Pride and Prejudice: Affordable Rural Rented Housing Under Threat: A View from the Private Rented
Sector.
Rural Housing Conference 27th February 2015
Andrew Bradford.
Background:
In 1990 Scottish Homes Launched their Rural Housing Challenge. In the Smiths Gore Winter
Newsletter of 2014/5 an article by Derek Logie, Chief Executive of Rural Housing Scotland was titled
Scotland’s Affordable Rural Housing Challenge. That the identical phrase is still being used is a sign
of failure. In 1990 at that launch I made the logical suggestion that government engages with the
Private Rented Sector (PRS) to deliver affordable rural rented housing. I’ve been saying it ever since
but with greater urgency today.
The problem remains but there are real threats - taxation, regulation, land reform and
tenancy reforms being among them which, unchecked, will combine to turn the rural housing
challenge into a disaster. The problem remains because Government has largely failed to engage
with the PRS.
For the past century Government has suppressed the PRS and obstructed it from delivering
affordable rented housing. This year is the centenary of the 1915 Rent Act. After 42 years of fixed
rents, furnished rentals got some relief but by 1979 the unfurnished PRS was near collapse.
I took over running Kincardine Estate that year and with it came a portfolio of run-down
properties - a direct result of 75 years of Government intervention. The two oldest tenancies from
1928 and 1935 had annual rents of £7 and £4 respectively, the same since they were leased.
Unsurprisingly, given the negative environment for housing private land managers focussed their
attentions elsewhere – letting property wasn’t worth it.
The 1915 Act is one reason the PRS lags behind in quality assessments today; the high age of
PRS properties (when compared with other housing sectors) is another and there are further reason
which will become evident.
Fiscal Disincentives for the PRS.
The 1980s Rent Acts allowed recovery, but government taxes the PRS to crush it rather than
nurture it. For Income Tax the PRS isn’t regarded as a trading or service business – but as investors,
which, illogically, discourages private investors from providing affordable rented housing.
Given the backlog of disrepair that resulted from the 1915 Act most, if not all, rural rented
houses required improvement by the 1980s. Unlike repairs you can’t offset improvements against
rental income, they’re capital expenditure. If a PRS landlord is looking to carry out improvements
from rental revenue he has first to pay the income tax. Starting with a £100,000 surplus a charitable
Registered Social Landlord (Housing Association) would pay no income tax and have £100,000 for
improvements. In contrast a PRS landlord, after income tax, will have between £55,000 and £67,000
left – depending on tax circumstances.
Valuations are another issue. In the public sector the government uses Tenanted Market
Value – based on future cash-flows. It is this mechanism which allowed Glasgow Council Houses to
be transferred at a value of minus £11,250 per home – all 80,000 of them. In contrast my PRS houses
are valued at between 100 and 300 times their annual net cash flow, which will have a huge impact
on how they’re taxed at times of transfer. Of course, if a private business is to continue operating it
has to be transferred between generations. Taxation on transfer has a greater impact today because
of the big increase in property values.
If I transfer in my lifetime: I’ll pay Capital Gains Tax (CGT) of well over 40 years of income,
net of tax, just to transfer ownership. Bang goes any cash for improvements. That’s not on. We’d
have to sell some of the houses to fund the tax. There’s no roll-over relief for reinvestment in the
housing business whereas there is for trading businesses.
If I can’t transfer without selling in my lifetime, I can wait till I die, then there’s Inheritance
Tax (IHT). A trading business is eligible for 100% Business Property Relief while the Private Landlord
may be paying 66 or many more years of net income to cover this tax. Looked at in multiples of
earnings IHT hits the providers of affordable rented housing hardest. It is hardly logical. Selling
rented houses becomes inevitable in order to transfer the remainder to the next generation.
Those who want to fragment landed estates may cheer at the prospect – but look what
happens when rented houses are sold to pay Capital Taxes.
In 1997 the only way the next generation of one Aberdeenshire Estate could fund the IHT bill
was to sell part of it – 16 properties, all previously let at affordable rent; 4 farms or areas of land and
2 steadings. To maximise return on their sale they needed vacant possession so the Short Assured
Tenancies (SAT) on those houses weren’t renewed. You can imagine the headlines. All the owner
was trying to do was pay the tax demanded of him. The houses were sold and are now valued at
between £350,000 and £710,000 each. The result of IHT was to put out of reach all 16 previously
affordable rented homes. A significant impact on a rural community.
It’s an illogical tax that didn’t offer exemption in return for those properties continuing to be
rented affordably.
