Property industry calls plans for rent cap in the UK unworkable

The leader of the opposition in the UK has been criticised by the lettings industry after announcing that his Party would introduce a national cap on rental increases if it comes to power at next year’s general election.

Ed Miliband unveiled the idea as part of a wider Labour Party plan that would also see restrictions on lettings agent fees and the introduction of three year tenancies.

Under the plans, landlords and tenants would agree initial rents based on ‘market value’. Following this, rents would be reviewed once a year. While landlords would still be able to increase what they are charging following changes in market conditions, Labour plans to introduce an upper ceiling to prevent rent hikes which are significantly higher than changes in the overall market.

Landlords would continue to pay charges just as people selling houses pay fees to estate agents. But estate agents would no longer be able to charge a letting fee to tenants for renting out properties.

Rules on tenancy agreements would also be changed. All tenancies would be three years long by default, with a six month probation period. During this time landlords would be able to evict a tenant if they are in breach of their contract.

This would be followed by a two and a half year term in which tenants would be able to terminate contracts with one month’s notice. Landlords would only be able to terminate contracts with two months’ notice if a tenant fell into arrears or was guilty of anti social behaviour; or if the landlord wanted to sell the property or needed it for their family.

Labour says this is designed to prevent landlords from terminating tenancy agreements to put up rent. However, there would be a provision that allowed landlords to enter into shorter contracts where they are contractually obliged to do so as part of a buy to let mortgage entered into before the start of this new legislation.

There would also be provision for new tenants like students or business people on temporary contracts to request shorter term tenancies subject to the landlord’s agreement.

The Royal Institution of Chartered Survyors (RICS) said it is always important to consider all options which could potentially expand the supply of private rented homes, and to explore any that might make a positive impact on the sector and drive up property standards.

'However, RICS is not developing proposals on rent benchmarks for the private rented sector, and we do not recommend that a government introduce a ceiling on rent increases. Labour is right to talk about generation rent, but arbitrary caps are not a solution,' a spokesman said.

Richard Lambert, chief executive officer of the National Landlords Association, described the proposal for a three year default tenancy as ‘unnecessary, poorly thought through and likely to be completely unworkable’.

The NLA believes that fundamentally changing the structure of tenancies will create uncertainty amongst landlords and the lenders which provide the finances underpinning housing in the UK.

‘Were these proposals to become government policy it would strike a devastating blow to investment in housing of all tenures and further constrain supply at a time of real housing crisis,’ he said.

‘We are concerned that the proposals will actually increase the insecurity of tenure for renters. The experience of Ireland, where a similar system of six month introductory tenancies has been running for some years, is that landlords, concerned about the danger of being unable to end a problem tenancy, look to move tenants on after six months rather than find themselves forced into inflexible restrictive tenancies,’ he pointed out.

‘This does nothing to create a fair and balanced rented sector that works for landlords, tenants and agents. Frankly, I’m surprised that, after the effort Labour front benchers put into consulting on how to make the private rented sector work better, Ed Milliband announces a change which risks putting landlords in a position of conflict with their tenants and leaves future housing provision on a knife edge,’ he added.

The British Property Federation (BPF) has also voiced concern. ‘There are many institutions investing in UK housing, or on the cusp of it, that will be feeling extremely nervous. Those who are investing already are very receptive to offering longer tenancies and many are doing so and the Labour Party’s aspiration on that in itself is not objectionable, but the rent control aspect of this announcement makes no sense,’ said Ian Fletcher, director of policy at the British Property Federation.

‘Good landlords will be getting a perverse message that if you are providing a premium product the most you can expect is the average, whilst bad landlords with substandard accommodation can find another justification for charging over the odds. There are already mechanisms to deal with dodgy rents on longer tenancies via Rent Tribunals and Unfair Contract Terms,’ he explained.

‘If Labour doesn’t want to alienate the one million plus landlords in the UK it must also be more forthcoming on not only allowing eviction for reasons of sale, or rent arrears, or anti social behaviour, but how that will work in practice and whether our courts will be resourced appropriately, plus the spending commitment that entails. Keeping as many possession proceedings out of court, and providing a guaranteed timescale when cases go to court would be a good start,’ he pointed out.

‘The private rented sector has attracted phenomenal investment into housing over the past two decades and with institutional money now entering the sector there is great opportunity for it to contribute towards Labour’s aspiration of 200,000 additional homes per annum, which is the bare minimum the country needs. We welcome that housing is high up the Party’s agenda, but it won’t achieve its objectives if it has investors in new housing delivery doing a rethink and won’t get away without filling in the blanks in its policymaking for too long,’ he added.

