Is it time to think about regulating residential property rents?

They are aligned around the possibility of regulation of the rental payments made by tenants to their institutional fund management landlords. This is because both industry and the government have similar aspirations.

Given the extent of the housing shortage in the UK, especially affordable housing, where more than 1mn households are waiting for social homes, it is clear private capital has a key role to play in seeking to resolve this issue. 

Providing more protection for renters is associated with improved performance for large institutional landlords.

It is very possible that resolving the issue will also generate the sort of opportunities your clients might be interested in as they seek attractive returns, diversification, and a clearer path towards net zero.

In a cost of living crisis, with rising mortgage rates bolstering demand for rental accommodation, the UK government is considering new legislation for the rental sector. 

Rent regulation rather than rent controls

If the government does look at rent regulation, they are doing so from a position very close to that occupied by our members – fund managers who invest mainly pension fund money into UK real estate.

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 is also looking for. 

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, such as ending no-fault evictions, tends to have positive outcomes for both landlord and tenant.

The risk is that rent controls might reduce supply of rental accommodation and lower its quality.

Providing more protection for renters is associated with improved performance for large institutional landlords and reduced cash flow risk. 

Any move towards renter legislation should not be confused with rent controls. The former is legislation to protect tenant rights, the latter is direct market interference to influence rent – typically placing a limit on the amount that a landlord can demand for leasing a home or renewing a lease. 

The idea behind rent control rules is to keep living costs affordable for lower-income residents.

However, 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. 

Rent controls should not be dismissed out of hand though. Indeed, other markets in Europe have seen rent regulation for many years but the effects very much depend on the institutional set-up of rental markets and policy design. 

Institutional and pension scheme money can make the difference

A government might find it politically expedient to set legislation to control rents, but it is also politically dangerous – akin to letting the genie out of the bottle over the long term.

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 45,000-50,000.

Housing associations can improve their deliverability through equity partnerships with private capital.

The social benefits of the BTR market are demonstrable and substantial.

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. 

The build-to-rent (BTR) sector has been a driver of better-quality accommodation in the market, as institutional landlords deliver and maintain housing of a high standard.

It is arguable that the social benefits of the BTR market are demonstrable and substantial.

There are plenty of examples from among our membership. One is a recent development of 85 affordable homes in Edinburgh.

They are all built to an energy efficiency rating of EOC-B, to keep bills as low as possible, and the development has solar panels and electric vehicle charging points too.

Councils demanding too high a proportion of social homes in a project simply kill the economics for that project.

At the risk of sounding like agency marketing, it is close to a medical centre, a library, tennis courts, supermarkets – and the list goes on.

The development is located in an area where there had historically been very little new homebuilding, limiting the ability of tenants to remain in the area. 

If you look at the development’s website and marketing, it is a good job well done. But – and this is not a comment on our member at all – the broader real estate investment industry is less good at selling this story in other quarters.

It is pretty clear we need to get better at measuring and communicating success like this to government and local authorities. 

Delivering the right kind of housing

Let us get back to the question in hand: is it time to think about rent regulation?

Should the government commit to rent regulation? They could also work to counterbalance the supply-side regulations that are being inconsistently interpreted and applied across the UK. 

Doing this would add certainty and encourage additional investment in much-needed housing.

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.

Having a more candid relationship with government would benefit each side.

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 respond by either trying to over-compensate through the specification of the non-social element or they just pull the project completely.

Perhaps if councils tempered their requirements, working with developers, more projects would be viable and delivered. This would likely create the delivery of more social/affordable homes 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 regulations, such as rent freezes, are unlikely to help tenants, landlords, investors, councils or indeed any interested party 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.

The merits of independence

If we do end up with rent regulation, who should police it? 

It is a statement of fact to say we have had 23 housing ministers since 1997. Stability this is not. 

With a frank and open dialogue, a balanced framework can be achieved.

It is possible that the period of political instability may be coming to an end. We can but hope.

But it might not and, in any case, there is little to stop politicking getting in the way of solutions to the housing crisis in future.

What the sector might need is an independent regulator of rents. The Bank of England’s ownership of interest rates is a working template.

And I will hazard a guess that such independence, and depoliticisation, is something you, your clients and their scheme members – in other words the long-term funders of housing – might see as welcome.

If industry, government and local authorities can develop an open and cordial relationship, perhaps regulation can actually facilitate the certainty much sought by the real estate investment industry. 

With a frank and open dialogue, a balanced framework can be achieved, benefitting tenant and landlord, and the authorities seeking to solve the shortage of housing throughout the UK.  

Paul Richards is managing director of The Association of Real Estate Funds