Build-to-rent in Scotland: the story so far

On 4 September 2024, Scotland’s first minister, John Swinney, announced his first Programme for Government. This included amendments to the Housing (Scotland) Bill which would “clearly set out how rent increases will be capped in areas where rent controls apply, in a way that provides certainty for tenants while also encouraging investment”. This is an important development in what has been a hotly debated topic in the property industry since rent controls were introduced in Scotland in October 2022. The crucial role of BTR It has been well publicised that Scotland is facing a housing emergency and the private rented sector plays an important role in providing housing stock in Scotland. Build-to-rent is an emerging market which is becoming more developed across the UK, where new, high-quality homes are constructed with the purpose of being rented as opposed to being sold to individuals. Typically, BTR developments are found in cities and larger towns, and provide tenants with a secure tenancy with a reputable landlord and a comprehensive property management scheme. There are currently operational schemes in Edinburgh, Glasgow and Aberdeen, with further schemes under construction in Glasgow and Edinburgh as well as South Queensferry. While BTR investment and construction has continued to grow in other parts of the UK, statistics provided by the British Property Federation showed a 54% decline in BTR construction activity in Scotland in the past year (to July) which has been put down to the uncertainty caused by the Bill (there were, however, more than 11,000 BTR units in planning). When rent controls were first introduced, this was done quickly and without consultation, thereby creating a nervousness among would-be investors in BTR in Scotland. Investors need to understand and project their return on investment and have not been able to do this with any certainty on the level of rent controls which may be imposed going forwards. Rent-setting Currently, there is no cap on rent increases in place in Scotland, but if tenants are concerned about a proposed increase received from their landlord, they can apply for a rent adjudication. Rent Service Scotland or the First-tier Tribunal for Scotland (Housing and Property Chamber) will then set the rent based on the lowest of: the open market rate; the rent requested by the landlord; and a comparator based on the difference between the market rate and current rent (taper formula). The taper formula works so that if the gap between the market rate and the current rent is less than 6%, then the rent increase can go ahead without modification. If the gap between the market rate and the current rent is above 6%, the taper would apply, with an additional 0.3% increase allowed for each percentage point between the current rent and the market rate, up to a gap of 24%. If the gap between the market rate and current rent is 24% or larger, the increase cannot exceed 12% and this will apply in all cases. In each case, Rent Service Scotland and the First-tier Tribunal cannot set a higher rent than that requested by the landlord. The Bill contains provisions requiring local authorities to assess rent conditions in their area and report to the Scottish ministers, who are then entitled to designate rent control areas based on this evidence. If a rent control area is designated, then it would be so designated for five years and “the rent payable under a private residential tenancy of a property in the area that is not an exempt property may not be increased by more than an amount specified in the regulations”. There is no detail in the Bill as to what this cap on increases is to be, but it does specify that this can even be 0%, so no increase on rent would be permitted at all. It is worth noting that rent increases in rent control areas would be restricted for existing and new tenancies, so the cap would link rents between tenancies. Rent can be increased not more than once in any 12-month period and not during the first 12 months of a lease term, and this applies to properties both in and outside a rent control zone. There are provisions for some exemptions to the rent control measures, but the draft Bill notes these exemptions would be set out in regulations which we have not yet seen. Clarity needed Various industry bodies have been closely involved in the consultation process for the Bill with a view to reaching a rent control system which protects tenants, while being transparent and easy to understand for both tenants and landlords. The Scottish Property Federation has called for more clarity from the Scottish government on the rent control measures and caps which might help to support investment. The SPF’s proposal to the Scottish government was an approach based on CPI +1% but with a 6% cap where a rent control area is implemented. It has also pushed for any rent control measures to be linked to the tenancy as opposed to the property, which is a key concern for investors. The industry has been encouraged by the announcements from the first minister but it remains to be seen if the proposed amendments will address the concerns in the market and hopefully reintroduce some further investment in Scotland’s BTR market. It is expected that detailed amendments will be considered in early 2025 with a view to the final Bill being approved by the Scottish parliament and regulations coming into force in summer 2025. Lauren Fowler is a senior associate at Dentons Image © EyePress News/Shutterstock