Liam Bailey, head of global research, Knight Frank, does not believe the plan would result in lower rents. ‘There is no doubt that affordability and access to accommodation have become real and growing issues for increasing numbers of households. However there is a risk of worsening this situation by misdiagnosing the problem,’ he said.

‘The fundamental issue facing the housing market, especially in London and the South-East, is supply and demand. Household numbers have been rising rapidly and supply hasn’t. This has meant that rents and prices have risen as the market works to ration available supply,’ he explained.

‘Landlords may be charging higher rents than tenants would ideally like to pay, but these rents are nonetheless market rents. The only sustainable way to reduce rents over the long term is to increase housing supply, and thereby increase competition between landlords, and give more choices to tenants and would be first time buyers,’ he added.

His colleague, Gráinne Gilmore, head of UK residential research, Knight Frank, pointed out that committed long term landlords already look at ways to retain tenants rather than trying to move them on as keeping tenants in place for longer not only creates a positive environment but is also good for business as it minimises void periods and helps guarantee long term income for landlords.

‘Rental caps must be carefully debated. The rental market is as localised as the housing market, and forcing a nationwide cap on rent rises could have large scale and unintended consequences. If the cap encourages smaller buy to let landlords to sell up, then while there will be more housing on the market for sale, the demand for rental accommodation will grow as the pool of accommodation shrinks, which will, in itself, push up rents,’ she explained.

She also suggested that if a landlord wants to improve a property, by say, upgrading the kitchen, or adding an extra bathroom, there needs to be an allowance for rent to increase beyond the cap to take this into account.
‘There is also the question of the data these caps will be based on. At present, policymakers are still struggling to capture rental data on a national basis. This will need to be resolved, as the figures used to calculate a market cap will need to be cast iron,’ she added.

Jennet Siebrits, head of residential research at CBRE, also reckons such a policy could affect the number of new institutions entering the private rental market in the UK. ‘These latest measures if introduced could stem investment into the sector. While many of today’s renters and landlords might prefer longer tenancy arrangements, we feel it should be down to the individual providers to decide how long the tenancy should be rather than have it forced upon them through legislation,’ she said.

‘The implementation of rental caps may also discourage a continued appetite from institutional landlords looking to invest in this market. Coupled with the risk of creating uncertainty through calling for more regulation, the current evidence demonstrates that the introduction of these rental caps could lead to a poor quality of rental stock as owners may not have funds to maintain properties to a high standard,’ she added.

Landlord Assist, the nationwide tenant eviction and referencing firm, the plans will undermine any attempts to create a more professional rental market and not make renting more affordable of give greater protection against rogue landlords.

‘In our view the proposals are simply unworkable. Most buy to let investors are primarily attracted to the sector by the lack of restrictions surrounding rent levels, so capping rent levels will do little to help the sector grow,’ said Graham Kinnear, managing director at Landlord Assist.

‘Capping rent increases will only prove to disincentivise people from investing in buy to let property and renovating tired properties. This will ultimately lead to a reduction of available quality accommodation at a time when the market is already experiencing a substantial shortage and will simply undermine any attempts that have been made to create a more professional sector as tenants will be paying more for poor standards of accommodation,’ he explained.

‘Labour’s suggestions, if implemented, will undo all of that work and lead to a reduction in mobility and a reduction in the availability of accommodation,’ he added.

Stephen Parry, commercial director at Landlord Assist, reckons that mortgage lenders would be extremely nervous about granting three years tenancies which can only be terminated in the event that the tenant is in substantive breach.

‘With longer tenancies in place it will make it extremely difficult for landlords and lenders to act and gain repossession of the property in cases of rent arrears,’ he said.

Whilst some agents charge excessive fees, the firm believes that market forces should prevail in this regard without government intervention. ‘To ban administration fees entirely is wholly unfair on agents especially given the amount of administrative work they must undertake. For every tenancy letting agents are required to prepare a tenancy agreement, inventory report, schedule of condition report, arrange a gas safety inspection, energy performance certificate and orchestrate the move in. If Ed Miliband believes that all of this can be provided without cost then he is clearly out of touch with business practice,’ explained Parry.

According to UKALA executive director, Richard Price, while there is a need for greater transparency about charges, who is responsible and for what they are paying, a blanket ban will not achieve this. ‘Rather, it will make it less clear by forcing agents and landlords to incorporate their numerous costs into rental demands. Far from reducing the ultimate cost to tenants, the likely outcome will be a long term levy on the cost of rented housing,’ he said.

‘Although there are many disadvantages within these proposals, introducing an annual indexation of rents during longer tenancies will make agents’ lives easier and potentially more profitable. This near guarantee of rent increases and security of income is welcome news for UKALA members, as currently the majority of rent rises are only levied between tenancies on new agreements,’ he added.