Capital Taxes are reserved powers so we can argue if we’d voted Yes last September it would
all be different. Well would it? The Scottish Government’s record is equally illogical if not worse.
The Scottish Government’s Record:
The Private Sector provides over 3/4s of
Scotland’s housing. Most is owner occupation. As you
move from the cities to the country - owner occupation
increases at the expense of the rented sector; while
within the rented sectors there’s a shift in balance from
Social to
Private
housing.
There are many definitions of what is an
affordable rent. The one I use which is widely accepted
is: An affordable rent is at, or below, 80% of the Local
Housing Allowance. 1
1
LHA is set by local authorities by Post Code area and for size of home. Easily found on internet.
I’ve been telling the Scottish Government (and its predecessors) for at least 25 years that,
despite decades of government opposition, rural estates are providing affordable housing in the very
places where social providers find it costly and difficult. Logically government should nurture those
in the PRS who deliver affordable rented housing. It is a tragedy that the Scottish Government hasn’t
listened to me, nor to the same message from others. The message is simple - the PRS delivers
affordable
rented
housing.
It is a good news
story, it gets better: In
1999, where an RSL
could deliver 8 homes, I
proved I could deliver 14
affordable
rented
homes for the same
amount of grant. That’s
75% more for value for
taxpayers’ money. I
asked to repeat the
exercise and roll out a
similar programme on
rural estates across
Scotland.
Did
the
Scottish
Government
respond logically? Both requests were rejected. Over the next 9 years the Scottish Government
spent £2.5 billion of our taxes on delivering new affordable rented housing. Any Government would,
logically, have distributed the funds to get best value for taxpayers’ money, but as you can see from
this chart the PRS share was a single knife cut – not even a slice of the cake.
The logical solution didn’t happen because, I suspect, of latent prejudice against the PRS. A
prejudice that still influences housing policy today. The Scottish Government’s “support for the PRS”
is mainly hot air.
It seems Housing Policy’s based on presumption rather than on facts and logic. It is
presumed that the PRS delivers rented housing for market rent and the affordable rented housing is
delivered by the Social Housing Sector. This is a huge error.
From the mid 90s my Kincardine Estate has demonstrated its capacity to deliver new as well
as existing affordable rented housing.
The
graph
shows
how
the
increase in Council
housing of the early
1980s was more than
eliminated by Right to
Buy
(RTB).
My
affordable
housing
shows sales to fund
improvements
and
then investment to
increase supply. We’ve more than compensated those RTB sales. Add my agricultural tenancies and
one remaining tied house and you’ll see the estate today provides over 4 ½ times as many affordable
houses as the council. The Green sliver at the top are the properties rented above 80% of LHA.
Critics of the PRS often
argue that Kincardine Estate is
atypical. I disagree. To prove my
point in 2015 I carried out a quick
survey of estates in my home
patch – Deeside, to the west of
Banchory. Much of the area is hill
and a significant proportion of the
lower land is under forest. The
main settlements are indicated
and the black line indicates the approximate boundary of the Cairngorms National Park.
I contacted 19 estates and all responded, for which many thanks. The following map
indicates the approximate estate boundaries. The colours aren’t significant. As you see there are
gaps and these result
from my failure to
contact them.
Significant
areas of land owned by
so few are, of course,
the target of the land
reformists many of
whom maintain that
nothing good comes
from this pattern of
land ownership and
that the only solution is
their fragmentation. Let’s see what these dreadful landowners provide in the way of housing.
The
RSLs,
funded by some of that
£2.5bn.
rent
155
homes. Aberdeenshire
Council
lease
390
mainstream
homes.
The 19 estates lease 97
houses at more than
80% of the Local
Housing Allowance and
492 homes at below
80% of the LHA – i.e.
affordable
housing.
85% of their full-time
housing is affordable.
They also lease 58 self-catering properties.
As I’ve pointed out these 19 estates aren’t the only landowners in the survey area, nor are
they the only PRS landlords. There’s a significant number of smaller scale PRS landlords who may
have one or two let properties. I expect most of the latter let at market (i.e. the highest attainable
rent) and others who let self-catering homes. I didn’t survey their numbers. This is an opportunity
to remind you that Government, in yet another feat of illogic, gives tax advantages for self-catering
properties at the expense of providing full-time housing. Logic and government are rarely bedfellows
it seems.
The Land Reform Report2 states the concentration of land ownership means - available
properties, land for development and the most effective use of property is dependent on the
attitudes and decisions of a relatively small number of people and the policies of few public sector
agencies. As if that’s always a bad thing.
