Rent controls could help PRS develop

As the May general election approaches, attitudes towards the Labour Party’s suggestion that private sector rents should be controlled is starting to receive a wider level of support. And some of that support is coming from new institutional investors in the sector.

In comments reported in the Financial Times, John German of Invesco Real Estate, who is also on the residential committee of the British Property Federation, indicated that some level of control would not cause a problem for institutional investors, who stand poised to invest billions in the UK private rented market.

“There are rent controls and rent controls,” said German. On rent rises he said some upper cap on annual increases, perhaps indexed, “would create exactly the type of investment that a lot of institutions are looking for, which is a linkage to inflation”.

Labour has proposed among its election policies that it would look to introduce rent controls to limit increases; and give tenants greater security of tenure by offering longer tenancy agreements. “The feedback I get from the political parties is that they get the idea residential property is a huge asset class in the UK,” added German. “They see investment by institutions in the UK private rented sector as an ideal way of trying to tackle some of the housing problems in the UK.”

Invesco, already active in other mainland European residential investment markets, has indicated it thinks the UK PRS market is fundamentally attractive with the potential for attractive returns. And the company has already backed developer Be:Here with a £33m investment in its PRS scheme in Hayes with the promise it will support further Be:Here projects with investment.

And writing in the New Statesman, London Labour MP David Lammy argues for a middle line when considering rent controls. “Let me be clear about what I mean when I talk about rent control. I don’t mean the old-school “first generation” rent control that was introduced in the UK during the Great War, which prevents any increase in rents, diminishes investment returns in real-terms over time, and discourages people from becoming landlords. I don’t mean the type of rent control that keeps rents so low that they are not enough to pay for the proper maintenance of a home in a liveable condition. I mean rent controls that nod to the market but allow for the realities of what it is to have a home to live in; the type that are espoused by those who could hardly be called left-wing ideologues, including Angela Merkel and Michael Bloomberg.”

He favours the German system, noting that:
• renters have tenancies with no end date and can only be evicted under a restrictive number of circumstances, such as being behind with rent, or damaging the property
• landlords cover the charges of letting agents (i.e. they get included in rent)
• initial rents cannot be more than 20% above average local rents
• rent rises are capped at 20% over three years
• rents are linked to a commitment from the landlord to retain the property in good condition
He concludes: “Perhaps a system like Germany’s is exactly what London needs to address the uncertainty and unaffordability faced by tenants in our private rented sector.”

Lammy’s linkage with the German market is highly significant. Invesco has already invested more than £100m in housing in that market, effectively declaring itself satisfied with the German system. And German investor Patrizia, which has made a highly successful business out of investing in the German private rented sector, is now looking to create a similar, large scale, operation here.

Lammy further argues that the British supply problem “has more to do with cautious developers, the planning process, and a scarcity of developable land than it does with rent prices.” He argues for conditions to encourage more institutional development, such as concessions on rent controls for new developments. “Rent controls should not apply to any new property built after 1 January 2014. Or maybe they should not apply to the first tenant of any new development; that will have the added benefit of encouraging longer term leases by property developers.”

Concludes Lammy, MP for Tottenham: “Though not a silver bullet that will singlehandedly solve the crisis, we should think about how rent controls – done sensibly – can be part of a comprehensive plan to ensure that all Londoners can afford a home in our city.” The New Statesman article is here.

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