The first in a new series of AREF events centred on the residential sector was held last month, kindly hosted by Schroders. Given the extent of the housing shortage in the UK, especially affordable housing, it is clear private capital has a key role to play in seeking to resolve this issue. In a cost of living crisis, with higher mortgage costs further bolstering demand for rental accommodation, Government is considering new legislation for the rental sector. The distinguished panel discussed rent regulation; what good regulation might look like, what may be considered detrimental to the sector, and what the best approach for our industry might be.
Interestingly, it was clear from the outset that the interests of Government and industry are actually well aligned – perhaps more so than each may realise. Any government should be seeking three essential things for tenants: security of tenure; quality, well managed accommodation; and certainty of rental levels. This is precisely what the institutional real estate investor looks for also. So perhaps the first thing the industry needs to do is get better at clearly communicating this point.
Academic research seems to show legislation around renter protection (e.g. against no-fault evictions) tends to have positive outcomes for both landlord and tenant (see McCollum and Milcheva, 2022). Providing more protection for renters is associated with improved performance for large institutional landlords and reduced cash flow risk. Renter legislation is not to be confused with rent controls. The former is legislation to protect tenant rights, the latter is direct market interference to influence rent. There are mixed research findings when it comes to legislation controlling rent; depending on the policy design, the risk is that rent controls might reduce supply of rental accommodation and lower its quality, as yields decline and landlords cut back on servicing and reinvesting to maintain properties in order to save costs. The unintended consequences of rent controls.
It is important to highlight that the panel were not dismissing rent controls out of hand though. Indeed, it was noted there has been regulated rents in Europe for many years but the effects very much depend on the institutional set-up of rental markets and the policy design. At the event, it was suggested that while setting legislation to control rents might be politically expedient, it is also politically dangerous – akin to ‘letting the genie out of the bottle’, as one described it. If repealing rent controls would be difficult, policy makers must in the first place be very cognisant of what they are proposing and the possible long-term consequences of introducing it.
For example, there is a big shortage of affordable homes in the UK. We need to be building around 150,000 a year but are presently delivering only 45-50,000. Housing associations can improve their deliverability through equity partnerships with private capital. Such capital requires certainty and predictability of income – inflation-linked rents being the most common. ‘Government interventions’ could disturb that certainty, causing this much needed investment to withdraw.
Furthermore, it was claimed that the build-to-rent (BTR) sector has been a driver of better quality accommodation in the market, as institutional landlords deliver and maintain product of a high standard. Thus, the social benefits of the BTR market are demonstrable and substantial. Again, it was suggested that industry needs to get better at measuring and communicating this important aspect to Government and local authorities.
It was made clear that supply-side regulations are being inconsistently interpreted and applied across the UK. This is also a major impediment to delivery of new stock. A better understanding of the BTR use-class could help ensure the right product is delivered at the right price point for the locale. In their desire for more social housing, councils demanding too high a proportion of social homes in a project simply kill the economics for that project. Developers either try to over-compensate through the specification of the non-social element or just pull the project completely. If councils tempered their requirements, working with developers, more projects would be viable and delivered. Hence more social/affordable homes would be delivered overall, along with the right specification of product, at the right price, for the demographic profile of that area.
So, rental protections are distinct from rent controls. Restrictive/regressive regulations, such as rent freezes, are not helpful to anyone as over-regulation hits supply. Sound regulation, however, helps both tenant and landlord. A balanced approach, therefore, is key. Having a more candid relationship with Government would benefit each side, hopefully easing anticipated tensions and allowing industry to get ahead of future regulation, alleviating uncertainty - that nemesis of (much needed) private capital.
If industry, Government and local authorities can develop an open and cordial relationship, perhaps any regulation can actually facilitate the certainty much sort by industry. Through having a frank and open dialogue, perhaps a balanced framework can be achieved, benefitting tenant and landlord, and the authorities seeking to solve the shortage of housing throughout the UK.
There is a clear role for AREF in helping the sector, through improving communication, its policy engagement and seeking industry collaboration to aggregate tenant data to use with Government.
For the full discussion, you can find the link to the replay here.
Don’t miss our next event in this series on 9th February, where we discuss Single Family Housing. Register for this event here. Don’t delay, spaces are limited!
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