Rent regulation is neither new nor destructive

COMMENT The government’s recent announcement on its planned rental reform has filled many column inches in the papers. Much of this commentary has focused on suggested rent regulation, deploring the proposals. Assar Lindbeck’s famous soundbite that “rent control appears to be the most efficient technique known to destroy a city – except for bombing” has been readily touted as gospel. But should we be so led by thinking that’s nearly half a century old? Regulation in itself should not necessarily be considered bad for the sector. As an industry, it is vital that we take this opportunity to engage with the government to shape a fairer rental system. This will allow all potential consequences to be explored, prior to any kind of political policy being implemented. We should be rightly wary of repeating the damage done by poorly conceived rent reductions and caps in the past. But we need to enter the debate with an open mind on what a rental system could look like, rather than just looking back to previous failed attempts. Open-ended options Little to 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 counterintuitive, the introduction of open-ended, predictable tenancies will encourage tenants to stay longer. Despite the generally negative rhetoric generated within the investment community by rent regulation, we believe that implementing the right system can benefit tenants without unfairly disadvantaging good landlords. Our experience across Europe shows that rent 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 the jurisdictions across Europe where we hold residential investments. Of the roughly €8bn (£7.1bn) worth of residential assets we hold in Europe, more than €7bn is in markets where regulation of rents and open-ended tenancies are the norm. An inconvenient truth is that the larger rental markets often have (or have had) forms of private rented sector regulation. One of the primary objectives for institutional investors allocating funds 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. We also have the flexibility to offer lower rents for tenants able to commit to longer tenancy agreements. At ASI we have found that lowering tenant turnover is often more important for good investments than maximising rental growth. Regulation that introduces fairer terms for tenants should encourage them to stay for longer, benefiting both tenant and landlord. New regime We propose that the government introduce a new assured shorthold tenancy regime as follows: ■  A minimum six-month fixed term, with tenants given the option to stay longer. A longer term can be incentivised through a rent concession applied to the headline rent. ■  Following the fixed term, the agreement would continue on a rolling basis at the headline rent. This could be ended by the tenant only or, if one of a small number of conditions is met, by the landlord. ■  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 the end of the fixed term (reverting to the headline rent and based solely on inflation) and annually thereafter. 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. Ultimately, renting should be considered part of the solution to the UK housing market, and not the problem. Ed Crockett is head of UK residential investment at Aberdeen Standard Investments