Has the Revival in the Scottish Private Rented Sector Since the Millennium Achieved Maturity?

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Has the revival in the Scottish private rented sector since the millennium achieved maturity?

Citation for published version: Farnood, F & Jones, C 2021, 'Has the revival in the Scottish private rented sector since the millennium achieved maturity?', Housing Studies. https://doi.org/10.1080/02673037.2021.1928006

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Has the revival in the Scottish private rented sector since the millennium achieved maturity?

Farhad Farnood & Colin Jones

To cite this article: Farhad Farnood & Colin Jones (2021): Has the revival in the Scottish private rented sector since the millennium achieved maturity?, Housing Studies, DOI: 10.1080/02673037.2021.1928006 To link to this article: https://doi.org/10.1080/02673037.2021.1928006

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Has the revival in the Scottish private rented sector since the millennium achieved maturity?

Farhad Farnood and Colin Jones The Urban Institute, Heriot-Watt University, Edinburgh, UK

ABSTRACT ARTICLE HISTORY The paper presents a framework for assessing maturity of the pri- Received 1 June 2020 vate rented sector (PRS) that is tested by reference to a study of Accepted 26 April 2021 Edinburgh set within a Scottish context. The mature market KEYWORDS framework is developed by reference to investment theory and Private rented sector; comparison with established PRSs in Europe. The PRS is accepted market maturity; private to a degree by users, the government, the wider community and landlords Edinburgh; investors. However, the PRS still lacks complete acceptance Rent regulation among tenants and fiscal changes have reduced its financial attractiveness to landlords. Recent Scottish legislation has brought greater regulation that has favoured tenants. There is also little evidence of acceptance by institutional investors. The study therefore finds the case for maturity is unproven, although some subsectors are more mature than others. From a housing system perspective PRS maturity is a function of how the state frames the interaction between private markets and public provision, particularly in countries like the UK which retain a significant sized social sector.

In the nineteenth century, the vast majority of households in the UK were private tenants and the tenancy market could probably be described as mature. All this was to significantly change as the private rented sector (PRS) suffered almost a century of decline following the onset of rent controls in 1916. It has begun to revive, and the platform for the resurgence is the removal of long-term regulation in 1989. It followed from the Housing Act (Scotland) 1988 that introduced market rents and the Shorthold Assured Tenancy (SAT). A SAT tenancy gave landlords the right to reclaim their property simply because the fixed term (often as short as 6 months) had ended, provided required procedures and notice periods were followed. This represented one of the least secure tenancies in use in Europe. A second catalyst for the revival was that access to mortgage finance for landlords at low interest rates became available. The finance scheme was set up in September 1996 by the Association of Residential Letting Agents (ARLA) and four lenders to

CONTACT Colin Jones [email protected] ß 2021 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way. 2 F. FARNOOD AND C. JONES

Figure 1. UK New Business Gross Advances for BTL purposes 2007 to 2019. Source: Mortgage lender’s and administrator’s statistics – Bank of England (2019). enable private individuals to invest in property to let without being penalized by high mortgage surcharges. It stimulated the modern emergence of buy to let (BTL) landlords from 1997. Private small-scale investors were drawn to the PRS in large numbers (Ball, 2006). From a low base the BTL market expanded dramatically in the housing boom of the 2000s and, as Figure 1 indicates, weathered the downturn following the global financial crisis (GFC). Nevertheless, the GFC reined in highly lever- aged private landlords and substantially reduced the number of BTL mortgages being sold. The spike in mortgages at the beginning of 2016 was created by changes in taxation explained later. This expansion of the PRS has also brought with it pressures to change its regulatory environment in Scotland. Reviews and policy development culminated in the passage of the Private Housing (Tenancies) (Scotland) Act 2016. It featured provi- sions to strengthen security of tenure, offer protection from frequent rent increases. Safeguards for landlords, lenders and investors were also provided by streamlining the repossession process in cases of rent arrears (Scottish Government, 2017b). A combination of the rapid growth of the sector and the new regulations have led to policy questions about its long-term stability and its position in the tenure system of the country. A particular focus is to what extent the PRS is still a transitional or residual tenure. Historically the PRS has been characterized as a waiting room for those seeking alternative tenures (Murie et al., 1976). Or is it changing to offering a stable long term housing tenure (Lux & Sunega, 2018)? Besides these demand side questions there are also supply-side issues: namely do the new BTL private landlords attracted to the sector in the boom of the 2000s now see the sector as a long-term investment? This in turn has implications for the efficacy of the new legislation. These questions can be collect- ively encapsulated in the concept of the existence of a ‘mature market’. HOUSING STUDIES 3

The key question therefore addressed in this paper is to what extent from the fragile beginnings of the millennium has the PRS sector now given rise to a mature market in Scotland. To date the theoretical exposition of the restructuring of residential rental systems in the literature has been dominated by the views of Kemeny (1995, 2005). In particular he examines the ways in which the PRS and social housing compete with each other to bring change, shaped by government policies. However, Hulse et al. (2010) argue that such a dichotomy is breaking down and governments are introducing measures to promote investment in the PRS with a view to generating increased access by low income households. This is a further policy context to the study. This paper develops a conceptual basis on which to assess the evolution of a mature PRS market. The viability of the PRS depends on its success as an investment and so the paper first focuses on investment theory. It then undertakes a comparison of mature/established markets elsewhere in Europe before an exposition of the characteristics of the mature market thesis. The subsequent empirical analysis is based on the development of the PRS in Edinburgh and Scotland over the last two decades. Based on this evidence the state of maturity is then assessed, and the appropriateness of the framework discussed.

