Sometimes in life the moons align. Such rare events often present opportunity.
They are aligned around the possibility of regulation of the rental payments made by tenants to their institutional fund management landlords. This is because both industry and the government have similar aspirations.
Given the extent of the housing shortage in the UK, especially affordable housing, where more than 1mn households are waiting for social homes, it is clear private capital has a key role to play in seeking to resolve this issue.
It is very possible that resolving the issue will also generate the sort of opportunities your clients might be interested in as they seek attractive returns, diversification, and a clearer path towards net zero.
In a cost of living crisis, with rising mortgage rates bolstering demand for rental accommodation, the UK government is considering new legislation for the rental sector.
Rent regulation rather than rent controls
If the government does look at rent regulation, they are doing so from a position very close to that occupied by our members – fund managers who invest mainly pension fund money into UK real estate.
Any government should be seeking three essential things for tenants: security of tenure; quality, well-managed accommodation; and certainty of rental levels. This is precisely what the institutional real estate investor is also looking for.
So perhaps the first thing the industry needs to do is get better at clearly communicating this point.
Academic research seems to show legislation around renter protection, such as ending no-fault evictions, tends to have positive outcomes for both landlord and tenant.
Providing more protection for renters is associated with improved performance for large institutional landlords and reduced cash flow risk.
Any move towards renter legislation should not be confused with rent controls. The former is legislation to protect tenant rights, the latter is direct market interference to influence rent – typically placing a limit on the amount that a landlord can demand for leasing a home or renewing a lease.
The idea behind rent control rules is to keep living costs affordable for lower-income residents.
However, there are mixed research findings when it comes to legislation controlling rent; depending on the policy design, the risk is that rent controls might reduce supply of rental accommodation and lower its quality, as yields decline, and landlords cut back on servicing and reinvesting to maintain properties in order to save costs.
Rent controls should not be dismissed out of hand though. Indeed, other markets in Europe have seen rent regulation for many years but the effects very much depend on the institutional set-up of rental markets and policy design.
Institutional and pension scheme money can make the difference
A government might find it politically expedient to set legislation to control rents, but it is also politically dangerous – akin to letting the genie out of the bottle over the long term.
