By Stephen Wilmot, 15 February 2012
Property Matters
We have clamped down on this market so hard we have temporarily shut it. That was the gist of a grimly triumphalist announcement by the Financial Services Authority on 3 February. "This is the type of action that the FSA will increasingly be taking to protect consumers," an official commented.
The market in question was the sale-and-rent-back market, whereby companies buy houses off homeowners, usually in financial distress, and rent them back to them. Few tears will be shed for its closure. Sale-and-rent-back is neither popular – in the British psyche, 'losing' one's home is one of life's greater tragedies – nor widespread; just 61 transactions have been reported since the FSA moved to full regulation of the market in June 2010. The mainstream media reception was predictably positive. Here was a sterling opportunity to portray financial services providers as the moustache-twirling bandits of Victorian legend.
So let me raise a cautiously contrarian voice. The FSA is there to make markets work, not to shut them down. And sale-and-rent back, done properly, could be a useful financial service.
Imagine we are back in 2007, watching images of savers queuing to take their money out of Northern Rock. Some canny investors probably realised the repercussions this would have on the housing market. But they didn't sell up because they wanted to avoid the disruption of moving. The obvious solution would have been for them to find a willing buy-to-let investor – there were plenty at the time – and hammer out a sell-to-rent deal.
Of course, this isn't the market the FSA shut down. By all accounts real-life sale-and-rent-back operators have been incompetent at best. The Office of Fair Trading launched an investigation into misleading marketing in 2008 that led to 12 companies changing their adverts or taking down their websites. Last year a study by the consumer group concluded that customer advice in the sector was "woefully inadequate". Now the FSA has found that "the majority of sale-and-rent-back sales were either unaffordable or inappropriate".
The basic problem seems to have been that sale-and-rent back companies operated on the amateurish assumption that if the customer asked for it, they should sell it. Rightly, the FSA says that's not good enough in the smoke-filled, mirror-lined world of financial services – companies also have a duty to understand the underlying needs of their clients and ensure the products they sell them are appropriate. One sale-and-rent-back company has been referred to the regulator's "enforcement division", while the others have either stopped taking new business or cancelled their regulatory permissions.
Anecdotally, one apparent example of bad advice comes from the company Rent Back My Property, which burnishes a "success story" on its website featuring Mr and Mrs Hawkins from East Sussex. "We were able to release equity from my house so I could make some home improvements," beams an elderly man. But why would you be improving a home you no longer own? And wouldn't a straightforward equity-release deal have been a more sensible option – then Mr and Mrs Hawkins would have no rent to pay at all? The company didn't return my calls for an explanation.
But let's return to my fantasy world in which sale-and-rent-back is not just a dubious solution to financial distress, with sales rushed through at a discount. Let's imagine owner-occupiers use it when they want to reduce their exposure to the housing market. Entrepreneurs who need cash to start a business find it useful, too – bank loans are hard to get and come with strings attached. Deals typically include a five- or 10-year rental agreement and perhaps a buy-back option. Buy-to-let landlords are not the only ones happy to take the other side of the trade; funds also appreciate a long-term income stream backed by sturdy tenants.
This world is not as fantastic as it seems – in the commercial property industry it is very common (albeit without the options). Supermarkets sell their big sheds to pension funds, releasing cash to build more sheds. Some canny financial institutions sold their offices in 2007 and leased them back for 20- or 25-year periods – most famously Swiss Re, which sold the Gherkin for £600m, and HSBC, which sold its tower in Canary Wharf for £1.09bn.
Consumers' needs are different from those of businesses, but not that different – consumers are also investors. It would surely be useful to have a way of shorting the housing market without having to move home. So why aren't financial institutions queuing up to offer a reputable sale-and-rent-back service?
Presumably for the same reason that they don't offer mortgages that vary in value with house prices – which would be another useful risk-management product for homebuyers and banks alike (though a new venture called Castle Trust wants to offer a kind of inflation-linked mortgage). That reason is probably that consumers persist in believing that house prices always go up 'in the long run' – a belief banks don't contradict because it helps them meet sales targets.
Banks are in no mood for innovation right now, particularly if it comes with a risk of negative press coverage. So I suspect my call for a new, more serious market to succeed the one shut by the FSA will go unheeded, at least for many years. That's a shame. If everyone has a view on the property market, they should be able to trade on it.
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