Pride and Prejudice: Affordable Rural Rented Housing Under Threat: A View from the Private Rented Sector.
Rural Housing Conference 27th February 2015
Andrew Bradford.
Background:
In 1990 Scottish Homes Launched their Rural Housing Challenge. In the Smiths Gore Winter Newsletter of 2014/5 an article by Derek Logie, Chief Executive of Rural Housing Scotland was titled Scotland’s Affordable Rural Housing Challenge. That the identical phrase is still being used is a sign of failure. In 1990 at that launch I made the logical suggestion that government engages with the Private Rented Sector (PRS) to deliver affordable rural rented housing. I’ve been saying it ever since but with greater urgency today.
The problem remains but there are real threats - taxation, regulation, land reform and tenancy reforms being among them which, unchecked, will combine to turn the rural housing challenge into a disaster. The problem remains because Government has largely failed to engage with the PRS.
For the past century Government has suppressed the PRS and obstructed it from delivering affordable rented housing. This year is the centenary of the 1915 Rent Act. After 42 years of fixed rents, furnished rentals got some relief but by 1979 the unfurnished PRS was near collapse.
I took over running Kincardine Estate that year and with it came a portfolio of run-down properties - a direct result of 75 years of Government intervention. The two oldest tenancies from 1928 and 1935 had annual rents of £7 and £4 respectively, the same since they were leased. Unsurprisingly, given the negative environment for housing private land managers focussed their attentions elsewhere – letting property wasn’t worth it.
The 1915 Act is one reason the PRS lags behind in quality assessments today; the high age of PRS properties (when compared with other housing sectors) is another and there are further reason which will become evident.
Fiscal Disincentives for the PRS.
The 1980s Rent Acts allowed recovery, but government taxes the PRS to crush it rather than nurture it. For Income Tax the PRS isn’t regarded as a trading or service business – but as investors, which, illogically, discourages private investors from providing affordable rented housing.
Given the backlog of disrepair that resulted from the 1915 Act most, if not all, rural rented houses required improvement by the 1980s. Unlike repairs you can’t offset improvements against rental income, they’re capital expenditure. If a PRS landlord is looking to carry out improvements from rental revenue he has first to pay the income tax. Starting with a £100,000 surplus a charitable Registered Social Landlord (Housing Association) would pay no income tax and have £100,000 for improvements. In contrast a PRS landlord, after income tax, will have between £55,000 and £67,000 left – depending on tax circumstances.
Valuations are another issue. In the public sector the government uses Tenanted Market Value – based on future cash-flows. It is this mechanism which allowed Glasgow Council Houses to be transferred at a value of minus £11,250 per home – all 80,000 of them. In contrast my PRS houses are valued at between 100 and 300 times their annual net cash flow, which will have a huge impact on how they’re taxed at times of transfer. Of course, if a private business is to continue operating it has to be transferred between generations.Taxation on transfer has a greater impact today because of the big increase in property values.
If I transfer in my lifetime: I’ll pay Capital Gains Tax (CGT) of well over 40 years of income, net of tax, just to transfer ownership. Bang goes any cash for improvements. That’s not on. We’d have to sell some of the houses to fund the tax. There’s no roll-over relief for reinvestment in the housing business whereas there is for trading businesses.
If I can’t transfer without selling in my lifetime, I can wait till I die, then there’s Inheritance Tax (IHT). A trading business is eligible for 100% Business Property Relief while the Private Landlord may be paying 66 or many more years of net income to cover this tax. Looked at in multiples of earnings IHT hits the providers of affordable rented housing hardest. It is hardly logical. Selling rented houses becomes inevitable in order to transfer the remainder to the next generation.
Those who want to fragment landed estates may cheer at the prospect – but look what happens when rented houses are sold to pay Capital Taxes.
In 1997 the only way the next generation of one Aberdeenshire Estate could fund the IHT bill was to sell part of it – 16 properties, all previously let at affordable rent; 4 farms or areas of land and 2 steadings. To maximise return on their sale they needed vacant possession so the Short Assured Tenancies (SAT) on those houses weren’t renewed. You can imagine the headlines. All the owner was trying to do was pay the tax demanded of him. The houses were sold and are now valued at between £350,000 and £710,000 each. The result of IHT was to put out of reach all 16 previously affordable rented homes. A significant impact on a rural community.
It’s an illogical tax that didn’t offer exemption in return for those properties continuing to be rented affordably.
Capital Taxes are reserved powers so we can argue if we’d voted Yes last September it would all be different. Well would it? The Scottish Government’s record is equally illogical if not worse.
The Scottish Government’s Record:
The Private Sector provides over 3/4s of Scotland’s housing. Most is owner occupation. As you move from the cities to the country - owner occupation increases at the expense of the rented sector; while within the rented sectors there’s a shift in balance from Social to Private housing.