Investment maturity Investors fundamentally require a return above the cost of capital. Other factors in the investment decision are risk, liquidity, marketability, taxation liability, transaction and management costs, growth expectation, and frequency and timing of income (Fraser, 1993). Investors for example tend to prefer investments with high liquidity, and if not expect to be compensated by higher return (Fraser, 1993). Risk can be to income or to capital. The behavioural motivations and priorities towards risk and return of landlords with a small number of properties to invest in the sector are varied. In some cases it is accidental through inheritance or the inability to sell their home. Many landlords have a naïve belief in investing in bricks and mortar. Further, Soaita et al.(2017) highlight how some landlords see their property wealth as a source of welfare for potential stricken times. In general investments in the PRS compete with other assets not just on the basis of relative returns but also in relation to differences in characteristics. For individual landlords the decision about alternative investments could relate to pension plans and unit funds, comprising other forms of securities such as shares and bonds. The decision also needs to take account of the characteristics of individual properties (location/rental yield) often called specific risk (Crook et al., 2012). Market risk is also relevant that relates to the economy/interest rates but also regulations that could impinge on return/risk – the most extreme of which would be rent control. This could be called political risk and stifled investment for more than 80 years or so (Jones, 2007). A key issue for investors is whether the revival of the PRS has reached a mature state that reduces the risk and that there is the basis for continued growth. Market 4 F. FARNOOD AND C. JONES maturity can be viewed as a set of characteristics that offer a secure investment environment. Market maturity frameworks pertaining to real estate have been mainly applied to comparative analysis of commercial space markets. Comparing office markets in European cities Keogh & D’Arcy (1994) arrive at a set of subjectively eval- uated criteria, the presence of which indicate market maturity:

Existence of a sophisticated profession with its associated institutions and networks Extensive information flow and research activities Flexible market adjustment in both the short and long run Market openness in spatial, functional and sectoral terms Standardisation of property rights and market practice Accommodation of a full range of use and investment objectives

Other researchers have applied the Keogh and D’Arcy approach to national commercial property markets using Likert scales and in some cases other variables (Chin & Dent, 2005; Chin et al., 2006; Cohen & Galiniene,_ 2014). The attraction of a purely quantitative approach to establishing the levels of maturity present is that different national markets can be compared and be analyzed over times to map their development. Such comparative analysis, however, seems predicated on all property markets following a common pathway which Keogh and D’Arcy explicitly rule out. Nevertheless, the maturity concept implies a dynamic process by which the state is achieved. Indeed, researchers have suggested a series of stages through which a property market progresses. One example is Seek (1996), who proposed that a market evolves continuously with initial rapid growth slowing down as it nears maturity in a form of development cycle – an overbuilding phase, a maturing phase, a mature phase and, ultimately, a post mature phase. A market maturity framework has also been applied to the residential market in Dubai (Foreman, 2014). It is viewed as the ultimate desirable stage for long term investors following initial instability. Foreman’s study reviews the Dubai property market in terms of its new-found maturity and evidences this through its cooling prices restricted by modest annual growth rates. Foreman sees maturity bringing a deli- cate balance between supply and demand, newly regulated loan to value (LTV) mortgages, and the presence of serious long-term investors rather than speculators looking for a short-term profit. Government regulation also acted to stabilize growth leading to a flight of speculators. A market maturity dynamic framework was also developed by Jones (2009)to assess the evolution of retail parks and business parks as acceptable investments to financial institutions. In his paper, Jones examines how these new property forms not only evolved through a product life cycle to meet user or occupier demands, but also saw a process that led to the establishment of an investment market for these prod- ucts. The focus here is on the maturation of an investment market that is developed to the notion of a sustainable market. The research builds on his previous papers in the context of regeneration where new house types/land uses are introduced into an area and a local market has to be created over time (Jones & Brown, 2002; Jones & HOUSING STUDIES 5

Watkins, 1996; Jones et al., 2003). Jones & Watkins (1996) in particular argue that property markets have a great susceptibility to the downturns in economic cycles and that the amplitude of the property market cycles usually exceeds that of the macro- economic cycle. This can substantially hinder or even fatally wound the evolution of such fragile markets. The (adapted) process of property market maturity in Jones (2009) goes through the following phases:

1. Introduction of a new property form during which stage the product may evolve, creating substantial risk. Yields required will be very high to reflect the risk. These properties are developed by risk averse specialist property companies. 2. Growth is a period of rapid market acceptance and increasing returns. At this point, potential competitors who were watching developments in the initial stage now enter the market. 3. A mature (or sustainable market) is established when there has been a period of both sustained letting activity and the credibility of the product as an investment is generally recognized. The latter condition also implies the achievement of a critical mass to ensure its marketability and the ability of the market to sustain itself through downturns in the property cycle. The acceptance of the property form as a mainstream investment medium leads to a fall in yields. It is now attractive to risk averse investment by financial institutions.

