ENTERPRISE ZONES AND AN INSTITUTIONAL PRS

Part of the problem faced by the Government in setting fiscal policy (and, for that matter, the Bank of England in determining monetary policy) is that the full ramifications of its decisions can’t be seen until the changes they have set in motion are a long way down the line.

Even interest rate decisions - which come into immediate effect - are widely accepted to take months to fully feed through to economic performance, so what hope does the Chancellor have with tax changes that are often scheduled to kick in anything up to twelve months after they were first announced?

I raise this as, a month on from George Osborne’s first ‘proper’ budget, the implications are still being revealed to us. Only time will tell what effect the budget will have on the prosperity of the nation - truth be told, Mr Osborne had precious little room for manoeuvre - but what really piqued my interest was the announcement of 11 new ‘enterprise zones’ (with more to follow in subsequent years) to trigger investment in deprived areas of the country.

The political motives and actual effectiveness of these zones could be debated ad nauseum, but their instigation has taken on a new twist with the news that the Greater Birmingham and Solihull Local Enterprise Partnership (LEP) has requested its enterprise zone be sited in the centre of the city. A business case for locating the zone in such a location has been submitted to the Government for consideration.

The question is whether such a move could be the trigger for residential development by institutions, with the blocks held as cash-generating assets? As per usual, it all comes down to yield. The institutions are chasing a return - widely believed to be around 6% - that meets their needs, a return that has to date been hard to realise.

The exact tax breaks available within the proposed enterprise zone are still far from clear, but it can be expected that they will have a positive (ie: downward) impact on development costs and add valuable percentage points onto the yield. Add in the economies of scale that come with purpose-built accommodation and a compelling argument is starting to form. City centre rents, lower initial costs and lower running costs make it hard to see a better location to make the institutional PRS model work.

Whether the boost to the yield will be enough to encourage institutions to invest remains to be seen, but it will certainly be yet another step in the right direction. Allied to the alternative revenue streams that are the norm in the American rented sector - and I’ve discussed before the vital part that furniture rental has to play in this - we could be approaching the magic 6% figure.

Combined with Birmingham City Council’s announcement last year of a public-sector model for social housing provision, it seems that Birmingham is fast becoming the crucible where the UK institutional PRS sector is both most likely to start and most likely to succeed. The following years could see central Birmingham become a proving ground for the viability of the model, and I for one will be watching very closely indeed.

But such a situation will not last forever. The cycle will change and landlords will once again find themselves chasing potential tenants at a time when yields continue to be central to their success. And when this happens, the flexibility that furniture rental affords will be an invaluable tool.