The case for regulatory change in the private rented sector

COMMENT Tucked away on page 113 of the recent Queen’s Speech and ignored by many mainstream commentators was a short but focused note committing the government to take forward regulatory reforms to the residential rental market. While it did not generate the column inches dedicated to discussions on planning reform, it is arguable that the proposed changes could be more radical and far reaching than any of the other property related changes or, indeed, any of the 30 laws intended to be passed by ministers this year. There was a time when such a note would have brought howls of derision from the residential investor base. True, those with a more “traditional” mindset and operating model may be concerned about any increase in restriction or oversight on managing their portfolio. But it is fair to say the majority of institutional investors, perhaps all of those who are more recently coming into the market, welcome this opportunity to improve the regulatory framework in the UK. The current failings There is a growing acceptance that change is coming and that the current legislation is not fit for purpose. The current system, designed for yesterday’s landlords and tenants, is failing today’s investors and residents. These are investors who put sustainability and societal goals ahead of short-term rental growth and residents who are choosing to make their home as renters for the convenience and advantages it offers. It is indisputable that the European markets with the largest rental markets are those where there is increased tenant protection relative to the UK market. That protection gives tenants certainty on long-term outgoings such as indexation, while security understandably encourages residents to emotionally invest in their home in a way that can be difficult for a UK renter to conceive. While landlords’ use of “no fault” evictions is low, the fear of the threat of eviction amongst tenants is far more powerful. Is the prize of a larger pool of demand, with residents who chose to rent for the long term, a big enough prize for the market to rescind some of the previous so-called “powers” held by UK landlords? I would argue that it is. Call to action I recognise that sweeping statements such as this overly simplify a complex and multifaceted issue. Just as it is not possible to introduce security of tenure for tenants without looking at the role of indexation on review, so routes for landlords to be able to deal with unruly tenants in timely and cost effective manner must be improved. An ambition from government to encourage continual investment in housing requires there to be an open-market element of any new rent setting. My sense is that government is aware of these circular relationships and we should take some encouragement from the fact that the Queen’s Speech references the need for changes in the possession process. The amount to which it is prepared to consider all the aspects required to bring in a more modern regulatory environment will depend very much on the industry. Landlords must explain this interconnectivity and ensure there are no unintended consequences of the changes in regulation. It will be important to learn the lessons from the recent changes in Scotland. There, the lack of a sensible minimum term has led to abuse by some short-stay occupiers and the short notice period required to end a tenancy has led to less efficient occupancy – meaning that a proportion of potential supply is unwittingly removed from the market. Change is coming to the UK residential rental market and it is time to embrace the opportunity, rather than defend the threat. But threat there is. Misguided yet well-intended interventions can be extremely damaging. Confusing, unclear guidance from the market will lead to a fudge that benefits no one. It is up to us to make sure that doesn’t happen and that we can take this chance to improve the future of renting in this country – for residents and investors alike. Ed Crockett is head of UK residential investment at Aberdeen Standard Investments