

Learning from abroad: positive lessons

1. Funding: private renting needs a range of investors.

2. Regulation: well defined and stable but also strong frameworks not incompatible with large, stable sectors.

3. Private renting can suit families and older households, not just the young/mobile. Long-term secure leases may help.

Learning from abroad: positive lessons (2)

4. Making private renting work for low-income households usually requires generous income-related benefits and well defined government licenses.

5. New supply depends on investors, built form and ownership structures. Many countries only allow single ownership of apartment blocks which helps company and institutional investors and REITS.

6. In eg USA and Australia, private landlords get tax breaks for providing social housing – could it work in the UK ?

Learning from abroad: positive lessons (3)

7. Many countries offer more generous tax treatment for landlords—e.g. rental losses offset against other income. But any incentives must fit the UK tax system.

8. Demographics, income distribution and the labour market forces all point to increased demand in the UK. If supply is to increase as well, investors need reasonable and predictable rates of return – ideally total returns on private rental investment should be more like a utility than a casino.

9. Scale reflects policy decisions about all tenures as well as returns on other investments, financial markets and cultural norms.

Goals of institutional investors for residential property: all countries (1 = most important, 5 = least important)

Source: Montezuma, J. (2006). “A survey of institutional investors’ attitudes and perceptions of residential property: the Swiss, Dutch and Swedish cases,” Housing Studies, 21(6): 883–908

Learning from abroad: positive lessons (4)

10. No country has everything right.

But those with larger, well operating private rented sectors tend to be prosperous, with generous income support, little social renting and neutral or favourable tax treatment – also stable or declining demands for housing – Exemplar: Germany.

Others with large private rented sectors but also housing market volatility and uneven income distributions show considerable signs of stress.Exemplars: USA , Australia and UK?

Project 2: Comparative Regulation and Size of the Private Rented Sector

• Case studies of eleven European countries clarifying how regulation had changed over the last thirty years and how regulation relates to the scale of private rental provision

• Also, provided further evidence on many of the findings in the other project

• Coverage up to 80% of the European market• Starting in early 1980s• Examining three types of countries

(i) with mainly stable regulatory systems: Germany, Switzerland, Sweden, Netherlands?, Denmark?(ii) with increasing regulation, mainly in context of security of tenure -Ireland, France(iii) with declining regulation - England, Finland, Norway, Spain

• Within each group considerable variation but PRS across Europe/types of regulation generally declining

Country Early 1980s Early 1990s Early 2000s Current (estimate)* Current trend Data source:

Denmark 22

(1980)

18

(1990)

17

(2004)

14

(2011)

Declining Lunde 2010; Danmarks Statistikbanken Table BOL 101

England 11

(1981)

9

(1991)

10

(2000)

17

(2010)

Growing DCLG Live Tables: Table 1041: Dwelling Stock by Tenure, England

Finland 33

(1970)

13 (1990) 16

(2000)

16

(2009)

Stable Lyytikainen 2006; for 1990, Oxley 1995; for 2009, Statistics Finland 2010

France 23

(1984)

21 (1992) 21

(2002)

21

(2006)

Stable INSEE Housing Survey 2007, cited in Haffner et al. 2009

Germany 45

(1982)

48 (1993) 48

(2002)

49

(2006)

Stable Van der Heijden et al. 2002 and Kirchner 2006, cited in Haffner et al. 2009

Ireland 13 10 9

(2004)

10* (2009)

Volatile For 2004, OECD Economic Surveys, other years Scanlon & Kochan 2011

Netherlands 19 13 13 10 Declining Scanlon & Kochan 2011

Norway 27 18 17 17* Stable Scanlon & Kochan 2011

Spain 21

(1981)

16 (1990) 10-11

(2001)

around 7-8* Declining Oxley et al. 1995; Hoekstra et al. 2010

Sweden 21

(1980)

20 (1990) 22

(2002)

23

(2009)

Stable Turner 1996 for 1945-1990; Norris & Shields 2004 for 2002; Andrews et al. 2011 for 2009

Switzerland 63 63 58 58

(2000)

Declining Swiss Federal Statistics Department

The changing scale of private renting

Changing Regulatory Frameworks

• Post-war mainly 1st generation rent controls with strong security (but often a great deal of avoidance and evasion affecting those who were not established tenants)

• Some signs of change in 1950s/60s and 70s – but politically difficult

• By the 1980s some systems had already experienced some deregulation and restructuring while others were moving from 1st to 2nd generation rent control (initial market determination but controlled increases).

