Podcast Summary: "Building London's Private Rented Sector"

LSE: Public Lectures and Events (March 3, 2014)
Speakers: Kathleen Scanlon & Christine Whitehead (LSE London)

Main Theme and Purpose

This lecture explores the complex challenges and opportunities in expanding London's private rented housing sector. With London facing a sustained housing crisis and declining rates of owner-occupation, policymakers are increasingly looking to build up the private rented sector (PRS)—primarily through new construction and encouraging institutional investment. The discussion focuses not on issues like rent control, but on the underlying practical, financial, and regulatory hurdles facing 'build-to-rent' initiatives and the evolving profile of landlords.

Key Topics and Insights

1. Historical Context of the Private Rented Sector in London

• 20th Century to 1980s:
  • The PRS in London was previously defined by purpose-built rental blocks—communal amenities included.
  • Post-war rent controls, deregulation, and owner-occupation incentives led to a decline in PRS; landlords sold to owner-occupiers, aided by favorable legislation and tax incentives.
• Decline and Recovery:
  • By the mid-1980s, PRS stock had shrunk to about 14% in London—with primarily social housing and owner-occupation providing new supply.
  • The introduction of buy-to-let mortgages in the late 1990s triggered a resurgence of PRS, particularly after the 1989-90 housing crisis when many couldn't buy homes.
  • Subsequent affordability crises and financial shocks further shifted young and mobile populations into private renting.

“...By the mid-1980s, the private rented sector had declined to about 11% of the total stock in England, about 14% in London...”
— Kathleen Scanlon (06:53)

• Current Profile:
  • 92% of landlords in Britain are 'amateurs', i.e., individuals or families with one or two properties, often with a short-term investment horizon.
  • Landlord profile in the UK contrasts with the perceived professionalized, institutionally-backed PRS in the US or Germany, although even in those countries, individuals still play a significant role.

2. Why Rebuild the London PRS?

• Supply and Demand Pressures:

  • A growing city population (immigration, natural growth), stagnant construction, and declining owner-occupation stress supply—almost all net tenure growth in London since 2000 has been in PRS.
  • Policymakers now focus on new build PRS to support housing supply, professionalism, and stability.

• Policy Direction:

  • The government is promoting institutional investment and ‘build-to-rent’ developments—mirroring successful student accommodation models.
  • National ‘Build to Rent’ funds and government guarantees are key tools encouraging this shift.

“Policymakers are looking for more housing overall and particularly new build in the private rented sector.”
— Kathleen Scanlon (12:47)

3. Financial and Practical Barriers to PRS Growth

a. Land Economics

• Developers building for owner-occupation can pay more for land than those building for rent, skewing land markets against PRS.
• Investors look for yields competitive with alternative uses, creating a gap between what rental projects can afford and what landowners demand.

“The price of land...is determined by the end price of what they’re building. That’s how the developer sees the world.”
— Christine Whitehead (18:00)

b. Yields, Returns, and Risk

• Small landlords often tolerate low or negative cash yields, anticipating capital appreciation as their reward.
• Institutions, expected to hold assets long-term, want stable, inflation-linked rental income, but face risks: construction, letting-up, management, reputational, exit, and above all, regulatory (incl. potential changes in rent control or tenancy law).
• Institutional players also lack comfort and established data for risk modeling in PRS compared to commercial property.

“Most landlords buying now with a loan wouldn’t be able to cover their costs... They expect to make a profit on the appreciation.”
— Christine Whitehead (20:27)

c. Regulatory and Policy Risks

• Investor uncertainty about rules on rent controls, tenants’ rights, safety, and the risk of sudden policy changes make UK residential less attractive than, say, offices.
• Local authority planning processes are inconsistent—no guarantees the Mayor’s pro-PRS policies will be implemented borough-wide.

d. Product and Market Barriers

• There’s little ready-made new PRS product for institutions to buy, because most new building has targeted owner-occupation.
• Market data and management know-how at institutional scale are underdeveloped.

“There actually isn't much on the market now that an institution could go out and buy because these products have not been built.”
— Kathleen Scanlon (28:10)

e. Investment Mandates

• Pension funds and insurers routinely approve commercial property, but residential PRS is mostly off-limits—change requires pioneers and internal reform.

4. The First Movers: Case Studies (Stratford, London)

[~36:30]

• East Village at Stratford (Olympic Village):

  • Half sold to social housing groups; half to a joint UK-Qatari group specializing in PRS.
  • Targeting families—a major innovation for London PRS, which generally serves young professionals/sharers.

• Stratford Halo:

  • Built by Genesis Housing Association, with a mix of market rent and affordable housing.
  • Illustrated an emerging model—housing associations developing mixed-tenure blocks, some at full market rent.