This survey shows that these few estates seem to be making all the right housing decisions
despite decades of government obstruction. Fragmentation will result in them providing fewer
affordable houses and those that are sold off will become owner occupied, second homes, or rented
at market rent – all unaffordable.
The Report3 grudgingly acknowledges estates contribute to local housing provision – but
that this is ‘by no means universal across all estates’. This survey shows it’s a very consistent trait in
Deeside. Across Scotland other researchers, Madhu Satsangi 4included, found the same. The
astonishing thing is that so much is being done by estates despite the decades of negativity. Think
what more could be achieved with a background of decades of government encouragement rather
than opposition. Instead land reformists find a few exceptions which don’t conform to the above
pattern and conclude that because of a few bad apples the whole barrel should go, rather than
change housing policy.
The Report5 claims 40% of the rural PRS is tied housing. SL&E data shows 11.5% of members’
houses occupied by staff, that tallies with the 2011 Census showing just 11% of Private Houses being
neither Rented or Rent Free. I talked earlier about prejudice against the PRS and it seems that the
Land Reform Report may be sexing-up data to support a hollow argument.
Logically, the largest providers of rural rented housing would be nurtured by government –
to engage their ability to deliver in challenging locations. The obvious move would be to eliminate
the obstacles and give grants where PRS landlords can deliver better value for taxpayers’ money. But
Logic doesn’t come into government plans - further obstruction is in the offing from tenancy reform
and land reform. The basic aim of Land Reformists, however it is dressed up, is fragmentation of land
ownership – continuing pressure for Absolute Right To Buy for tenant farms and the promotion of
radical changes in Succession Law on inheritance - to give but two examples. What happens when
you fragment an estate?
As it happens the neighbouring estate of mine, Dess, was sold as a single entity by the owner
– he wanted it to stay together. All the rented properties were previously at affordable rent. The
purchaser – a property company – broke it up and sold off the houses. The smallest of those was
sold early in 2015. The asking price was over £530,000. None of the cottages sold from that estate
could be considered affordable today. Fragmentation of rural estates results in the loss of
affordable rented rural housing.
2
Land Reform Review Group; The Land of Scotland and the Common Good; May 2014, Scottish Government.
Land Reform Review Group: ibid.
4
Researcher and Board Member of Rural Homes Scotland
5
Land Reform Review Group; ibid.
3
Occasionally Government throws crumbs of finance to the rural PRS. We’ve picked them up,
proved they deliver affordable housing at great value to the taxpayer, and the Government has
quickly dropped them. A logical response?
The development director of a Housing Association tells me their provisional grant
requirements for affordable rural housing today is around £75,000 and one calculation showed
£86,000 a pop.
Last year I offered to deliver a 2 bedroom affordable rented house for £30,000 of grant.
Aberdeenshire Council, supportive of the PRS, put that to the Scottish Government who took 3
months to dismiss it – saying they didn’t have a mechanism to assist the PRS deliver affordable
housing. A logical response? It is after all only 16 years since I proved it could be done.
The Land Reform report wants a Housing Land Corporation compulsorily to purchase land so
that the public sector can develop rural housing, particularly social housing. If this is at twice the cost
to the taxpayer than can be delivered by the PRS then is that a logical response to the rural housing
challenge? Why not encourage the PRS? Most of my fellow landowners are keen to develop rural
housing but find themselves battling rural housing planning policy.
We aren’t ‘Not for Profit’ organisations, so some argue we shouldn’t receive grants. Let’s
look at that argument as taxpayers who surely all expect public money to be spent most effectively. I
referred earlier to one of my developments; 14 affordable homes for the grant for 8; 75% of the
vacancies are offered to the Council for nomination – I believe the norm for RSLs is 50%.
Government wouldn’t repeat the project – so it seems the argument goes:
•
•
RSLs are ‘Not for Profit’ so they get public funding even if housing costs more
I make a profit so I shouldn’t receive public funding even if I can deliver 75% more houses for
that same grant.
Is that logical? Government pays the profit-making private sector for building roads or
buying services. Does anyone buy a car, or a TV only from not-for-profit manufacturers? Or do you
select on price and specification of the product? Why should it be different for housing? Focus on
the product. Don’t discriminate against the producer. But the illogical response of Government gets
worse.
Because I make a profit I pay tax on a surplus. Most RSLs are charities and don’t. Looking at
that one housing project which was completed in 1999:





I’ve already paid £160,302 in extra income tax since 1999.
