The UK Competition and Markets Authority (CMA) recently published the final report of its market study into housebuilding in England, Wales and Scotland.
The CMA’s view is that “the housebuilding market is not delivering well for consumers” due to problems in the planning system and the speculative nature of development. It also finds that there is “significant consumer detriment” in the private management of amenities on housing estates such as roads, sewers and drains, public open spaces etc. (see the CMA’s press release).
This blog looks at the CMA’s analysis of the private management of amenities on housing estates and how its conclusions apply to Scotland.
Private management of amenities on housing estates
As outlined in the SPICe Briefing ‘Property Factors – Frequently Asked Questions’, housing estates often have areas of land which are used by, or benefit, all the homeowners in the estate and sometimes the general public (e.g. play parks, green spaces or drainage systems).
In the past, these areas were normally owned and managed by local authorities as they would adopt the land (i.e. take on responsibility for it in perpetuity at public expense). However, for some time it’s been very common for the private sector to be involved. According to the CMA, 80% of new homes sold by the eleven biggest builders in 2021 to 2022 are subject to estate management charges.
There are different ways in which private companies can get involved.
One approach involves what are known in Scotland as “land-owning maintenance companies” purchasing the common spaces from the housing developer and agreeing to act as the property manager (also known as “property factor”) for the new estate when it is built. Residents are then required in their title deeds to pay these businesses for managing the common spaces. Unlike a contract, the requirement to pay passes on to future buyers.
Another approach, the most common one according to the CMA’s evidence, is the setting up of a resident management company (RMC) – controlled by the residents – which owns and manages common spaces, often by using a property factor.
Advantages and disadvantages of private sector involvement
Private sector involvement can benefit housing developers financially as they do not need to pay local authorities the “commuted sum” (a capital payment representing forecasted future maintenance costs), which councils require for adopting the land. Local authorities also do not have to consider how to finance the management of land on housing estates long term.
The system has, however, been the subject of criticism for some time and there have been various inquiries into it over the years (for details see the SPICe Briefing ‘Property Factors – Frequently Asked Questions’). However, these haven’t led to fundamental changes in policy.
For its part, the Scottish Government’s approach to the issue has been to rely on rules regulating the sector in the Property Factors (Scotland) Act 2011 and the existing legislation on dismissing property factors. Since 2013 the Scottish Government has also proposed a voluntary code of practice on dismissing and replacing land-owning maintenance companies. However, no code has been published with the Scottish Government recently stating, in response to public petition PE2006, that the work has not progressed “due to other work pressures.”
All in all though, the Scottish Government’s approach hasn’t challenged the underlying model of private sector involvement in the management of amenities on housing estates. The Scottish Government has also recently stressed, in response to public petition PE2006, that it has no plans to change the law in this area.
The CMA’s analysis
The CMA takes a very different view to the Scottish Government (and other governments across the UK). Based on its analysis of the evidence, the CMA’s view is that the status quo isn’t working for homeowners and that fundamental change needs to happen.
According to the CMA, problems include:
- high estate management fees, a significant proportion of which may be allocated to management/administration, rather than maintenance work
- lack of transparency about important details of management arrangements
- amenities not being constructed to an acceptable quality or maintained satisfactorily over time
- the fact that it is very difficult, or sometimes not possible, to switch management companies.
The CMA examines the drivers behind these problems and concludes in its report that a root cause is the:
“4.161 … decrease in levels of adoption of amenities by relevant authorities, resulting in a proliferation of private management arrangements in which estate management companies may possess significant market power.”
It also takes the view that consumer protections, e.g. in Scotland the Property Factors (Scotland) Act 2011, don’t go far enough.
The CMA’s report concludes that:
“3.92 … as a result of the proliferation of this model, and with some households unable to switch provider at all, households may face detriment …. We consider that if the status quo is maintained, aggregate detriment is likely to worsen over time …”
The CMA’s recommendations
One of the options for the CMA at the end of a market study is to proceed to an in-depth market investigation. The CMA has decided not to do this on the basis that government action is arguably a more appropriate response. As a result, the report recommends that the UK, Scottish and Welsh governments:
- implement common adoptable standards for public amenities on new housing estates
- implement mandatory adoption of public amenities on new housing estates
- prohibit the establishment of new embedded management arrangements (i.e. what are known in Scotland as land-maintenance companies)
- provide guidance to members and directors of RMCs to support them in managing the amenities on their housing estates.
It also recommends that the UK Government, in consultation with the devolved governments, introduces enhanced consumer protection measures in this area.
What next?
CMA recommendations aren’t binding on government. The report does, however, provide a serious challenge to the status quo in this area and it will be interesting to see how governments across the UK respond. Local authority funding is likely to be a key issue given the report’s recommendation that there should be mandatory adoption of public amenities on new housing estates. The report itself recognises this, noting concerns about lack of funding and stating that:
“5.37 … the UK, Scottish, and Welsh governments will need to consider how best to ensure that appropriate funding is provided to local authorities.”
Angus Evans, Senior Researcher, SPICe