Caution Needed in the Rent Setting Debate
August 28, 2014
In May the British Property Federation (BPF), like many other organisations, heard alarm bells ring when Ed Miliband, realising the voting potential of ‘Generation Rent’, set out a range of rental reforms that included the possibility of what looked like ‘rent controls’.
Recognising the pressing need for more rental accommodation and the disquiet of many of those forced to rent, Miliband proposed that a Labour government would introduce three-year tenancies, ban letting agent fees, and put a ceiling on rent increases.
The latter part of the proposals caused particular unease amongst the property sector, which feared that a ceiling on rents posed a very serious threat to the health of the UK’s emerging Build to Rent sector.
This sector is an area of the property industry that has enjoyed cross-party support, but which is still very much in its early stages. The BPF’s ‘Who Buys New Homes in London and Why’ report, launched earlier this year, showed that Build to Rent represented just 8% of the new-build landscape in London in 2013. To get off the ground most of these projects have been entirely reliant on institutional investment, from both the UK and overseas.
Investors are attracted by real estate markets that offer steady returns and a stable political landscape. Bold statements such as those made by Labour have the capacity to scare off the large-scale institutional investors that are so vital to the health of the rental sector.
The BPF is apolitical. We are here to act as an adviser on property issues to any political party, using our members’ expertise to inform policymaking, its outcomes and consequences. On Labour’s proposals, good policy-making would be far more cautious. For example it would:
- Choose a particular area to pilot three year tenancies, which will measure their impact before being rolled out nationwide
- Make it a requirement for landlords to offer three years tenancies, but allow them to offer shorter term tenancies when a tenant prefers it
- Provide a choice of rent setting mechanisms during the period of the tenancy
However, politicians are not after awards for good policy-making and prefer short-term solutions that will get them votes.
Rent setting is particularly important to get right. A quick look at the mechanisms used by a number of professional landlords reveals a range – from RPI to CPI to a fixed uplift of 3.5%. Each of these landlords operates a fair and successful business, and none of them are exploiting their tenants.
In light of this, the BPF would advise against being prescriptive on any capping mechanism, and believes that no cap should be needed. Tenants already have mechanisms in place if their landlord is being exploitative, such as unfair contract terms legislation and rent tribunals, which offer sufficient protection.
One of the criticisms that could be levelled at Labour’s announcement is that it was woolly. It suggested that rent setting during a three-year tenancy would use ‘average market rent’ as its basis, but that raised more questions than it answered. Would it be set at a regional, local or sub-local level? Would it be set for each different style, size and type of property? Would it be based on mean or median rates? Data to find an ‘average rent’ could be easily manipulated and the scope for unfairness and lack of transparency is huge.
The setting of Local Housing Allowance rates, which is based on rent measurements, is rightly or wrongly viewed suspiciously by landlords, because there are so many parameters that can be tweaked for different effect.
Inflation indices offer a different set of considerations. They have the benefit of relying on data that is measured monthly and are generally felt to be robust and devoid of political interference in their collection. One fear would be that, while politicians are not involved in the statistical calculations, there would be significant scope for them to interfere in the setting of the cap itself – as happens in the social sector where negotiations take place every so many years on rent setting. The rent settlement from 2015 was CPI plus 1%, having previously been at RPI plus 0.5%.
A further issue on rent setting, which we have learned from the commercial sector, is that institutional investors tend to view potential negative rental growth very adversely. The same is true of the social rented sector, where it damages investment prospects. Labour’s proposals therefore would have to ensure that an annual rent review was a landlord option, not an obligation.
The desire to better the Private Rented Sector is commendable, and something that the BPF is very much committed to. The Build to Rent movement will play an important part in improving conditions for the UK’s renters, and those already operating within the sector have proved this.
Brands such as FizzyLiving and Get Living London recognise the importance of keeping their tenants happy, and are already offering longer-term tenancies and fixed rent setting mechanisms to provide both security and value to their tenants.
The irony is that government rent setting will make life harder for the professional landlords who are working to better the sector, as any sense that politicians are setting rents will severely damage the sector’s investment prospects.
A number of us have worked very hard to encourage a climate that would support institutional investment in housing, and sought to encourage institutions to consider investing more of their funds in the Private Rented Sector. It would be a true pity if all our aspirations were dashed, including the Labour Party’s, for encouraging large-scale institutional investment via Build to Rent.
We appreciate that politics is about making bold statements, but that brings with it risks that could be mitigated with a more cautious approach.