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Income guarantee could 'catalyse' Scottish private rented sector, says expert

A planned rental income guarantee for new large-scale private sector developments in Scotland could "catalyse" the sector and encourage the construction of thousands of new homes, an expert has said.09 Mar 2016

Martin Devine of Pinsent Masons, the law firm behind, was commenting as the Scottish Government began consulting on its preferred model for the planned guarantee, through which it would share a proportion of the rental income risk associated with new housing developments. The proposals were put forward by Homes for Scotland's Private Rental Sector (PRS) Working Group, as part of a joint industry-government initiative examining ways to meet the Scottish Government's ambitious housing targets.

"The consultation on a rental income guarantee scheme is a very welcome and positive step for the PRS market in Scotland, and shows that the Scottish Government recognises that it has a key role in helping this market grow," said Martin Devine, who is a property law expert at Pinsent Masons.

"It will be very interesting to see what feedback the consultation solicits from developers and investors, and their views of the potential impact a rental income guarantee scheme could make on the PRS in Scotland. Although obviously many details of the scheme are yet to be finalised, the proposed framework set out in the consultation appears to be a sensible starting point and could provide a much-needed catalyst for PRS activity in Scotland," he said.

The proposed guarantee scheme has been put forward for consultation following feedback from developers and the Scottish property industry, which suggested that a government guarantee was needed to "build investor confidence" by compensating project owners for any financial shortfall should a planned project not generate sufficient rental income. The 'joint market engagement document', published by the Scottish Government and PRS Working Group, has been designed to "test this hypothesis", according to the Scottish Government.

The scheme set out in the document would apply to projects not yet under construction, new conversions of non-residential property to private rentals and new-build projects that had "demonstrably stalled" where the developer planned to switch from build-to-sell to build-to-rent. It would not apply to planned new social rentals or help-to-buy or shared equity properties. Projects must have outline planning consent, consist of at least 30 separate units and be capable of completion and occupation within three years of an in-principle agreement to proceed, among other eligibility criteria, in order to be eligible for a guarantee under the proposed scheme.

According to the paper, the guarantee would be designed to compensate for financial shortfall as a result of lower than expected rental income, less a "standard adjustment" for voids and bad debts. The Scottish Government would compensate the landlord for 50% of this shortfall for the duration of the guarantee, from a 'ceiling' level which is currently suggested will be set at 95% of the adjusted revenue; down to a 'floor' level which is currently suggested will be set at 75% of the adjusted revenue. The guarantee period would run for a maximum of three years, although the paper seeks views on whether longer guarantee periods should be permissible in some circumstances.

As well as seeking views on their preferred scheme, the Scottish Government and PRS Working Group would like to hear from respondents with "viable alternatives" to the proposal. The consultation will run initially until 22 April, but may be extended at the discretion of the Scottish Government.

The PRS Working Party said that the proposed scheme could directly support the construction of 2,000 new homes for private sector rental, as well as "thousands more" when combined with other policy measures. The Scottish Government is targeting the delivery of 50,000 new affordable homes over the next five years, but also recognises the need for new housing "across all tenures and price points", according to social justice secretary Alex Neil.

"I see the private rented sector playing a major role in the expansion of our housing supply, and we are determined to continue to make Scotland an attractive place for investors to operate in the long term," he said.

"This scheme is designed to give investors greater confidence during the early stages of letting and managing the homes, encouraging early movers in this emerging market to bring developments to fruition at a time when they are needed most. We continue to lead the way in the UK in developing innovative financial models, such as this PRS Rental Income guarantee to attract large-scale investment and accelerate the supply of new homes across the country," he said.