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Montague's proposals for boosting housing investment don't go far enough

MossjohnCllr John Moss is a Chartered Surveyor who has worked in housing and regeneration for over 25 years. He co-authored Principles for Social Housing Reform in 2009 and is now a Councillor in the London Borough of Waltham Forest. He welcomes proposals from Sir Adrian Montague to encourage housing investment - but says they don't go far enough for the small investor

The Government has just published a report by Sir Adrian Montague which seeks to address a question which has bounced around the housing market for some years. Why don’t “institutions” invest in rental housing. For “institutions” think pension funds like the Prudential and Legal and General.

It is widely argued that such investment would provide new homes to rent which would be well managed for the long term and that the UK is somehow missing out because this doesn’t happen. It is true that some European countries have higher levels of institutional investment in rental property, but it is not so large as some might have you believe. It is also true that institutions used to invest in rental homes in the UK, though rent controls imposed after WW1 and mass social house building largely killed that off.

However, there is another source of pension fund investment which could be directed towards investment in new homes to rent, but it is currently excluded from doing so. One simple move could liberate million for potential investment in housing. And it would not cost the taxpayer a penny, or see accusations of “social cleansing” thrown at the Government.

In 2004, the Labour Government announced a major simplification of the rules on pension investment. This came into force on 6 April 2006, dubbed “A day” by the pensions industry. One aspect of this was to make it much simpler for individuals to run their own pension scheme by creating Self Invested Personal Pensions, or SIPPs.

However, this was 2006 and there were significant concerns that people would plough into SIPPs and use them to buy in to the raging housing boom, which was largely being driven by buy-to-let “investors”. In response, the Government did not include residential property in the list of qualifying investments for SIPPs. It is possible to get round this by using a corporate vehicle to do the property investing and then have the SIPP hold the shares of that vehicle, but then the tax advantages are largely lost, so hardly anybody has done this.

Fast forward to August 2012. The economic context could not be more different. We have a stagnant housing market with new building stuttering along. We have record high housing waiting lists and though this does not equate to homelessness, it is a good measure of the desire of people to find alternate housing. And of course, we have a clamour for the Government to borrow even more money to build “affordable housing”, something it simply cannot do given the scale of the deficit and the hangover of debt run up by Gordon Brown.

So, we come back to Montague Review. Sadly, the majority of comment on this has been driven by gales of outrage from the left and the media at the idea that the requirement to provide “affordable housing” as part of new building projects might be waived for such investors. This follows similar righteous outrage and the Policy Exchange idea of selling vacant, expensive homes to fund more building.

This is not surprising as housing is an emotive issue which touches all of us and there are many political and professional careers invested in the continuation of the status quo of a market largely driven by mortgage-backed owner-occupation and segregated social housing on estates owned and run by social landlords, with private renting still seen somehow as a poor relation to both. This inevitably makes sensible debate on what should or should not be done hard. But it has to be a desirable outcome that we have lower housing costs and a more stable market without booms and busts.

It is argued that Germany has a much more stable economy overall, in part because they don’t have housing booms and busts. That is, in part, ascribed to their having far lower levels of home ownership and a larger rented housing market in which people are happy to see their pension contributions invested for the long term. (For detailed breakdown see fig 4 on pg 62 of this report by the LSE.)

So, let’s focus on the basic idea of a private rented sector funded by peoples’ pension savings, which buy long-term assets which over time are likely to provide a steady income and a safe store of value.

Personally, I don’t see why money that is given to the Prudential or Legal & General in pension contributions should be treated any differently from money invested by Joe Bloggs in his SIPP. So why not lift that restriction I mentioned earlier? Let people invest in the private rented sector through their SIPP investments. As long as this is limited to newly built property bought to rent as a long-term investment this could provide just the fillip the housing sector needs, without recourse to more borrowing from the Government.

There are plenty smaller sites out there which could accommodate small scale builds ideally suited to investment of this nature. There is still a limit on borrowing so 2/3rds of the investment has to be real cash invested in the fund, so we’re not going to unleash another borrowing binge. And, it is something that could be done quickly with a simple change to the definition of “Qualifying Investment” in the regulations.

Let the Prudential and Legal & General and the bigger pension funds go after the big sites, but let the little fish have a share as well.


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