There are many definitions of what is an affordable rent. The one I use which is widely accepted is: An affordable rent is at, or below, 80% of the Local Housing Allowance. [1]
I’ve been telling the Scottish Government (and its predecessors) for at least 25 years that, despite decades of government opposition, rural estates are providing affordable housing in the very places where social providers find it costly and difficult. Logically government should nurture those in the PRS who deliver affordable rented housing. It is a tragedy that the Scottish Government hasn’t listened to me, nor to the same message from others. The message is simple - the PRS delivers affordable rented housing.
It is a good news story, it gets better: In 1999, where an RSL could deliver 8 homes, I proved I could deliver 14 affordable rented homes for the same amount of grant. That’s 75% more for value for taxpayers’ money. I asked to repeat the exercise and roll out a similar programme on rural estates across Scotland. Did the Scottish Government respond logically? Both requests were rejected. Over the next 9 years the Scottish Government spent £2.5 billion of our taxes on delivering new affordable rented housing. Any Government would, logically, have distributed the funds to get best value for taxpayers’ money, but as you can see from this chart the PRS share was a single knife cut – not even a slice of the cake.
The logical solution didn’t happen because, I suspect, of latent prejudice against the PRS. A prejudice that still influences housing policy today. The Scottish Government’s “support for the PRS” is mainly hot air.
It seems Housing Policy’s based on presumption rather than on facts and logic. It is presumed that the PRS delivers rented housing for market rent and the affordable rented housing is delivered by the Social Housing Sector. This is a huge error.
From the mid 90s my Kincardine Estate has demonstrated its capacity to deliver new as well as existing affordable rented housing.
The graph shows how the increase in Council housing of the early 1980s was more than eliminated by Right to Buy (RTB). My affordable housing shows sales to fund improvements and then investment to increase supply. We’ve more than compensated those RTB sales. Add my agricultural tenancies and one remaining tied house and you’ll see the estate today provides over 4 ½ times as many affordable houses as the council. The Green sliver at the top are the properties rented above 80% of LHA.
Critics of the PRS often argue that Kincardine Estate is atypical. I disagree. To prove my point in 2015 I carried out a quick survey of estates in my home patch – Deeside, to the west of Banchory. Much of the area is hill and a significant proportion of the lower land is under forest. The main settlements are indicated and the black line indicates the approximate boundary of the Cairngorms National Park.
I contacted 19 estates and all responded, for which many thanks. The following map indicates the approximate estate boundaries. The colours aren’t significant. As you see there are gaps and these result from my failure to contact them.
Significant areas of land owned by so few are, of course, the target of the land reformists many of whom maintain that nothing good comes from this pattern of land ownership and that the only solution is their fragmentation. Let’s see what these dreadful landowners provide in the way of housing.
The RSLs, funded by some of that £2.5bn. rent 155 homes. Aberdeenshire Council lease 390 mainstream homes. The 19 estates lease 97 houses at more than 80% of the Local Housing Allowance and 492 homes at below 80% of the LHA – i.e. affordable housing. 85% of their full-time housing is affordable. They also lease 58 self-catering properties.
As I’ve pointed out these 19 estates aren’t the only landowners in the survey area, nor are they the only PRS landlords. There’s a significant number of smaller scale PRS landlords who may have one or two let properties. I expect most of the latter let at market (i.e. the highest attainable rent) and others who let self-catering homes. I didn’t survey their numbers. This is an opportunity to remind you that Government, in yet another feat of illogic, gives tax advantages for self-catering properties at the expense of providing full-time housing. Logic and government are rarely bedfellows it seems.
The Land Reform Report[2]states the concentration of land ownership means - available properties, land for development and the most effective use of property is dependent on the attitudes and decisions of a relatively small number of people and the policies of few public sector agencies. As if that’s always a bad thing.
This survey shows that these few estates seem to be making all the right housing decisions despite decades of government obstruction. Fragmentation will result in them providing fewer affordable houses and those that are sold off will become owner occupied, second homes, or rented at market rent – all unaffordable.
The Report[3]grudgingly acknowledges estates contribute to local housing provision – but that this is ‘by no means universal across all estates’. This survey shows it’s a very consistent trait in Deeside. Across Scotland other researchers, Madhu Satsangi[4]included, found the same. The astonishing thing is that so much is being done by estates despite the decades of negativity. Think what more could be achieved with a background of decades of government encouragement rather than opposition. Instead land reformists find a few exceptions which don’t conform to the above pattern and conclude that because of a few bad apples the whole barrel should go, rather than change housing policy.
The Report[5] claims 40% of the rural PRS is tied housing. SL&E data shows 11.5% of members’ houses occupied by staff, that tallies with the 2011 Census showing just 11% of Private Houses being neither Rented or Rent Free. I talked earlier about prejudice against the PRS and it seems that the Land Reform Report may be sexing-up data to support a hollow argument.
