Better Scottish PRS data needed

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Attracting major institutional investors to the private rented homes market requires better data on returns, and clearer property management standards, according to residential property lawyers in Scotland.

Caroline James, a real estate partner at law firm HBJ Gateley, welcomed a report from Homes For Scotland which made several recommendations on the subject, and said the time was right for the industry to focus on real progress. Pension fund Royal London last week said it was interested in private rented homes investment.

She said while commercial property investment data was well-established and provided reliable information on returns, comparable data in the Scottish residential market was hard to come by and lacked the consistent input of landlords and property agents. The Investment Property Databank (IPD) is currently the main source of property investment data, and would benefit from a wider pool of Scottish investors from which to draw the necessary information from the residential sector.

James said: “Investors need robust, long-term performance data and the HFS Report says that at the moment that just isn’t there for Scotland in any meaningful way. The IPD launched its residential investment index last year but it faces a real challenge in getting enough Scottish landlords and agents to consistently provide it with the information required.

“Major investors like Royal London saying they’re interested in the sector will undoubtedly help, but there still needs to be a concerted effort to produce quality data which stands a chance of encouraging other investors to follow suit. Residential property can provide a very stable long-term asset, but as Homes for Scotland has pointed out, there’s still a lot to do if we’re to convince the big institutions to get involved.”

Another challenge is the impact which the fragmented property management sector has on gross to net yield ratios. The Property Managers Association Scotland (PMAS) requires its members to abide by a code of conduct, but no requirement exists for all property managers to become members of the PMAS. James said a lack of mandatory professional standards has created inconsistencies in the quality of property management practice across the sector.

She said: “Legislation governing property managers has recently been updated, but a mandatory code of practice would help to drive up standards and improve professionalism. Wider co-operation across the smaller players in this fragmented sector might also introduce economies of scale which would help to reduce overall management costs.”

Other challenges exist in legal structures and forthcoming tax changes. Scots property law bans anyone other than social housing landlords from accepting longer than 20-year leases, which rules out certain funding models. Certain models currently being developed on England are based around the availability of long leases and provide additional comfort for investors. Abolishing the current rules in Scotland could open up new sources of funding for the private rented sector, said Caroline.

There is also some uncertainty over the impact of the new Land and Building Transaction Tax, which in April 2015 will replace Stamp Duty Land Tax in Scotland. While the broad structure of the new tax is fairly straightforward, the actual tax rates and the detail of how it will affect investors looking to acquire large numbers of residential assets is not yet clear.

James added: “There is currently a window of opportunity for Scotland’s private rented sector to attract significant investment, at a time when it’s very badly needed. The societal imperatives for this are without question – we quite simply need more homes, and soon.

“In order to attract the scale of funding required, however, there needs to be a co-ordinated approach to creating the environment where investors feel sufficiently confident to fund new development. The Homes for Scotland report lays out the scale of the opportunity extremely well, and we should all be working together to overcome the challenges which go along with that.”

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