By 2022 the total income tax paid will exceed the grant received.
The project will keep on paying tax thereafter.
By 2025 I’ll repay my bank borrowings.
Finally in 2029 the Grant Conditions expire.
Ignoring inflation for a moment, having repaid it, perhaps I could have that grant back again
in 2022. I could then have built 28 houses for the cost of 8 delivered by an RSL. What on earth is
wrong about giving grants to a profit-making landlord to enable him to deliver affordable rented
housing?
Is it better to spend £363,000 of public money to get 8 affordable houses and never see a
penny back?
Or is it better to spend that £363,000 to get 14 affordable houses and to get your money
back within 23 years? At what point does logic outweigh prejudice against the PRS?
(There followed illustrations of other projects improved under GRO Grants, REPG, and Rural
Homes for Rent - all giving excellent value for taxpayers’ money and all now paying income tax back
to the government). Much more could be done but not one of the grants used in these illustrations
is available today.
The Empty Homes Loan Fund is the latest little Government sop thrown to the PRS. Note, it
isn’t even a grant but a loan. I now find the scheme isn’t open to individuals. The Government knows
full well most private landlords are individuals. So it has introduced a scheme supposedly to help us
that isn’t accessible by the majority of private landlords. Did I mention the misalliance of
Government and Logic?
Summary of the Problem:
The strategy of the Scottish government towards the rural PRS is akin to shooting itself in
both feet, and cutting off its nose to spite its face.
There has to be another way if we’re to avoid a disaster. That disaster will happen:
•
•
•
•
•
•
If UK Fiscal policy remains unchanged
If Scottish Government continues to ignore PRS
If Grants to PRS remain unavailable
If Scottish Government fails to obtain best value for public money
If Land Reform & Succession Law Reform fragments estates
If Tenancy Revisions deter PRS landlords from letting at affordable rent
The combination of these will lead to major loss of affordable rented housing from the largest
providers in rural Scotland.
The Way Ahead:
I’ve a short Action Plan for you. The aim is that Government Nurtures those PRS landlords who
provide affordable rented housing.
IHT exemption and CGT roll-over relief are needed now – conditional to landlords who deliver
affordable rented housing. This will produce the following WINS:
•
•
WIN - Secure existing PRS affordable rented housing
WIN - Encourage rents to be lowered = more affordable housing
•
•
WIN - Encourage self-catering to return to mainstream = more affordable rented housing
WIN - Encourage new private investment = more affordable rented housing
To achieve this needs UK-wide support. The Scottish Government should fund collaboration with
housing departments in the rest of the UK. Put a £1m. towards this - that’s the grant for about
17 new 3-person RSL homes – to secure thousands of existing affordable rented houses and
create the environment in the PRS for many more.
Drop the prejudice against the PRS, give grants instead where they can deliver better value for
taxpayers’ money. Take Income Tax into account when considering value.
We support several of the issues in the PRS Tenancy review, but, doing away with the no-fault
clause of the Short Assured Tenancy - when government’s own research shows that, even when
prompted, only 1/3rd of 1% of private tenants expressed insecurity - is yet another illogical step
which will discourage landlords from letting at affordable rents.
Ever since I proved the PRS could deliver at far less cost, the Government has failed to act – yet
here we are, rushing headlong towards land reform measures to fragment and disable the
biggest providers of rural affordable rented housing - when there is a critical shortage of that
very product. Is that Logical?
Government, and housing strategists in every rural council, need to wake up to the enormous
damage that Land Reform and unreformed taxes will do to the supply of affordable rural rented
housing. Take action, make your concerns known.
Logic has been my constant theme. It’s sadly absent in government housing policy. I’m
convinced it is prejudice against the PRS that’s led us where we are today.
Are the powers-that-be too proud, after 25 years of getting it wrong with rural housing, to admit
they should engage whole-heartedly with the PRS – treating it as part of the solution and not the
problem? Or must we wait another 25 years for the same failing policies to be compounded by
land reform and taxation?
Rural estates have the capacity to deliver affordable rented housing. Land Reformists want to
break them up, reducing their affordable housing which will cost the taxpayer a bomb to
replace.
I, on the other hand, want Government to support estates as rural businesses and value-formoney providers of affordable housing and save the taxpayer a fortune - two very different
strategies.
Those in need of rural housing, as well as taxpayers, have the greatest interest in which route is
chosen.
*******
“When dealing with governments, remember you’re not dealing with creatures of logic, but with
creatures bristling with prejudice and motivated by pride and vanity.” With apologies to Dale
Carnegie.