Other housing associations developed or acquired market rent schemes at about the same time and for a variety of reasons. Reasons included:

• generating cross-subsidies for social housing;
• meeting a gap in the local housing market;
• regenerating an area;
• diversifying their activities away from social housing;
• in some cases, to meet the wishes of a local authority; and
• reducing the stigma associated with being tenants of a social housing landlord.

Though there are exceptions, and though associations seldom have rigid lettings policies, the core market client group comprises young mobile people with professional or keyworker occupations and incomes between about £15,000 and £30,000. This is a group for whom neither owner-occupation nor social housing offers a convenient or practical alternative. Owner-occupation, though a long-term goal for most consumers, involves high costs and sometimes long delays in moving from one property to another. Access to social housing is limited by the priority given by local authorities and other social landlords to people in need.

Mobile young people typically demand housing in and around city centres, and this has become the most common image of housing association market renting. City centre does not necessarily mean the centre of the largest regional cities, however. Associations have also invested in the inner suburbs and in a long list of medium-sized towns such as Northampton, Chester, Ipswich, Poole and Macclesfield. There are also some developments of typical semi-detached and terraced suburban properties.

Most housing association respondents stated that rent levels were no higher, and probably lower, than equivalent privately-rented housing. However, associations do not seek to compete purely on rent levels. The typical marketing strategy is to emphasise a combination of location, value for money (but not luxurious) accommodation, good design and efficient management.

Voids significantly exceeded seven per cent in one scheme: the problem was attributed to a combination of competitive pressures from other landlords, an unattractive external appearance and unattractive internal decorations. The implication for housing associations is to:

• remember the importance of market research;
• recognise the existence of local diversity in market conditions; and
• recognise that practice is still evolving.

A particular theme in the response of management staff is that the tenants of market rent schemes have different demands from social housing tenants. Market rent tenants are less concerned about having a say in management, but are more demanding about the level of service. These include:

• speedy rectification of faults;
• ensuring that any management or repairs visits take place at a time that is convenient to the tenant; and
• the importance of keeping any appointments that are made.

The experience of market renting had, in the view of respondents, significant lessons for service delivery within social housing.

If institutional and private investors are to be persuaded to commit significant funds to the market rented housing sector, they will be looking at the totality of performance in terms of both rental income and capital growth. Whilst they may, for example, be prepared to accept an initial yield of six to seven per cent return on their capital investment, they would also be looking to achieve a similar amount in capital growth each year, giving them a combined yield of around 12-13 per cent. Three of the housing associations suggested that capital returns were around or in excess of 14 per cent. The rest stated that they could not give an overall average figure. The evidence suggests much local variability.

Market rent schemes generally involve a choice between leasehold and freehold forms of investment. In leasehold, the freehold interest is held by an investing institution to which a leasehold charge is paid by the housing association. In freehold, the association finances the scheme through borrowing. The advantage of leasehold development for associations is to provide protection against any depreciation in property values. For an association which already has extensive borrowing, leasehold is generally considered the least risky option. The disadvantage is a reduced level of control in the property portfolio and reduced long-term benefits from any appreciation in property values.

Institutional investors, in contrast to past practice, are prepared to invest in housing association leasehold schemes, so long as the viability of a scheme can be demonstrated. Housing associations have specific advantages in channelling institutional investment into rented housing - they:

• have the experience and expertise to undertake cost-effective housing development and management;
• are able to work with builders in finding sites and in negotiating the purchase of schemes during the construction stage; and
• have sufficient technical and management staff, and a sufficiently wide spread of offices, to acquire portfolios of rented property.

There is one qualification, however. The detailed financial models of leasehold contracts require careful assessment. Moreover, this assessment will have to respond to the scepticism of some, though not all, associations about whether leasehold is as advantageous as freehold development.

The regulatory regime was a repeated source of complaint for the housing association respondents and is itself a deterrent to the expansion of the market rent sector. Three particular complaints were made, that it lacks:

• a recognition of the positive role of housing association market renting in promoting a variety of public policy aims, in addition to the provision of social housing;
• a balanced view of risks and does not consider the role of market renting as a means of reducing the financial vulnerability of associations to declining demand for social housing in some areas; and
• a clear framework for judging the risks involved, with too much discretion being left to regional offices and individual officers.

In addition, the view was expressed that the Corporation lacks the staffing expertise to undertake judgements about the risks of market renting.

The details of the regulatory framework are outside the scope of this report. Nevertheless, it is possible on the basis of discussions with housing associations to indicate the general lines in which the regulatory framework might be reformed. The researchers recommend that the regulatory framework should provide:

• an explicit recognition of the legitimate role of housing association market renting in providing affordable housing and other relevant public policy aims; and
• a more formal and clearer statement of the test of adequacy of the housing association's governance structures and business planning processes, possibly using independent advisers to assess the viability of the business plan.

• a group discussion of the chief executives and development directors of six housing associations, their specialist market rent division managing agents and specialist financial consultants knowledgeable about private residential investment and the operation of investment fund managers;
• information provided by the Joseph Rowntree Foundation and by interviews and other communication with the same six housing associations; and
• background information from published sources.

The research mostly applies to England rather than to Wales or to Scotland. The discussion of the Housing Corporation regulatory framework applies, by definition, only to England. However, two of the participating associations also have experience of market conditions in Scotland.