Buy-to-let properties have become an important source of supply to the private letting market over the past 10 years. Could they play a similar role in the public sector housing market?

Some buy-to-let owners are reluctant to take on tenants from the public sector, fearing they might be less able or willing to keep up with their rent payments. But those involved in this market say such fears are overstated, while schemes have been devised that can make letting in this area more secure and just as profitable as private letting.

"Quite a lot of landlords have had a good experience of letting through their local authority," says Gus Park, head of buy-to-lets at Mortgage Express, part of Bradford &Bingley. "People who do not know about the market might get a bit sniffy but it is a secure source of rental income."

Local authorities have been encouraged to look closely at the buy-to-let market by government policies aimed at reducing housing waiting lists and the number of people living in bed and breakfast accommodation. Right-to-buy policies introduced by Margaret Thatcher in the 1980s reduced the stock of affordable housing available to local authorities and have led to a revival of the private market.

In the mid-1990s, legislation giving landlords more powers to evict tenants who do not keep up with their rent led to the birth of the buy-to-let mortgage, which brought many more individuals into the market for private rented accommodation. Buy-to-let mortgages became a viable proposition for lenders and meant borrowers who were previously dependent on the expensive and less flexible commercial loan market could get their hands on more reasonably priced funds.

Landlords have been able to benefit from efforts by some local authorities to, in effect, outsource parts of their housing management business under what are known as private sector leasing contracts. The largest scheme is run for Hillingdon, a west London borough which sought tenders in 2002 for private sector providers to supply homes for up to 1,000 families. The borough funds the project through the housing benefit subsidy it receives from the government.

"Hillingdon invited organisations to tender for the contract to provide homes and look after families," says Nick Medhurst, chief executive of Orchard & Shipman, which won the contract. Up to then the company had been a conventional letting and estate agency. "This was a major departure for us."

Orchard & Shipman has since won a contract to provide up to 1,500 homes for the City of Edinburgh. It signed up private landlords with 500 properties on their books in the first year, twice the target number, and expects to reach the total in the next two to three years. "There is a high level of interest," Medhurst says.

The schemes offer private landlords the opportunity to sign a five-year head lease with the council, which then pays the rent on behalf of the tenant, usually quarterly and in advance. The council commits to returning the property to the landlord at the end of the lease in good condition, minus normal wear and tear.

This arrangement gets around the problem of voids, periods between tenants when the landlord is not receiving rent, because the local authority guarantees to pay the rent anyway. It is very unlikely that a local authority will be unable to pay so there should be no problem with bad debts. The scheme also provides a reasonable degree of certainty about the condition of the property when it is handed back.

Rents are typically 10-15 per cent lower than landlords could obtain in the commercial market but there are no agent's fees to pay, resulting in a saving of between 10 and 15 per cent. In addition the absence of voids means the net rent should at least match what the landlord could earn in the private sector and could even be higher.

Under the large schemes in Hillingdon and Edinburgh, Orchard & Shipman takes over the local authority's role in looking after the tenants it takes on. "It is midway between property management and a social service," says Medhurst. "We take a significant responsibility for the welfare of the tenant. We offer a 24-hour service and are geared up to deal with anti-social behaviour."

If you are thinking of entering this market, getting a mortgage should not be a problem. "It is attractive to lenders because you are lending to a strong covenant," says John Heron, director of mortgages at Paragon Group, a buy-to-let specialist. "The local authority or housing association manages the tenant. Our standard letting conditions allow for this but it is important you know what you are doing." But lenders sometimes impose restrictions on some forms of letting. "We would not lend to a landlord who was letting to someone on housing benefit if it was not going through the local authority," Park says.

And not all sorts of property will be suitable. Local authorities are usually looking for accommodation for families, so they may not accept smaller properties or flats in large blocks. Properties must meet electricity and gas regulations and have smoke detectors but these requirements should not be more onerous than would be imposed on any responsible private sector landlord.

"It works for everybody," says Park. "The local authorities need good quality accommodation and landlords want the security of reliable income."

Source:  Financial Times