This process illustrates that the development of a mature market for a particular real estate product requires acceptance in the occupier and investment markets. While the former is a prerequisite, it is the latter that is crucial to maturity. Jones (2009) shows that the terms mature and sustainable are inter-changeable; and in a previous paper defines a sustainable market as one that undoubtedly ‘meets the long term needs and aspirations of consumers’ (Jones & Watkins, 1996, p. 1132). The process of reaching maturity took 20 years for retail parks (Jones, 2009).

A comparative international PRS approach An alternative perspective is to examine the characteristics of established PRSs in different countries that can be described as mature. Shelter’s (2016) study of ‘mature’ European PRSs focussed on government intervention to ensure that the needs of landlords and tenants are balanced. This meant examining four aspects of the landlord-tenant relationship: the notice period for eviction without grounds, allowable grounds for eviction, a tenant’s ability to end a tenancy before term, and restrictions on rent increases within the minimum term. Together these four measures indicate the level of tenant security. Shelter (2016) argues that among their sample of 32 European countries higher levels of tenant security are correlated with PRS maturity. However, the concept of maturity is more complex than simply the degree of regulation. Two countries with a particularly large and stable PRS are Germany and Switzerland: both feature significant regulation but also fiscal benefits for landlords (Whitehead et al., 2012). Their 6 F. FARNOOD AND C. JONES tax regimes have historically tended to discourage home ownership (Haffner et al., 2018). It is useful to focus on the German PRS model as it is often held up as the ultimate mature sector. In brief, it features long-term tenancies, a diverse supply of rented properties, and a high participation rate of non-profit entities in the ownership of rental properties (Westerheide, 2012). The average tenancy in Germany lasts 11 years compared with 2.5 years in England (Davies et al., 2016). The German PRS is characterized as being stable and large in size, with a positive public image. It features regulation of market rents, tenancies on indefinite leases, strong security of tenure, and catering for all tenant segments (Kemp & Kofner, 2010). However, it is also note- worthy that the legislative framework for the German PRS is not set in stone, for example the introduction of a rent freeze for new lettings in 2015 (Deschermeier et al., 2016). The German model sees tenants much less likely to be financially overburdened by their housing costs than English tenants (Davies et al., 2016). One comparative study claims that Germany has the most effective way of regulating rents as it balances the needs of both landlords and tenants (De Boer & Bitetti, 2014). The sector has established acceptability by tenants and landlords. Small-scale private landlords dominate the German PRS investing for the long term aimed at providing for their retirement (Westerheide, 2012). Elsewhere in Europe there are contrasting longstanding PRS frameworks that dem- onstrate tenant acceptability but with different approaches to ownership and regulation. Non-profit housing agencies dominate in Sweden and the Netherlands, for example. Nonetheless, a common historic theme is regulation and strong security of tenure. And yet, there have been some moves towards deregulation or liberalization of rents in the PRS to support investment (Hulse et al., 2010). Another interesting feature associated with some of Europe’s more mature private rented markets is hybridization, and government moves towards the PRS catering for low income households (Hulse et al., 2010). Examples of this can be seen in Germany, Switzerland, and France where private landlords can be involved in the provision of both market-priced private rental housing and subsidized social housing. Similarly, social landlords can offer provision in the market rent private sector (Haffner et al., 2018). The Czech Republic also provides different insights on the evolution to maturity. The PRS emerged from the Soviet era when private renting was a black economy activity. In the process of financial liberalization the sector required professionalization and legal contracts to permit the entrance of professional investors into the sector (Lux & Sunega, 2018). This comparative evidence across Europe to some extent queries the concept of a mature market, certainly in terms of size and implying stability. Furthermore, governments can use the tax system and other incentives to shape the tenure system. This can work in favour of both home ownership as seen in the UK through mortgage tax relief and the right to buy policy and the PRS with the generous allowances available to landlords in Germany, Switzerland and the Czech Republic. The traditional role or function of the PRS within the wider housing system in many countries is also HOUSING STUDIES 7

Figure 2. PRS Market Maturity Framework. changing. Nevertheless, it is clear that achieving a mature private rental market implies a balance of fairness between tenants and landlords/investors, acceptability and professionalism.

A market maturity framework for the PRS The reviews of investment maturity and international PRSs reveal a number of com- monalities. Based on these reviews a framework is now proposed that identifies the criteria of a mature, sustainable PRS. The framework, presented in Figure 2, identifies four groups of criteria as being relevant: Economic maturity, Acceptance, Fairness and Professionalization. Economic maturity and acceptance follow primarily from an investment perspective. Fairness stems from the key characteristics of mature PRSs. Professionalization can be seen as emanating from both aspects of maturity. Economic maturity in a PRS market is characterized by stable rents and asset values that ensure viability. This is related to an equilibrium of supply and demand. 8 F. FARNOOD AND C. JONES

