Housing
Homes in the property collapse
Jane McLoughlin
Among the present spate of property company collapses, by far the most significant socially is the break-up of the Stern empire, for this involves people's homes rather than office blocks or industrial premises. Thousands of tenants in blocks of unfurnished flats in London and the South East are anxiously awaiting a decision on their fate from liquidators Cork Gully, while speculating vultures gather to consider the cost before they pick over the corpse.
The Stern group of companies are a comparatively recent breakaway from the giant Freshwater Group, who were the biggest private landlords in the country. Thirty-nine-year-old William Stern, who came to this country as a graduate from the Law school of -Columbia University, New York, to meet and marry Osiah Freshwater's daughter, built up and managed his father-in-law's property company before branching out on his own within the last three years. His group, like Freshwater, was a series of interlocking private companies with one or two public company outcrops in the City. As with the Freshwater group again, control of the group was held very tightly in Stern's own fist.
His tenants are largely middle class, many of them women on their own living on private rather than state pensions. They have probably taken Stern flats after the break-up of their own homes because they wanted to surround themselves with their own furniture and possessions full of memories for them, and had few points in their favour on council housing lists. It was not Stern's policy to charge premiums or key money, even unofficially, and his tenants will find it difficult to get similar accommodation terms again.
Many of the people renting his flats may hope to buy their flats cheaply now, but mortgages will not be easy to find for those on a small fixed income, and even if they could buy, they will find it a problem to maintain centralised overheads such as repairing lifts and general servicing in the oldfashioned mansion blocks which form most of Sterns holdings. It is hard to see, too, how it will be practical to sell off a few flats per block, and then offer the rest to a speculator or council. Whoever does take over as landlord is more likely to want a complete block of rented flats for easier administration.
Stern recognised the need of this middle-class minority group. Almost alone, he realised that the potential for profit in the private rental sector was increased because no finance was being put into the building of new property for open-market rental. On the publication of the 1965 Rent Act, he foresaw that the law, instead of helping the middle-class tenant, would accelerate the disappearance of available private unfurnished flats because the small-scale landlord could no longer expect to make a reasonable return on property.
Stern read the Act differently: he accepted that it made a rent in excess of the registered rent irrecoverable in law, but he also saw that it was not a criminal offence to agree a higher rent with a willing tenant and for this rent to be paid with no reference to rent officers or courts. Because of the shortage of similar accommodation, there was no shortage of tenants willing to agree a rent with Stern.
In many cases, when a new block of existing flats was purchased, the first flat to become vacant in that block was modernised — very well; Stern's flats were of a uniformly high standard in their price bracket — and this flat would be let to a tenant willing to pay what was not, after all, an unreasonable market rate for the flat. Such a tenant would be invited, before taking possession, to make a joint application to the rent officer to register the agreed rent. Usually the rent officer reduced this by up to 10 per cent in respect of the scarcity element which the Rent Act states must be disregarded, but the registered rent for that flat set a precedent for all other flats in the block, establishing the rental value at levels well in excess of rents being paid by other flats in the block. As these became vacant, they were modernised in turn and registered rents at the higher level were almost automatic, particularly as there was no shortage of tenants prepared to pay in the current chronic shortage of private unfurnished property. The value of a block of flats in capital terms is a multiple of its rental income. A block of tenanted flats bought for, say, 00,000 when the annual rental per flat was only 000, would rise in value once one or two flats had been modernised and the higher rent potential illustrated. On the basis of this high rent potential, Stern could mortgage the property to a bank, an insurance company, or even a company pensions scheme, and use the funds to repeat the exercise on another block. Stern can scarcely be criticised for this procedure; he fulfilled a distinct public need for one of the least vocal population groups, the lower-income middle classes.
The flaw in the Stern approach is that like a chain letter it can only continue to succeed if it continues infinitely. The collapse of property prices could have been weathered if his ratio of borrowings to assets had been at a lower level, but it had always been his policy to maintain his borrowing at as high a level as possible since inflation would erode the actual future repayments against capital. It was this that seems to have led to Stern's separating his own group from his father-in-law's empire.
There is, of course, a very considerable rental income collected monthly from Stern's properties. Stern himself tended to regard the rental income as a bonus only. His concern was capital value. He has always pointed out that while the middle classes exist, there is a need for private rented accommodation. His own solution to escalating rentals was the construction of more and more private accommpdation for rent, but he claimed that this was made impossible because of the low return on capital that could be expected from an industry hide-bound by controls like the Rent Act, and the high cost of investment funds.
A state-sponsored low-interest finance source for private accommodation to rent seemed to him to be the solution, and he constantly advocated an institution modelled on the American Federal Housing Agency, which guarantees the loans of approved property developers in the private sector. He pointed out that even if the level of council building met the present demands of existing housing lists, the effect on rentals and demand in .the private sector would be unchanged.
So the solutions at present proposed to the Stern property crisis — the transfer of many of the properties to 'social ownership,' i.e. a council takeover — offers only a short-term stop-gap. By transferring these flats to the local authorities, substantial amounts of rates income will be lost, just when the local authority financial requirements are increasing, and the removal of large numbers of flats from the private sector can only further increase the pressure of demand on the diminishing supply. Stern himself predicted four years ago that within ten years, it will be impossible for middle income
groups — up-and-caoll managerial and executive much needed in British coruni,, — to put a roof over their beau' the London area.
Jane McLoughlin is a Telegraph staff writer
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