Our framework is based on four key components for a better Scottish PRS:
1. A collaborative approach to tenancy agreements
Our proposals suggest that a new relationship between landlords and tenants could be developed centred on the creation of two new distinct tenancy agreements, as well as maintaining the existing tenancy agreement.
- Flexible/short-term tenancy agreement (FTA) – A tenancy aimed at those seeking flexibility in the terms of their agreement, like students only seeking to rent during term-time, contract workers seconded to work away from their usual residence for a period of time or those individuals on low incomes or with low job security who cannot commit to a longer term tenancy. This tenancy can be adapted to reflect the needs of the tenant and the length of the contract and notice period agreed between tenant and landlord at the outset of the agreement. Once the tenancy agreement comes to an end then both parties have the opportunity to allow the contract to continue on a rolling basis or allow the contract to lapse.
- Long-term tenancy agreement (LTA) – This tenancy would predominantly be aimed at individuals or families who intend to occupy a PRS property for the longer term, perhaps with the intention of remaining in situ for 5, 10 or 15 years for example. This would allow landlords or institutional investors the opportunity to offer inducements to tenants signing up for longer term tenancies such as discounts on their rent and would take the form of a rolling contract, allowing for a long notice period. Any individual landlord wishing use an LTA (and therefore locking their capital away for a significant period of time), would then be able to register as business in order to take advantage of government inducements made available to them.
- Standard tenancy agreement (STA) – Whilst the new tenancy agreements seek to offer flexibility and stability respectively. They also aim to increase synergy between the needs of tenants and landlords, PRS 4 Scotland does however recognise that the existing tenancy agreement is suitable to a number of tenants across Scotland and would therefore argue that it should remain as an option for tenants and landlords who wish to utilise it. That being said, the existing tenancy agreement does require reform as outlined in the majority of responses to The Scottish Government’s consultation. To reflect this desire for reform the STA would seek to incorporate the proposed elements of reform outlined within the consultation which were broadly supported by respondents such as the introduction of a 12 week notice period for tenants, the establishment of grounds for repossession of a property by a landlord and the proposal that rent reviews should take place no more than once in any 12 month period.
2. A responsive, innovative investment environment
While Build to Rent is a mature institutional sector in both the USA and Europe, it has not yet been established in the UK as a mainstream investment sector – although it is becoming more prevalent in England with a danger emerging that Scotland is being left behind. Our proposals to introduce longer term tenancies, where capital is locked away for a defined period of time, would seek to give investors greater stability and predictability.
Our framework seeks to adapt the most beneficial features of overseas models like that of Germany by shifting incentives for PRS investment away from capital gain through house price growth toward annual dividends derived from steady rental incomes. This would be achieved using tax powers to treat individual PRS landlords, who are committed to long term tenancies, more like businesses, benefiting from incentives such as the offset of interest and amortisation in return for sustainable, long-term returns.
There is further merit in working with government and local authorities to create positive inducements to provide mid-market PRS supply to communities with high demand but where social landlords are not funded to participate.
3. A tailored planning system
The PRS market is growing rapidly and it is being identified as a growth opportunity. While incentives for groups to ‘build to hold’ are in place, particularly for the student housing market, similar schemes don’t exist for those seeking to invest in PRS developments. As a result the majority of institutional investment in the sector is aimed at the development of student accommodation.
We therefore need, perhaps through the development of a Scottish National Housing and Planning Advice Unit, a set of distinct, ambitious planning goals for delivery of PRS development sites on the basis of supply needs assessment.
4. Evidence-based policy
A common theme which has emerged from discussions amongst stakeholders in the PRS is that there is a lack of coherent statistics and data on the complete PRS market. There are a growing number of proprietary rental price indices being published by various players in the market such as portals, agents, and insurers but all have different methodologies which make comparison particularly difficult. We therefore propose that a new body, composed of representatives from government, the PRS, and academia, be established to collect, analyse, anonymise and harness PRS data that plugs crucial gaps in our understanding, such as levels of actual rents and the prevalence of buy-to-let mortgages.