Furthermore, an economically mature PRS market is likely to be resilient to downturns (an example of which was the GFC), and its tenure share is likely to be relatively stable. Another group of characteristics is acceptance. A mature PRS should be accepted by stakeholders, namely tenants, investors, policymakers and the wider general public. Studies of mature PRS markets in European countries suggest that fairness represents a third group of characteristics. The risks and advantages of the tenant-landlord relationship need to be shared in a balanced way. Security of tenure is featured in those European markets considered mature. Furthermore, some regulation of ‘in-tenancy’ rent rises and rent rise dampening would seem another important aspect of stability. Finally, the fourth group of characteristics added to the framework is professionalization. Again, this is a feature of maturity both in other European markets and in other property markets such as commercial and industrial. This would be characterized by the regulation of landlords and lettings agencies, market transparency, strong information flows and (specifically to meet the needs of institutional investors) a large portfolio management capacity. Market maturity is generally viewed as a positive state for housing investment markets by most stakeholders. This is why understanding what it looks like when applied to the lettings sector of the housing investment market is an important objective for investors, policymakers and researchers alike. The framework shown in Figure 2 is a static point-in-time one, but it can also be seen as a stage in market development. Following Jones (2009) a dynamic stages framework will also be considered as follows:

1. Introduction of BTL as a new product. During this stage the product may evolve with yields very high to reflect the risk. These BTL mortgages are taken up by short term investors prepared to take a risk. 2. Growth produces rapid market acceptance and increasing returns. There is an expansion of banks offering BTL mortgages. The image of private landlords becomes more socially acceptable. Growth of letting agents to meet demand. 3. A mature or sustainable market is established with sustained letting activity and the credibility of the product as an investment is generally recognized. The latter condition also implies the achievement of a critical mass to ensure its marketability and the ability of the market to sustain itself through downturns in a cycle. The acceptance of the property form as a mainstream investment medium leads to less speculation and more regulation, a more long-term horizon for investors and to a fall in yields. It is now attractive to risk averse investment by financial institutions.

Research method The framework structure is now applied to evaluate the current degree of maturity of the UK PRS market based on a case study of Edinburgh, embedded within a Scottish perspective. Edinburgh is a city of half a million people (Edinburgh City Council, 2016). The population is growing and features a high proportion of young workers. There is also a significant number of migrant workers from both Europe and beyond HOUSING STUDIES 9 with net overseas migration at 52,590 for the period 2008 to 2018, the most significant component of population growth Edinburgh has the highest level of employment in any major UK city (77.8%) and the highest proportion in high-skilled occupations (37.8%). Also significant in shaping the PRS in Edinburgh is the large student population with 62,100 studying at the city’s universities. Another dimension to Edinburgh’s economy which is increasingly affecting the PRS is its tourism sector. Of Scotland’s ten most visited attractions, seven are found in Edinburgh. This is significant as private landlords in Edinburgh are showing increasing interest in the short-term holiday letting market often at the expense of the PRS. The market share of the PRS is high at 25% (in 2018) compared to a Scottish average of 15% (Scottish Government, 2019). The Census recorded a share of 13% in 2001 and 21% in 2011, indicating a rapid recent increase in the PRS. The average house price is very high leading to the increasing unaffordability of home ownership (Edinburgh City Council, 2018). The unaffordability of home ownership and the growth of the PRS means that by selecting Edinburgh issues can be highlighted that are less marked in other cities. To evaluate the maturity of the Edinburgh PRS, this paper assesses secondary quantitative data from a range of authoritative sources to measure and describe the features and trends currently prevailing in the city. This data is combined with quali- tative interview data collected from Edinburgh landlords. The interview data used in this article were originally collected as part of a research study between September 2015 and April 2016 (Farnood, 2019). A convenience approach was used to sample the landlords. These landlords were recruited in three different ways, (1) from lettings advertisements, (2) attendees at a local landlords’ association meeting, (3) letting agent clients. A total of 19 interviews were conducted. A semi-structured interview format was used with the researcher preparing an interview schedule in advance but allowing sufficient flexibility for the participants to develop points of interest to the study. The audio-recorded interviews were subsequently transcribed, ready for analysis. This analysis was performed within the NviVo application (version 10) using a memoing and coding process. Initially the paper draws on secondary data. The Edinburgh PRS is reviewed from a statistical viewpoint to establish the current nature of private renting in the city. After this the study applies the maturity framework, dividing this evaluation into the four categories: economic maturity, acceptance, fairness, and professionalization.