“They want to create a new market in London and so they are making a big play that this is something completely new on the London market and they want to be the leaders.”
— Christine Whitehead (46:17)

5. Cross-National Comparisons and Lessons

• Continental Europe:

  • In markets like the Netherlands and Germany, regulatory frameworks are strict but developed over decades—PRS is more institutional but often limited in scale and flexibility.
  • Legal and cultural constraints (e.g., not allowing break-up of block ownership) can support large-scale PRS but aren’t easily transferable to the UK context.

• Policy and Taxation:

  • International differences in regulation, taxation (depreciation), and tenancy structures influence investment and supply.
  • Calls for learning from Germany/Netherlands are tempered by recognition of profound systemic and cultural differences.

“We have a dysfunctional system which will find it extremely difficult to take lessons from an entirely different system.”
— Kathleen Scanlon (51:10)

6. Open Q&A and Notable Audience Points

[53:00–72:00]

• Tenure Structure, Affordability, and Social Value:
  • Skepticism about claims that build-to-rent will support affordable housing—most investors targeting £2,000/month rent and up.
  • Housing associations mixing social and market units on the same site, but that risks reducing social housing unless carefully regulated.
• Investor Segmentation:
  • No strong evidence that incoming institutional investors are differentiating their products by price point or demographic—most seek standardized offers.
• Regulation and Securitization:
  • Historical missteps with tight rent controls cautioned against replication.
  • Some see a future in splitting property management and ownership, with potential for professionalization and regulatory consistency.

“It is not clear that rents alone are capable of generating new supply except in rather small amounts. So it's the new supply story which lies at the core.”
— Kathleen Scanlon (59:55)

• Buy-to-Let Mortgages:
  • Emerged from lenders seeking new markets, typically requiring higher equity and limiting tenancies to under a year, further constraining tenure stability.
• Regulation, Risk, and Financial Withdrawal:
  • If regulation tightened on rent or tenure, the likely first response would be withdrawal of mortgage lending and institutional investment, not mass landlord exit.

7. Conclusions

• Tangible Progress:
  • Despite many barriers, “this is the best opportunity in decades for a genuine shift in the private rental sector in London.” First-mover developments (esp. involving overseas investors or housing associations) are being watched closely as potential models.
  • The mayor’s 5,000 per annum PRS target is modest in relation to overall need but may set foundations for ‘beacons of good practice’ and future professionalism.
• Remaining Challenges:
  • The British planning and property market is uniquely fragmented and supply-constrained, limiting rapid transformation.
  • For meaningful scale, institutional appetite must meet supportive policy, viable returns, and standardized product.
  • Direct lessons from abroad are limited; solutions will need to work within the UK’s distinctive system.

“Even if the Mayor’s ambitious target of 5,000 new homes per annum is met, that...compared to the overall stock of private renting in London, that is a tiny, tiny amount. Maybe these will be beacons of good practice, but they're not going to change the broad spectrum of the market.”
— Christine Whitehead (42:50)

Notable Quotes & Timestamps

• “Private renting gone up from 13% through to nearly 20% and is now significantly...”
  — Kathleen Scanlon (08:50)

• “In the USA they're likely to own multi-family developments which are all rented in the same unit, the same building...while the UK is definitely individuals.”
  — Kathleen Scanlon (11:35)

• “Developers and investors say the yield is too low on private rental. What, what does that actually mean? Let's unpick that.”
  — Christine Whitehead (16:30)

• “The institutions themselves have no experience in this field and they don't really want to develop in house experience… They prefer to buy in expertise from outside managers.”
  — Christine Whitehead (32:22)

• “There actually isn't much on the market now that an institution could go out and buy because these kinds of products have not been built.”
  — Kathleen Scanlon (28:10)

Key Timestamps

• 00:37–06:53: Historical overview; causes of PRS decline
• 09:19–13:24: Current tenure structure, landlord profile, and international contrasts
• 13:24–21:12: Institutional investment: Policy motivations, barriers, and funding models
• 21:37–35:04: Investor risks (yield, management, exit, regulation); product and data limitations
• 35:04–43:26: Case studies: East Village & Stratford Halo; government targets; market potential
• 43:26–66:00: Q&A: affordability, regulation, international comparison, housing associations
• 66:16–72:56: Final audience contributions, reflections on mortgages, regulatory/policy wrap-up

Tone

The presentation is candid, analytical, and occasionally wry—acknowledging both promise and frustration in policy attempts to modernize the PRS. The discussion is rigorous, empirically-informed, and frames UK-specific dynamics within the global context.

End of summary.