Big businesses are pouring money into rental housing. Here’s why that’s a cause for concern

When tenants are numbers on a spreadsheet, the risks of something going wrong is clear, argues James Moore

Property for rent: big companies are increasingly keen on the sector (Reuters)

First it was John Lewis, now it’s Lloyds. City fund managers such as Legal & General have been piling in too. The rental housing market is rapidly becoming big business – but is the intervention of these big businesses a good thing?

They, and their advocates, point out that there is a marked shortage of rental property in Britain. There is, in fact, a marked shortage of property, full stop.

We have the capital to come in and meet a clear demand, they say.

They also talk up the virtues of “professionalising” a fractured sector dominated by small players. Sometimes it’s just “hobbyists” owning investment property or two with a view to funding their retirements (although tax changes have reduced their number).

The new would-be housing giants say they’re committed to it long-term and could help to solve the problem of people on short-term tenancies – guaranteeing them a year at best – having their homes sold out from under them (as often happens with smaller landlords).

“People who rent with us will be able to make homes out of our properties because we’re not planning to jump ship when it’s time to retire.”

The problem here is maths. No, I haven’t taken leave of my senses. Let me explain.

Maths is the reason behind big companies’ interest in the rental sector; the hunt for something offering returns that are a cut above those offered by more conventional vehicles, with the added benefits of stability and very low risks.

This is the holy grail for the west’s financial sector. It has been that way ever since its constituents worked out that interest rates were going to stay low for a very long time.

Banks, in particular, find it much harder to make money in the current low-rate environment, but insurers and other financial firms don’t find much fun either.

To date, their quest for something better than a pip or two above rock-bottom base rates has led them down some very dark alleys. One wheeze involved the bundling up and sale of “subprime” debt, which was once seen as an exciting new income-producing asset class. At least until “collateralised debt obligations” led to the financial crisis.

So yes, there are good reasons to take a very jaundiced view when banks and fund managers start stampeding into a new sector, especially when it involves people in shiny suits putting the rental income from the homes where people live into powerpoint presentations and saying things like “Yowza!”

Of course, John Lewis isn’t a bank or a fund manager. It’s primarily a retailer, one which finds itself with a lot of surplus property as a result of the difficulties faced by that sector.

While John Lewis shouldn’t get a pass, it is a mite easier to feel comfortable with what it’s doing here than it is in the case of the financial sector.

Its initial plan is to repurpose premises that played host to stores into rental property in places where there’s strong demand. But in the future it may move into the sort of big build-to-rent schemes that Lloyds is looking at.

While I’m not out to deify John Lewis, it does have a certain brand and a certain ethos that matters to its customers. Retail will remain a big part of its business going forward and it would be a surprise were it to put its hard-won reputation at risk by indulging in shoddy behaviour towards the tenants it hopes to attract.

I’ve also spoken to its head of housing, who seems genuinely interested in getting the model right and was open to ideas about how to develop it. The partnership appears to want to work with tenants rather than seeing them as numbers. That bodes well for the future, although the business still has to prove itself.

I’d be a little more worried about the interest of Lloyds, which doesn’t have the same reputation for service and is at a much further remove from its customers, who often seem like little more than numbers on a spreadsheet (as at all the big banks).

Ditto other more financially focused businesses, where shareholders rule and keeping them happy is the prime concern.

I’ve written before about the high proportion of “shared ownership” property in L&G’s portfolio. True, these help to fund much cheaper “social” rents. But the truly affordable homes, whose tenants may have no other option than the street, are a much smaller part of the mix.

Critics of shared ownership also say it’s a model that offers the “worst of all worlds”, involving all the responsibility of being an owner-occupier while still being saddled with a landlord.

Lloyds has created a shiny new brand with a silly name for its housing venture: “Citra Living”.

This will, it says, “build on the group’s existing support for the housing market as one of the biggest mortgage lenders to first-time buyers, home movers and private landlords”.

Citra’s managing director, Andy Hutchison, says: “We want to ensure more people have access to good quality, affordable, new-build rental properties that they can consider their home.”

That’s not all that different from what John Lewis is saying. And Lloyds has a lot more expertise when it comes to people’s homes.

But what happens when a future CEO of the bank decides that Citra is “non-core” and finds a private equity buyer that thinks they can make something more out of those stable, steady returns, and justify a fancy purchase price by cutting back on the customer service and squeezing the repair budget?

This is a potential risk with John Lewis too, but I’d submit it’s less likely because of the potential for brand damage.

Big business plus housing though? Controversy is surely coming. Count on it. It’s ripe for more regulation – but to get that, the controversy has to come first.