Logically, the largest providers of rural rented housing would be nurtured by government – to engage their ability to deliver in challenging locations. The obvious move would be to eliminate the obstacles and give grants where PRS landlords can deliver better value for taxpayers’ money. But Logic doesn’t come into government plans - further obstruction is in the offing from tenancy reform and land reform. The basic aim of Land Reformists, however it is dressed up, is fragmentation of land ownership – continuing pressure for Absolute Right To Buy for tenant farms and the promotion of radical changes in Succession Law on inheritance - to give but two examples. What happens when you fragment an estate?
As it happens the neighbouring estate of mine, Dess, was sold as a single entity by the owner – he wanted it to stay together. All the rented properties were previously at affordable rent. The purchaser – a property company – broke it up and sold off the houses. The smallest of those was sold early in 2015. The asking price was over £530,000. None of the cottages sold from that estate could be considered affordable today. Fragmentation of rural estates results in the loss of affordable rented rural housing.
Occasionally Government throws crumbs of finance to the rural PRS. We’ve picked them up, proved they deliver affordable housing at great value to the taxpayer, and the Government has quickly dropped them. A logical response?
The development director of a Housing Association tells me their provisional grant requirements for affordable rural housing today is around £75,000 and one calculation showed £86,000 a pop.
Last year I offered to deliver a 2 bedroom affordable rented house for £30,000 of grant. Aberdeenshire Council, supportive of the PRS, put that to the Scottish Government who took 3 months to dismiss it – saying they didn’t have a mechanism to assist the PRS deliver affordable housing. A logical response? It is after all only 16 years since I proved it could be done.
The Land Reform report wants a Housing Land Corporation compulsorily to purchase land so that the public sector can develop rural housing, particularly social housing. If this is at twice the cost to the taxpayer than can be delivered by the PRS then is that a logical response to the rural housing challenge? Why not encourage the PRS? Most of my fellow landowners are keen to develop rural housing but find themselves battling rural housing planning policy.
We aren’t ‘Not for Profit’ organisations, so some argue we shouldn’t receive grants. Let’s look at that argument as taxpayers who surely all expect public money to be spent most effectively. I referred earlier to one of my developments; 14 affordable homes for the grant for 8; 75% of the vacancies are offered to the Council for nomination – I believe the norm for RSLs is 50%. Government wouldn’t repeat the project – so it seems the argument goes:
•RSLs are ‘Not for Profit’ so they get public funding even if housing costs more
•I make a profit so I shouldn’t receive public funding even if I can deliver 75% more houses for that same grant.
Is that logical? Government pays the profit-making private sector for building roads or buying services. Does anyone buy a car, or a TV only from not-for-profit manufacturers? Or do you select on price and specification of the product? Why should it be different for housing? Focus on the product. Don’t discriminate against the producer. But the illogical response of Government gets worse.
Because I make a profit I pay tax on a surplus. Most RSLs are charities and don’t. Looking at that one housing project which was completed in 1999:
- I’ve already paid £160,302 in extra income tax since 1999.
- By 2022 the total income tax paid will exceed the grant received.
- The project will keep on paying tax thereafter.
- By 2025 I’ll repay my bank borrowings.
- Finally in 2029 the Grant Conditions expire.
Ignoring inflation for a moment, having repaid it, perhaps I could have that grant back again in 2022. I could then have built 28 houses for the cost of 8 delivered by an RSL. What on earth is wrong about giving grants to a profit-making landlord to enable him to deliver affordable rented housing?
Is it better to spend £363,000 of public money to get 8 affordable houses and never see a penny back?
Or is it better to spend that £363,000 to get 14 affordable houses and to get your money back within 23 years? At what point does logic outweigh prejudice against the PRS?
(There followed illustrations of other projects improved under GRO Grants, REPG, and Rural Homes for Rent - all giving excellent value for taxpayers’ money and all now paying income tax back to the government). Much more could be done but not one of the grants used in these illustrations is available today.
The Empty Homes Loan Fund is the latest little Government sop thrown to the PRS. Note, it isn’t even a grant but a loan. I now find the scheme isn’t open to individuals. The Government knows full well most private landlords are individuals. So it has introduced a scheme supposedly to help us that isn’t accessible by the majority of private landlords. Did I mention the misalliance of Government and Logic?
Summary of the Problem:
The strategy of the Scottish government towards the rural PRS is akin to shooting itself in both feet, and cutting off its nose to spite its face.
There has to be another way if we’re to avoid a disaster. That disaster will happen:
•If UK Fiscal policy remains unchanged
•If Scottish Government continues to ignore PRS
•If Grants to PRS remain unavailable
•If Scottish Government fails to obtain best value for public money
•If Land Reform & Succession Law Reform fragments estates
•If Tenancy Revisions deter PRS landlords from letting at affordable rent
The combination of these will lead to major loss of affordable rented housing from the largest providers in rural Scotland.