The Montague Report: Addressing Issues in the UK Housing Market

Last month, Sir Adrian Montague published his long-awaited review of the investment market in the private rented sector (PRS) in the UK. The report assessed the barriers to investment...

Last month, Sir Adrian Montague published his long-awaited review of the investment market in the private rented sector (PRS) in the UK. The report assessed the barriers to investment and made recommendations to help improve the situation, kick-start the UK's house building sector and attract higher volumes of investment. Initially, the review was established to determine the viability of large-scale investment in the PRS, its attractiveness to institutional investors, rather than those operating in the buy-to-let market, and what measures could be introduced to encourage more financiers to get involved in the market.

The findings

The Montague Report found that, on the whole, there are several positive outcomes from introducing institutional investment into the PRS. Among them are the security for tenants that comes from knowing the property is designed for long-term rental, the potential for better management when one company oversees an entire development, the ability of developers to tailor their schemes to meet local needs and the chance for stalled projects to receive new finance, based on the demand in the PRS, rather than in the owner-occupier market.

The research highlighted the strong growth of the PRS, which has increased from around 2 million households in the early 1980s to 3.6 million now. Approximately one-fifth of those in private rented accommodation have been in their current home for five years or longer, which indicates there is a substantial market for long-term rentals. Despite this growth, only one per cent of landlords operating in the PRS manage more than ten properties.

From an investment point of view, the report stated that the "underlying fundamentals are strong" and that the growth within the sector is "underpinned by pronounced imbalances between supply and demand". Another advantage for investors in the PRS, according to the review, is the possibility for diversification, as well as the fact that there are multiple ways in which to offload residential property investments in the UK.

The recommendations

In his recommendations, Sir Adrian Montague has sought to boost the level of house building in the UK to meet the significant shortfall and remove some of the barriers for institutional investors. Among the proposals are for local authorities to "use flexibilities in the planning system" to aid development of homes for the PRS, provided they meet local need, and for the government to release land specifically for the purpose of delivering this type of scheme, where it is appropriate.

Chief executive of the National Housing Federation David Orr said his organisation "absolutely supports" the Montague Report. He highlighted the experience possessed by housing associations in terms of managing large-scale residential projects and suggested their "business expertise and skills at property management" could "help attract more investment" to the sector. However, he cautioned that affordable housing should not be sidelined as a result of a new focus on the PRS. "With 1.8 million households on housing waiting lists, the delivery of market rented homes shouldn't be at the expense of affordable homes," he asserted.

Mr Orr also pointed out that encouraging a rise in the level of residential construction would be good news for the UK's economy as a whole, because it not only provides much-needed accommodation for the country's households, but also "creates jobs, supports small businesses and will give our local economy a shot in the arm with a speed and effectiveness few industries can match", he stated.

The other recommendations relate to the barriers to institutional investment in the PRS, with Sir Adrian suggesting that the government should provide targeted incentives to kick-start work on such projects, while a "body of best practice, norms and market benchmarks" should be established to help demonstrate the benefits and returns available by investing in the sector. Setting up a task force to coordinate interest in PRS developments and to provide support to all parties involved, as well as looking at ways introduce some form of standardisation across the services and quality of the construction that tenants can expect from this type of scheme.

Liz Peace, chief executive of the British Property Federation, backed the recommendations, although she stressed this is the beginning of a long process. She commented that local authorities are not being forced to deliver new developments in their areas, but rather are "in the box seat on this issue". Ms Peace said "an institutional private rented sector is an option they should consider" if they want to provide the necessary housing to support future generations, and stressed they need to "think about the differences between this and traditional house building".

- Monday 10 September 2012

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