The Edinburgh PRS According to HMRC, 20,555 private individuals, resident in the city, declared income from property on their self-assessment return for the 2015–16 tax year (HM Treasury, 2017). This may significantly understate the true number as some may not have realized net income and others may simply not have declared it. When east London’s Newham council and the HMRC investigated registered landlords, they found that of the 27,000 who had registered, less than half (13,000) declared income from property on their self-assessment return (Collinson, 2017). Whatever the true 10 F. FARNOOD AND C. JONES number of private landlords, to emphasize how important the PRS has become to Edinburgh housing we can compare it to Glasgow. According to HMRC, Glasgow (population 598,830) had 8535 individuals declaring property income on their self-assessment returns. Edinburgh (population 482,005) had 20,555 such people (HM Treasury, 2017). It is clear there is a general rise in private renting that is far more pronounced in areas where certain subgroups are present in large numbers. A UK government report highlighted the importance of the ‘the “high-end” luxury market; students; young professionals; families priced out of owner occupation; and housing benefit claimants’ to the rise of the PRS (DCLG, 2013, p.7). Other contributions have pointed to the demand from migrant communities for privately rented accommodation (Perry, 2012; Rutter & Latorre, 2009). Edinburgh is an example of a city with a ‘favourable’ mix of these subgroups for PRS growth (Edinburgh City Council, 2018). Rental demand in Edinburgh is strong not least because of the large student population. For the 2018/19 academic year the four universities in the city had a combined undergraduate and post-graduate enrolment of 64,030 students (HESA, 2019). Student rented accommodation has a range of providers. Universities now tend to restrict themselves to accommodating only first year students. There is increasingly private purpose- built student accommodation. One such provider, Unite, has five properties in the city totalling 1728 beds all within a mile of the city centre (Unite, 2018). Student demand for accommodation is not evenly spread. In 2011 the Census reported in 2011 less than one in ten housing reference persons (HRPs) is a student in many electoral wards. However, it is more than three in ten in those wards closest to university campuses, with 40% HRPs tenants in Southside ward being students (National Records of Scotland, 2014). Another symptom of Edinburgh’s status as a university city is the rising number of houses of multiple occupation (HMOs). There were 5761 licenced HMOs recorded in 2014 (Edinburgh City Council, 2014), with conversion of single-family houses into HMOs for students being a popular form of property investment for private landlords. While the PRS has been expanding in the city there has been a shift away from council housing. The building of new homes by local authorities has all but ceased with less than 200 being started in the City of Edinburgh between 1996 and 2013 (Scottish Government, 2015). Furthermore, the city ‘lost’ 3455 council homes between 2002–2003 and 2012–2013 through the tenants right to buy, a policy that was subsequently ended. On the other hand, there has been a rise in social housing provided by not for profit housing associations (Maclennan & O’Sullivan, 2008). There remains an overlap between the PRS and social housing in the provision of housing for low income households. The Scottish Household Survey of 2017 reported that 26% of Edinburgh households residing in the PRS were claim- ing housing benefit (local housing allowance) against 74% of those socially renting. Hence, while it is significantly less common to find housing benefit claimants in the PRS they still represent a significant part of the tenant mix (Scottish Government, 2018).

Assessing market maturity The static framework above distinguishes between economic maturity, acceptance, fairness, and professionalization. These categories are now assessed in relation to the Edinburgh PRS set within a wider context of Scotland. HOUSING STUDIES 11

Figure 3. Average rent increases (2-bmd flat) 2010 to 2019. Source: Private sector rent statistics: 2010–2019 Scottish Government

Economic maturity Rent stability The two prices of greatest relevance to the PRS are rents and property sale prices, the first representing landlords’ income and the second the value of their asset(s). The latter is determined by the wider owner occupied housing market, but is crucial to the viability of the PRS. The analysis here first focuses on rents. Figure 3 shows how Edinburgh rent increases for two-bedroomed properties compared to other Scottish cities and the rest of the country between 2010 and 2019. Notable from the chart is that rents have risen much higher in Edinburgh and Glasgow, the main PRS centres, than elsewhere. The exceptionally high increase in Lothian suggests an excess of demand over supply not seen in many other regions.

Resilience to downturns and house prices The most recent downturn experienced by the Scottish economy was the recession which followed the GFC. Economic output as measured by Gross Value Added (GVA) fell in 2009 and 2010 and by 2013 had still not returned to 2007 levels. Other indicators including employment, hours worked, and average weekly earnings also confirmed a recession (Scottish Government, 2017a). Despite the value of the Scottish residential property market not coming even close to returning to its 2007/8 level in the 10 years after the GFC (Registers of Scotland, 2018) the rent statistics above show that the PRS appeared to weather the crisis and subsequent recession in a resilient manner. 12 F. FARNOOD AND C. JONES

Many landlords found themselves in negative equity and were even subject to repossessions. In 2008 one in ten repossessions were BTL properties, some 4000 properties across the UK (CML, 2016). With overall repossessions substantially down since the GFC it is important to note that the proportion of repossessions in 2016 that were BTL mortgages was more than one in four (CML, 2017). House prices in Edinburgh suffered from the downturn at the end of the 2000s, from 2007/8. However, despite some dips (such as in 2016) the city’s average house prices increased by 10.4% between 2007/8 and 2016/17 in nominal terms (Registers of Scotland, 2017).The weathering of the GFC was partly down to the dramatic fall in interest rates so that the highly geared BTL sector experienced a relatively soft landing. The subsequent resilience may be partly a result of the lack of access to other tenures with the post-crisis tightening of lending criteria dampening the demand to purchase from first time buyers (FTB)s, plus the reduction of supply of new social housing as noted above. The BTL sector saw a combination of rent rises and a relatively modest increase in house prices over the subsequent decade.