How regulation has changed

How the size of the sector has changed

The relationship between changing regulation and changing scale

Project 2: Findings • Deregulation has not generally been related to an increase in the

scale of provision – only exception is England;• Partial deregulation in particular has often had little impact on size –

eg: Netherlands, Denmark deregulation by date of letting/building in early 1990s generated little interest;

• Strong regulation is sometimes related to larger and more stable sectors – but by no means always – and is the regulation the main reason for stability?

• 2nd generation rent control and regulation on security of tenure (indefinite tenancy) has worked well particularly in Germany and Switzerland which have sustained the role of the PRS to accommodate more middle-income families who cannot afford owner-occupation in high cost areas

Project 2: Conclusions• Regulation is only one factor affecting the role of the PRS;• Other important determinants include: tax benefits to landlords; housing

assistance to private tenants; subsidy to developers for the provision of new private rented dwellings; refurbishment subsidies and tax breaks to landlords for housing renovation etc;

• Important whether the sector accommodates lower income households - role of the social rented sector and income related housing assistance;

• Just deregulating is not enough to generate change – and adjustment may anyway take decades

• Some interest across countries in strengthening security – but linked to secure income for landlords through well defined 2nd generation rent controls – but also some interest in re-introducing rent regulation on capital cities – London, Paris, others?

• But stability of regulation a pre-requisite for investment?

Where Next in the UK?

• Main requirement at the present time is to get the housing market moving again

• Across Europe output levels are heavily down and there is little sign of recovery

• In the UK perhaps 1.5 million households that would have been owner-occupiers are either in the PRS or living with family

• Emphasis is on matching assistance to new build

Pre the Montague Report• Growth of Buy to Let mortgages and with some

associated growth in two bed flats until 2008• Long history of initiatives to involve institutional

investors but Treasury anti-tax breaks in the property sector

• In the last few years large scale initiative in London with public support and land completely unsuccessful

• More fundamental concerns about the risks associated with property ownership

• And concerns about the growth in Housing Benefit payments/fraud (perhaps 40% of PRS tenants eligible for Local Housing Allowance).

The Montague Report

• Emphasis on generating additional supply – the build to let market

• Key role for local authorities in supporting expansion of PRS (at expense of s106 affordable housing?

• Argues that fundamentals are strong; growing demand; rents good match to pension fund liabilities; potential for diversification; adequate yields; stable regulatory environment (no increased rent regulation/security)

Recommendations• Substitute time limited (10 plus years) PRS

development for S106 affordable housing (comparisons with Germany; Australia)

• Identify public land sites for PRS development –as earlier GLA schemes

• Targeted incentives to provide demonstration projects and seed funds (and possibly guarantees)

• A dedicated Task Force to support and inform expansion

• Clarity over tenants rights (but not a kite mark)

Will It Work?• Some fundamentals correct – institutions do have

good reasons to invest if the total returns are adequate

• But why didn’t the GLA demonstration projects work?• Does planning have the power to support tenure

specific arrangements?• Can the legal system enforce single ownership for

apartment blocks?• How secure is the income stream given the

dependence on LHA?• How generous will government have to be ?• And owner-occupation is still cheaper – if you can get

a mortgage and cope with the risks

Overall Conclusions• There is a role for institutional investors – but never likely to

dominate;• Some lessons learned from earlier experiences and greater benefits

to investors post crisis? • Treasury unlikely to be generous - so depends on local authorities

and public land; issues of competition with HAs and social housing; • Time limited provision has been on the cards for years – but big

issues of planning and rights to purchase; • Potential for integrating the private and social sectors more

effectively – especially through social sector capital assets and borrowing capacity;

• Stable regulatory frameworks can help support the sector and be acceptable to investors – but only if total returns are adequate and risk is managed.

• Longer term choices and opportunities depend on how the whole housing system develops – not on a particular initiative.