Thursday 9th May 2019
The UKAA alongside Dolphin Living held a roundtable based on homes for rent below market rent (DMR, AFMR, intermediate rent – were some of the names).
This was presented by Dolphin Living CEO, Olivia Harris.
If you missed this event, please find an overview of the roundtable here:
Homes for Rent Below Market Rent
The roundtable hosted at Dolphin Living brought together a group of landlords, investors, lawyers and representatives from the Ministry of Housing, Communities and Local Government (MHCLG) to discuss the benefits of providing below market rent housing, the attitudes of local authorities towards such provision and the portfolio of tenants in current below market rent homes. The discussion ended with ideas around innovation in the sector.
Benefits of submarket rent homes
Dolphin Living are one of the leading providers of affordable private rent (APR) in London, offering homes at an average of 53% of market rent. The key benefits to a landlord for APR are low arrears, stable rental income, low void levels and short void periods. Tenants are assessed for affordability before they are let a home, and so they are keen to maintain their tenancy resulting in low arrears. Dolphin Living also reported a 12% churn per annum, considerably lower than in the private sector, due to rents being at levels tenants can afford and a lack of affordable alternatives. It was also noted that a fall in market rents does not translate directly to a fall in affordable rents; in 2018 a fall of 30% in market rents would have resulted in a fall of less than 10% in Dolphin’s rent roll.
Research commissioned by Dolphin has shown that the value add of an affordable private rental home in London is £27,000. This is in part because for the typical Dolphin tenant, such as a nurse or teacher, the value of their work is greater than the remuneration they receive. Developments including APR also provide a more diverse community than would be experienced in pure private rent housing. This was acknowledged around the table, noting that the East Village scheme has formed a diverse and valuable community, and Legal & General agreed that their Build to Rent scheme in Bath had attracted a diverse range of tenancies due to the different price points (between 65% and 85% of market rate).
A representative of MHCLG commented that government consultation on tenancy lengths indicated tenants want security of tenure, which contrasted several landlord’s experience who reported that residents were opting for tenancies of 6 or 12 months over the possibility of 3 or 5-year tenancies. It was suggested that when such tenants renew their tenancies and so more clearly understand the offer they are more likely to opt for a longer tenancy.
The government will be running a consultation on whether to remove the section 21 notice, resulting in tenancies effectively rolling on. Those around the table felt this would impact APR providers significantly, removing the review point following set tenancy periods. APR providers need timely reviews to assess tenant’s continuing eligibility and housing need; both to fit with their organisational values but also to fulfil planning obligations. The investors also raised concerns that such changes would have an impact on rental levels, which would have repercussions on funders wanting to get into the market.
How different local authorities approach submarket rental homes
The National Planning Policy Framework and National Planning Practice Guidance encourage investment in the Build to Rent sector and do not require a Registered Provider to be involved. The New London Plan is supportive of affordable housing, requesting 35% affordable in new developments. An MHCLG representative expanded on this, stating that national policy asked for 20% of units on new developments to be affordable, and for these affordable units to be 20% discounted from market rate.
An overview of experience with three London boroughs, was given by Dolphin to initiate discussion. This highlighted the differences between London boroughs on their focus on either intermediate or social housing, the percentage of affordable that boroughs are requesting, the length of covenants and the potential tenant waiting lists. This inconsistency across boroughs can present problems with attracting investors. One investor / developer echoed this sentiment, talking through their experience with a London borough and the negotiations on massing, design and tenure split during pre-apps to reach the point where they are ready to submit for planning. It was advised that upfront communication with all parties is key from the beginning so that goals are aligned. Affordable units should be pepper-potted throughout schemes to create mixed communities and avoid a sense of segregation or the idea of ‘poor doors’. One provider commented that they have introduced a sub service charge to tenants in a scheme, so that they can access facilities such as gyms where the operational costs mean that they cannot be subsidised by the operator or market-rent tenants. Other providers choose to not provide any such amenities due to the costs.
Who are submarket rent homes for?
The average household income in London is £43,000; Dolphin Living provide the majority of their accommodation to households with an income of £30,000 – £60,000, with the average being £45,000. Amro Partners echoed this target income level. Profiling of customers helps confirm organisations are meeting their objectives and providing value to communities. Assessing the household type also helps inform future designs.
Innovation and new ideas in sub-market rent
Dolphin Living shared that they use the Joseph Rowntree Minimum Income Standard to assess affordability, which seems to result in a more accurate representation of what tenants can afford to pay in rent whilst still having a decent standard of living. This approach is used for Dolphin’s Personalised Rent product, and Homegroup have done something similar in linking rents to affordability.
The roundtable also discussed the benefits of technology in creating better homes for both the tenants and the landlords. PropTech is an increasingly important sector, and such smart technology helps improve efficiencies, understand the wellness of tenants and provides cost effective monitoring systems. As advancements are made there is a greater need to set sector standards, and developers will need to start considering the benefit of a sinking fund for future technology assessments of their developments. Sharing common data for tenants, landlords and investors on a dashboard helps the understanding and effectivity of a scheme.
Innovation in funding is also important within the Build to Rent sector, and Legal & General have demonstrated this with their scheme in Croydon.
The roundtable concluded with a comment on the significant interest in the submarket rent sector, and the increased demand especially in London; such schemes provide value and add to both the economy and the community.