Acceptance User acceptance Evidence from the Scottish Household Survey suggests that a reasonably high level of satisfaction exists among the country’s renters. When asked to rate their level of satisfaction, 38% of private renters surveyed responded ‘very satisfied’ and 49% ‘fairly satisfied’. While the highest level of satisfaction was far more commonly found among owner occupiers (70%) the PRS figures were close to those of social renters (Scottish Government, 2018). One aspect that did differentiate the PRS from the two other tenures is in the responses to the ‘Strength of belonging to immediate neighbourhood’ item. Here 35% responded ‘not very strongly’ or ‘not at all strongly’ a far greater proportion than owner occupiers (16%) and social renters (26%). This accords with data that 35% of PRS tenants surveyed had been at there current address less than 12 months (Scottish Government, 2018). These satisfaction data may not be entirely reflective of Edinburgh; for example, students, often on 40-week tenancies, may have greatly different expectations to other tenants. Further evidence of some level of user acceptance came in an earlier research survey of 1200 PRS tenants in Scotland, which recorded that when asked a ‘Why renting?’ question 48% indicated a ‘My choice/preferred/suited needs’ answer. However, a more popular response was ‘Unable to buy the property they wanted/ needed’ (58%) (Trevillion & Cookson, 2016). This latter percentage supports a ‘waiting room’ thesis that many tenants plan to become owner occupiers and the scale of demand reflects constraints on access to home ownership. This finding suggests that while the PRS may have grown, its popularity as a tenure has not grown with it. It also questions the thesis that the UK is becoming a ‘post-homeownership’ society (Ronald, 2008). When advantages of renting privately are elicited the two most common were choice of location and choice of property type (DCLG, 2011). De Boer & Bitetti (2014) proposed that one of the main determi- nants of the development path of the PRS is the extent to which citizens are HOUSING STUDIES 13 constrained from entering alternative tenures. Evidence is that in Scotland this con- straint is at a high level.

Investor acceptance The ongoing demand for BTL mortgages shown in Figure 1 suggests investor acceptance but the picture is more complicated given the changing tax position of landlords and new regulations introduced. The latter are considered later but a series of taxation measures has severely reduced the profitability of private landlordism. In common with the UK, a landlord buying a property after the 1st April 2016 was subject to a higher transaction tax (þ3%) than owner occupiers. Until 2017, income tax rates and associated reliefs were still within the remit of the UK Government and in 2015 it announced a highly significant change to the treatment of mortgage interest relief on BTL properties. Over a period of 4 years, the rate at which tax relief on mortgage interest payments can be claimed reduces down to the basic rate of 20% (Blackmore & Monk, 2016). Effectively, higher rate (40%) tax-payer landlords whose mortgage payments interest is 75% or more of their rental income will no longer make a profit on their investments and the situation for additional rate payers (45%) will be even worse (Blackmore & Monk, 2016). A further change which came into effect on the 1st April 2016 concerns the Wear and Tear Allowance which had hitherto enabled landlords to claim tax relief of 10% of their rental income and is now replaced with deductible receipted expenses for capital expenditure on replacements and refurbish- ments (Blackmore & Monk, 2016). The landlords in the survey gave their views of the PRS as an investment today. If you characterize the responses as positive, neutral and negative then the participants were mainly positive with just two seeming to have either neutral or negative views. Dealing first with the doubters, one gave the most detailed analysis: I think it is a very dubious investment, over the long term as a private landlord, unless you have the access to cash and know what you are doing. It is a risky investment if you are over reliant on borrowing. With all properties the problem is if you take the mortgage out, you are beholden to doing certain things at certain times, and if your income stops coming in, and you can’t afford to pay your lender, then there is trouble. …… You have to be able to weather residential property investments for 5 years sometimes, where the property doesn’t even go up in value and might even go down. Such a view probably reflects the experience of GFC and the fact that the backdrop to the timing of the interviews was a period of falling house prices. In the 12 months prior to data collection the value of the average property in Edinburgh had fallen 15.6%, among the largest falls in Scotland (Registers of Scotland, 2016). It emphasizes the risks in today’s PRS for BTL landlords. Turning to those who had a favourable view of the PRS there is a generally san- guine view of it as an investment among the participants despite a significant drop in asset values. One landlord made the point that the quality of the PRS investment is dependent on the way the investment was structured: If you have a big mortgage and already subsidising the rent to pay it out, then you have a serious constant worry. Also, I think the landlords who borrowed on interest only, and put their hopes on capital gain, with new regulations and legislations they might face some problems. 14 F. FARNOOD AND C. JONES

The get-rich-quick aspect of the buy to let boom period may have been at least in part a media myth but the PRS of today certainly does not represent such an oppor- tunity. It is seen as a long-term investment by many and is often mentioned in the same sentence as pension. For example, another landlord states: It is a long-term investment plan and only should be considered if you want to have a decent pension, and you know that you will not have that type of income from your employers, or if you are self-employed. With landlords enjoying a lower rate of return, following the fall in prices in 2016, they may be reliant on stability and avoidance of void periods which in turn could see the average length of tenancies increase. The recent financial and regulatory changes witnessed in Scotland have made being a private landlord less profitable and reduced the case for portfolio expansion. For some small-scale private landlords, the interviews found that acceptance as an investment has declined recently in reaction to the new environment. The most concrete expression of this was a switch by some private landlords into the short-term holiday lettings market. Figure 1 suggests that new mortgages have been at a low level since 2016, and most new investment is being financed by re-mortgages. The picture for institutional investors is very different and almost the reverse of what private small-scale landlords have experienced. Across the UK institutional investment in the UK has been sparse and has only recently shown signs of improv- ing. In Edinburgh there are companies investing in student accommodation but few signs of investment in other residential PRS projects. India Quay is one example where a council investment scheme sought to work with private sector partners to develop a mixed tenure project. This and other projects have seen private sector investors reluctant to participate, partly due to Brexit uncertainty (McCulloch, 2017). Overall, the process of institutional investment acceptance is still ongoing.

