UK housing regulation – time to deal tenants a fair hand

Regulation in itself should not necessarily be considered bad for the private rental sector. As an industry, it’s vital we take this opportunity to engage with the government to proactively shape a fairer rental system.

Rent regulation – good or bad?

The UK government has recently launched its ‘New deal on renting’, shortly after the Mayor of London’s ‘Blueprint for reforming tenure and rents’. There have understandably been several column inches praising or deploring the proposals, depending on how you see the debate. Much of the commentary has focused on proposed rent regulation, with Assar Lindbeck’s famous soundbite that “rent control appears to be the most efficient technique known to destroy a city – except for bombing” being readily touted as gospel.

But should we be so led by thinking that’s nearly half a century old? Little or no discussion has been had around open-ended tenancies. These can only really exist if there is some predictability in what a tenant is expected to pay in the future. While it may appear slightly counter-intuitive, we argue that the introduction of open-ended, predictable tenancies will encourage tenants to stay longer. This would be positive for well-meaning landlords. In addition, we argue that regulation in itself should not necessarily be considered bad for the sector. As an industry, it’s vital we take this opportunity to engage with the government to proactively shape a fairer rental system.

“A transparent and flexible lease would result in more certainty and less anxiety for tenants. It would also create greater efficiency for the landlord through reduced tenant turnover.”

We need to enter the debate with an open mind on what a rental system could look like, rather than hark back to previous failed attempts. We should be rightly wary of the damage done by poorly conceived regulation in the past. There is no doubt that any proposal of systematic rent reduction, cap or a decoupling of new lettings from a local market value would fundamentally undermine the entire sector. This could lead to a reduction in both number and quality of properties available to rent. It is critical the government fully engages with the investment community and tenant representatives with their proposals. This will allow all unforeseen consequences to be explored prior to any kind of political policy being implemented.

Europe shows the way

Of critical importance is the form that regulation takes. Despite the generally negative rhetoric generated by rent regulation within the investment community, we believe that implementing the right system can benefit tenants without unfairly disadvantaging good landlords. Our experience across Europe shows that rental regulation in the private rented sector is not a new or destructive phenomenon. Regulation of rents and open-ended tenancies already exist in almost all of the jurisdictions across Europe where we currently hold residential investments. Of the circa €8 billion of residential assets we hold across Europe, over €7 billion is in markets where regulation of rents and open-ended tenancies are the market norm. An inconvenient truth is that the larger rental markets often have, or have had, forms of private rental sector regulation.

Beneficial for both tenant and landlord

We set out below a list of ideas to change the existing legal framework around the Assured Shorthold Tenancy (AST), the standard form of residential lease in the UK. This would provide renters with increased security of tenure and predictable rental increases that we believe favour both tenant and landlord. This is something that already features high on the political agenda for most parties in the UK and is likely to remain a key focus.

One of the primary objectives for institutional investors allocating to the private rented sector is the stable, long-term income flows that the sector has historically provided. In the UK, we already offer a variety of lease lengths of up to three years. Additionally, we have the flexibility to offer lower rents for tenants able to commit to longer tenancy agreements. In fact, in a recent report published by Aberdeen Standard Investments entitled ‘Happy tenants = happy landlords’, we showed that lowering tenant turnover was often more important for good investment performance than maximising rental growth. Regulation that introduces fairer terms for tenants should encourage them to stay for longer, benefitting both tenant and landlord.

We therefore propose that the government should introduce a new AST regime incorporating the following.

• A minimum six-month fixed term, with tenants given the option to stay longer. A longer term can be incentivised through a rent concession agreed between landlord and tenant. The rent concession is applied to a headline rent for the fixed term of the lease.
• Following the fixed term, the agreement would continue on a rolling basis at the headline rent. This can only be ended by the tenant or, if one of a small number of conditions is met, the landlord. These conditions would largely mirror the terms adopted within the Scottish Private Housing Tenancies Act (2016). Certain conditions could be subject to providing fixed compensation for the tenants, based on length of continuous occupation and capped at a year’s rent.
• Two months’ notice would be required to end an agreement at the end of the fixed term, with a minimum notice period of three months for rolling contracts. This would provide the tenant with greater security of tenure and mean they cannot be forced to leave by an arbitrary decision of the landlord.
• Tenants could agree a new fixed term after the initial fixed period, in return for a new rent concession, providing greater certainty of income for the landlord and tenure for the tenant.
• There should be a rent review at end of the fixed term (reverting to the headline rent) and annually thereafter. If the fixed term is longer than 12 months, the initial rent review date must be agreed between tenant and landlord.
• The rent review mechanism should be solely based on inflation.
• The agreement is non-assignable, with no security for any unnamed parties such as children or dependents. Unnamed parties who are dependents can be added to the agreement if they are over 18 and have lived at the address for five years continuously.

We believe this proposition would make the system fairer and simpler for everyone involved in the private rented sector. However, we recognise we are only one stakeholder with one view. We appreciate some of the proposals above will raise eyebrows but our aim is to widen the debate rather than antagonise.

Summary

The goal is to create a tenancy system that works for both tenant and landlord. A transparent and flexible lease would result in more certainty and less anxiety for tenants. It would also create greater efficiency for the landlord through reduced tenant turnover. Ultimately, renting should be considered part of the solution to the UK housing market, and not the problem. A more transparent regulatory framework will help in this regard. However, it should not become a moving goalpost, as this creates greater uncertainty for both tenant and landlord.