Rent Control Could Be Coming To London BTR. Is That Bad?
Want to get a jump-start on upcoming deals? Meet the major London players at one of our upcoming events!
After heavy hints in December, Mayor of London Sadiq Khan confirmed that the introduction of rent controls on private rented residential properties will be part of his re-election manifesto in 2020.
Khan told The Guardian “Londoners overwhelmingly want it to happen”, and the paper said Deputy Mayor for Housing James Murray and Westminster North MP Karen Buck would devise the policy. There were no details of what form the rent controls might take.
It still remains a long shot that rent control will come to London: A change of legislation would be needed to allow the policy to be implemented anywhere in the country, and the Conservative arty is opposed to the idea. Labour is in support.
If it did happen, what would be the impact on the nascent UK build-to-rent sector? The evidence is mixed.
The British Property Federation has always argued that rent controls introduced in the 1960s and 1970s caused the dwindling of institutional investment in UK private rented accommodation. It is firmly opposed to allowing them now.
“The BPF does not support rent controls because there would be too much temptation for politicians to set rents for political expediency, rather than sound economic reasons,” BPF Director of Real Estate Policy Ian Fletcher said.
“For example, if one politician offers a cap of RPI as part of electioneering, another politician may be tempted to say RPI-1%, simply to court favour. It would damage investment into new housing at a time when institutions are just starting to invest once again in the sector. In turn, that would take us further away from resolving the underlying housing issue of our time — a lack of supply.
“More institutions investing in the private rented sector increases competition between landlords, in turn increasing the quality of standards in the sector. Discouraging institutional investment would lead to poorer conditions.”
Some feel that there is the possibility that the overseas institutions entering the sector would be put off by regulatory changes and a potential limit to rental increases.
“We are nervous about the prospect of rent control, which would scare investors and hold the sector back,” Platform Chief Executive Jean-Marc Vandeviere told Property Week last year.
Others however point to the example of Germany, where rent control has not held back a large institutional private rented sector, and even that bastion of the free market New York, where rent control of a form also exists.
“One look at the regulated rental markets of Germany and the US will confirm that BTR investors are comfortable with modest caps on rent inflation,” Savills said in a note last year. “They provide greater certainty of income while reducing perceived risk.”
Savills said it was the uncertainty over regulation rather than the regulation itself that held investors back.
And what does the academic literature say? Last year the Cambridge University Centre for Housing and Planning Research produced a major study on the question, interviewing landlords of all stripes on the question of whether rent control would cause them to pull back from the sector, and thus cause the overall supply of private-rented-sector housing to decline.
The study found that only rent control which reduced rental levels by a third overnight to bring them in line with wage levels would cause the size of the sector to decline. Rent control based around limiting rent increases within tenancies and between tenancies had a minimal impact, it found. LSE produced another study that was less effusive but still came out in favour of rent control.
If Khan is reelected, the sector might just put the policy to the test.
The financial viability of London rented residential will be on the agenda at Bisnow London's BTR Outlook & Expansion event 29 January.