Political acceptance Prior to deregulation at the end of the 1980s private landlords, then much fewer in number, received little encouragement in policy terms. Labour governments in Westminster tended to be hostile to private landlordism and while Conservative governments were more encouraging this did not translate to legislative support until the Housing Act 1988. From this point on there has largely been a political consensus that the PRS was an accepted part of the UK tenure mix, albeit one that required regulation (Best et al., 1992). Housing is a devolved matter and recent years have seen significant divergences of approach between England, Scotland, Wales and Northern Ireland (Wilson & Barton, 2018). The English approach is less intervention- ist while in Scotland the Private Housing (Tenancies) (Scotland) Act 2016 (‘2016 Act’) removed no fault grounds for possession and introduced a new form of tenancy with increased security of tenure and regulated rent increases. In sum, the role of the PRS is accepted in Scotland and the wider UK policy context. Yet a series of UK-wide changes to the tax treatment of private landlords noted above have removed some of the tenure’s advantages. The Scottish Government has declared its desire for: ‘A private rented sector that provides good quality homes and high management standards, inspires consumer confidence, and encourages growth HOUSING STUDIES 15 through attracting increased investment’ (Scottish Government, 2013, p. 2). The perception from landlords, however, is that the government does not appreciate their contribution. According to a survey of Scottish landlords, more than half believe the government views them as having little or no value (Makeyourmove, 2018).

Social acceptance The private landlord has always received attention as a ‘folk devil’ in popular culture. Rogue landlord is a popular media epithet commonly found in local newspapers and in October 2018 this extended to national televised news reports (Hills, 2018). In England and Wales in 2017, 512 landlords were convicted of offences under the Housing Act 2004 (Hills, 2018). Nevertheless, Crook & Kemp (2011, p. 1) assert, that, ‘From being almost a pariah in the 1970s, the private landlord has become, if not respected, then at least respectable once again’. The interviews with landlords revealed a phlegmatic set of views. As one landlord put it I think it’s just the same – you know private landlords always gonna have a certain reputation – like politicians and estate agents … it’s just a stereotype … but it doesn’t really change. I don’t see a time when landlords are going to be social heroes, housing the nation, heroes like nurses or something. Some landlords were more positive that with the increased number of landlords, negative perspectives would moderate. Overall in comparison to the post-war decades, the PRS has probably reached a generally higher level of social acceptance. It may increase still further once the latest rebalancing of risks and advantages under the 2016 Act are fed into the public consciousness.

Fairness European studies discussed above identified fairness, namely a fair allocation of the risks and advantages in the landlord-tenant relationship as indicators of a mature market. The 2016 Act was aimed at rebalancing this relationship in Scotland. The PRS of the deregulated era has been viewed as insufficiently fair to tenants (Robertson & Young, 2018; Scottish Government, 2013). In Scotland, a process of review of the PRS began in 2012 and culminated in the passing of the 2016 Act. The Scottish Government decided not to adopt a policy of full rent control. The two main aspects to fairness in the tenant-landlord relationship, rent increases and security of tenure are both addressed in the 2016 Act in such a way as to add balance to the tenant-landlord relationship. The Act introduced the Private Residential Tenancy (PRT) with a range of specific grounds for eviction to replace the insecurity of a SAT tenancy. The 2016 Act also provides that a landlord may increase the rent charged by giving at least three months’ notice. Such increases can only occur once in a 12-month period, and the tenant has the right to refer the rent increase to an independent arbitrator. Either landlord or tenant may appeal to a tri- bunal to set an open market rent should they disagree with the arbitrator’s decision. The 2016 Act also introduced Rent Pressure Zones (RPZ) which could be declared by a local authority with ministerial approval. A local authority can implement 16 F. FARNOOD AND C. JONES restrictions on rent increases within the zone in response to what it considers exces- sive rises. How this latter measure will work is as yet unknown as no application has yet been made to the minister. The high rents charged in Edinburgh suggest that at some point in the future the issue of an RPZ in the city may arise. In June 2017 Edinburgh City Council voted to prepare a report into the requirements for making an application, but as yet nothing has resulted (ARLA, 2018).

Professionalization Regulation The history of the PRS, at least the media portrayal and public perception of it has been one of a lack of professionalism. However, a raft of ‘consumer rights’ regulation in Scotland has corrected this to a substantial degree. Examples are:

HMO regulation in the Civic Government (Scotland) Act 1982 (Licensing of Houses in Multiple Occupation) Order 2000 (as amended in 2002 and 2003) Landlord registration required by Part 8 of the Antisocial Behaviour etc. (Scotland) Act 2004 The Repairing Standard provided for by the Housing (Scotland) Act 2006 Tenancy deposits protection under the Housing (Scotland) Act 2006 Electrical safety under the Housing (Scotland) Act 2014

However, recent media stories highlighting individuals banned from being landlords still operating (Goodley, 2019) show that despite the professionalizing measures the sector can still suffer from reputational damage. The growing number of lettings agencies, who manage tenancies on behalf private landlords, and their requirement to register and follow a code of practice also points to professionalization.

