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New homes for private rent – or affordable housing? Matthew Warburton - 30/08/2012

To Let 300Reactions to Sir Adrian Montague's report on private renting, published last week, were mixed. Opinion divided on his recommendation that councils should drop affordable housing requirements in section 106 agreements in favour of homes for market rent. Unusually, the Chartered Institute of Housing and National Housing Federation took opposing views, with the CIH willing to give the proposal a try, while the NHF and LGA were firm that homes for market rent should not be at the expense of affordable housing.

At first sight it is hard to see the argument for dropping affordable housing requirements in new build schemes. We need more rented housing because demand for house purchase has stalled, don't we? So surely development for rent should substitute for building for sale, not affordable housing.

The problem is, however, that the market is not geared up to build new homes for rent; while large scale investment in building for private rent is commonplace abroad, it has not been a feature of the British housing market for many years. Hence Montague's remit to look at the barriers to institutional investment.

The argument for institutional investment is not just about quantity; if a larger private rented sector is to become a permanent feature it needs to change. For renting to become a long-term choice for a range of households, the market needs to offer more housing to higher standards, with longer-term tenancies and a better service to tenants.

The biggest barriers to investment identified in Montague's report are novelty, and concerns about the yield, particularly if appreciation in capital value is not factored into the calculation because there is no foreseeable prospect of sale.

Investors, particularly overseas investors, are apparently reluctant to be the first to move into a untested market, or expect to be paid for taking a risk; hence the case for intervention to bump-start a market.

Montague also recommends earmarking public sites for rental development, and allowing developers to defer payment.

How much of an incentive is needed in practice to get investment going cannot be predicted in advance - what is needed to make a scheme stack up will depend on local circumstances.

Councils face different local needs and opportunities; the relative priority they give to new private rented and affordable housing will vary. Some will want to waive affordable housing requirements on particular development in order to get more building and more rented homes. But the government should not apply pressure on all councils to go down this road.

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