Council looks to make money as private landlord

The city council is entering the housing business. Picture: Getty
The city council is entering the housing business. Picture: Getty
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EDINBURGH is set to become the first local authority in Scotland to move into the private landlord business, building up to 1000 houses a year for commercial rent.

The city plans to set up an arms-length company called Edinburgh Homes and plough profits reaped from the rents back into council services.

City chiefs say a lack of housebuilding by the private sector has left a major shortage of housing in the Capital which has in turn forced up the cost of buying or renting a home. And they believe the authority is well placed to step in and fill the gap, helping to bring down prices and raise standards in the process.

Edinburgh Homes would attract private investment to fund new developments, while contracts would be awarded to construction firms to build the homes before the new company lets, manages and maintains them.

The first homes are expected to be built at a site already earmarked for development at Fountainbridge, where they would go up alongside new affordable homes.

Housing leader Councillor Cammy Day said the authority would continue to build houses for rent in the traditional way, but those for the private rented sector would be aimed at professionals and others able to pay higher rents.

He said: “We recognise there is a market in the private rented sector that will bring in income for the city.

“The private sector is not building very much, so we can get into that, build some more houses, and recycle money back into the council.

“We would aim for about 1000 a year. It has been done elsewhere and it seems to work well. It will make a profit for the council which will be reinvested into council services.”

Cllr Day said there would be a mix of houses and flats of different sizes.

And he added: “The other side of that is about bringing up the quality of the private rented sector. There are a huge number of good private landlords, but there are also some who are not so good.”

The initiative, which follows a similar scheme in Manchester, was given a cautious welcome by some in the property rental sector, while others said councils should stick to social housing.

A report to next week’s meeting of the health, social care and housing committee notes concerns about a rise in the cost of housing if the demand for private rented accommodation is not met and says the purpose of the new company would be to build “good 
quality, well managed homes”. The report says: “Since the 1970s house building has failed to keep pace with demand. This, and the relatively easy availability of credit for house buying (until 2008), are the main reasons that the cost of buying or renting a home in the city is too high for households on low to moderate incomes.”

And it points out that like other growing cities, Edinburgh has been subject to land speculation.

“Investors buy land at inflated prices then do not sell on the land until another investor is willing to pay significantly more,” it says. “Sites can change hands many times without serious thought being given to developing them.”

In contrast, the report says, since 2008 the council and its partners have trebled the number of new affordable homes in the city.

It says Edinburgh is an attractive place to invest, but potential developers wanted opportunities to invest “at scale” and for the long term and using public sector sites.

The report adds: “A city-wide company could co-ordinate on a strategic basis investment across a number of public and private owned sites in a way that is not happening currently.”

The high cost of home ownership has led to a growth in private renting in the Capital over the last 20 years.

There are now more than 39,000 registered landlords in Edinburgh, who own at least 52,000 private rented homes. Rent levels in the Lothian area increased by 17 per cent above inflation between 2010 and 2014. The average rent for a two-bedroom home in Edinburgh, in the first quarter of 2014, was £762.

John Blackwood, chief executive of the Scottish Association of Landlords (SAL), said councils should instead concentrate on building more social housing.

The association, based in McDonald Road, represents many individual landlords who may have only one or two properties, as well as larger letting agents.

He said: “There is a need for more housing across Scotland and we welcome new investment in new homes, but we do have concerns about local authorities competing in the private rented sector and the effect that might have on local landlords and letting agents.

“We need to look at housing across the board – people cannot buy the way they did before.

“But local authorities and housing associations have not been investing in new social housing.

“We would rather they invested their energies in building more social housing, which is often for the most vulnerable in society, rather than getting involved in the private rented market which tends to be for those who can afford it more than others.”

The scheme in Manchester saw families move into the first of the new council-built private homes earlier this year.

A total of 240 new homes are being built for sale and rent in the Gorton, Wythenshawe and Chorlton areas of the city.

Tory councillor Jason Rust said he was sceptical about the plan. “This sounds like a major change of direction,” he said.

“We’re all aware of the issues faced by younger people trying to rent in Edinburgh, but we need to be vary careful about the position of existing landlords, many of whom may be letting out just one property.

“The council also has some regulatory responsibilities for private rented housing, so we would also have to ensure there was no conflict of interest.”

Green housing spokesman Steve Burgess said: “Private rents in Edinburgh are too high and rising fast. In turn, tenants often get short-changed with shoddy management and poor conditions.

“So anything that can give the worst private landlords a run for their money has to be worth looking at.”

ANALYSIS

By David Alexander, Managing director of letting agency DJ Alexander

Since the launch of the DJ Alexander Rental Tracker five years ago, the cost or private rentals in Edinburgh has risen year-on-year, thus confirming my long-term advocacy of extending the private rental market, especially through large-scale new-build or renovation projects funded by the financial institutions.

Despite the growing demand (especially from young couples unable to afford the large deposits being requested by the mortgage lenders) progress has been rather slow so I welcome, in principle, the decision of the City of Edinburgh Council to set up its own arm’s length rental company, Edinburgh Homes.

The project will only work, however, if it is not subject to political interference and, crucially, the new company is given the freedom to charge “market rents”.

Otherwise this would be seen as unfair competition, which would undermine confidence in the local market among existing and potential new private landlords, leading to a net drop in rental accommodation to rent, even taking into account the additional properties provided by Edinburgh Homes.

This is called the “law of unintended consequences”, and great care to avoid it will be required.