Transparency and information flows The PRS market in Edinburgh as with the rest of Scotland features strong information flows. A landlord setting a rent and tenant evaluating the fairness of a rent have access to considerable information from both formal and informal sources. The government gathers data on rents by property types much of which is published in Private Sector Rent Statistics on an annual basis (Scottish Government, 2017b). The main source of data is the Rent Service Scotland market evidence database including its Fair Rent database. Any member of the public can search for registered rents by postcode. Tenants also now have access to far more information than historically, including the landlord register and the letting agents register. Likewise, there is substantial volumes of information available to landlords when considering making a buy to let investment. Private companies such as Rightmove and Zoopla maintain databases of individual properties sold. Registers of Scotland maintain property sale data online which is searchable by the general public (Registers of Scotland, 2017). HOUSING STUDIES 17

Large portfolio management capacity The growth of the PRS in the post-regulation era has been led by BTL investors with institutional investors almost entirely absent. Unsurprisingly, the professionalization of the PRS mirrored this and featured the establishment of thousands of residential lettings agencies. Scotland introduced a registration scheme and the Letting Agent Code of Practice for letting and managing agents in 2018. In England they remain unregulated and unregistered. The Montague Report highlighted the lack of large portfolio management capacity as a barrier to institutional investment (Montague, 2012). This remains an issue. One important exception in Edinburgh is the operation of major student accommodation providers such as UNITE and The Student Housing Company.

Conclusions The paper has developed a framework for assessing PRS market maturity and tested by reference to a case study of Edinburgh set within a Scottish policy context. The case can be argued as unproven. The PRS is accepted to a degree by users, the government, the wider community and investors. However, the PRS still lacks complete acceptance among tenants. In the 2017 Scottish Household Survey three quarters of those living in the PRS stated that their preferred tenure would be owner occupation with only 15% preferring the PRS (Scottish Government, 2018). The growth of the PRS proved resilient to the GFC, a pointer towards maturity, but has been dampened by recent fiscal changes that have reduced the financial attractiveness of landlordism, perhaps a continuing step to filtering out short term speculators. The Scottish Government is committed to the promotion of the PRS introducing greater regulation, and a new form of tenancy giving more security of tenure and moderation of rent rises. In terms of fairness, Scotland has rebalanced the risks and disadvantages in the tenant position. These initiatives should improve the social acceptance of the PRS and take Scotland a step closer to the mature market framework seen in many European countries. However, it should also be stated that the long-term effect of these changes is not yet known. From a wider perspective there is a good degree of professionalization within the operation of the PRS, and recent regulation has improved this further. In addition, there is an abundance of information available to market participants. However, the evidence suggests that there are a number of elements, including supply and demand balance, and user acceptance, that suggest that the Edinburgh PRS has not yet achieved a state of maturity. There is a wider national conflict whereby incomes have stagnated since the GFC so the burden of rising renting on low-income households has increased. Further, in common with the rest of the UK there is little evidence of acceptance by institutional investors, though this may be slowly changing. There has been too much ongoing change to conclude maturity. This conclusion is especially true of Edinburgh. Adapting the dynamic framework of PRS market development presented earlier the present study we can actually identify four stages: 18 F. FARNOOD AND C. JONES

An Introductory phase which featured pioneer landlords supported by the ARLA led mortgage scheme prior to 2002; A Growth phase featuring the expansion of BTL lenders/mortgage finance which supports rapid but fragile expansion of the sector based on highly geared BTL landlords – the high gearing/high risk is supported by house price boom 2002-2007; A Consolidation phase that followed the GFC, featuring constraints on bank lending, low interest rates which enable a soft landing to highly geared landlordism followed by increased regulation. Nevertheless, it also sees a shake out of short- term speculator landlords; The fourth stage of maturity is still in the melting pot based on our four dimen- sional framework (economic maturity, acceptance, fairness and professionalization).

These conclusions are tempered by the inherent complexity of the functions of the PRS, and the probability that some subsectors may be more mature than others, for example that focussing on students. Similarly, the role of the PRS in catering for low income families is at a more embryonic stage. To unpack these differences the framework would need to be disaggregated, and ultimately the key factor would be investor acceptance of each subsector. The policy implications are broader than simply the PRS. Maturity in the PRS in terms of catering for low income households and attracting long-term tenants will have implications for the wider housing context. It could be a reflection of reduced accessibility of home ownership and social housing decline, or alternatively the acceptability and availability of the PRS could be driving these phenomena. From this housing system perspective PRS maturity is bound up with national housing tenure taxation and social welfare policies. It results from the increasing blur of housing provision between the market and social policy. Ultimately maturity in the PRS is a function of how the state frames the interaction between private markets and public provision, particularly in countries like the UK which retain a significant sized social sector (Ferrari, 2015).

Disclosure statement No potential conflict of interest was reported by the author(s).

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