London mayor Sadiq Khan put the cat among the pigeons last week when he called on ministers to allow him to impose rent caps in the capital. He stands little chance, but would it be a bad thing?
It depends who you ask. For the army of ‘mom and pop’ buy-to-let (BTL) investors, their time’s probably been up since George Osborne’s 2015 Budget thanks to debilitating tax changes. For BTR developers or investors, it could be a good thing.
Khan called for an overhaul of tenancy laws as the cornerstone of his 2020 re-election campaign to “reduce rents and keep them at lower levels”. He proposed to launch a register of landlords to access data and enforce standards; to establish a private rent commission, including tenants’ representatives, to design a system of rent controls; and to implement rent stabilisation policies such as caps on rent rises while the commission was created.
There was the predictable response. In the Evening Standard, Conservative mayoral hopeful Shaun Bailey called rent controls “the most effective technique to destroy a city – except for bombing”.
A more measured response came from Grainger. Its bread-and-butter business is rental income from its 8,000-odd portfolio of regulated tenancy properties, which are just the sort of homes the small-scale buy-to-letter invests in. But the group has vaulting ambitions in BTR. As the news on Khan’s proposals broke, the company issued a stock market announcement, asserting the mayor differentiated between BTR and the wider BTL sector. The threatened move in fact “aligns to Grainger’s strategic aims and our position in the market”.
So what could Khan do? Cut rents? Forget it. He might as well plead for permission to control house prices. In any case, both rents and selling prices have been falling in the capital for many property types due to the 65,000 units under construction, mainly flats for speculators, sanctioned by Boris Johnson’s administration.
But here’s a thought: set up a voluntary best-practice register, with companies agreeing to lift rents on new homes only by the rate of inflation. This could make BTR more attractive to institutions.
First, it could be perceived as an ideal inflation hedge for income funds. Second, having rents linked to RPI could, ironically, make it easier for building owners to raise rates every year. Moreover, it could attract many new tenants and they might feel less inclined to shop around for a new landlord each year. Better occupancy rates and less ‘churn’ make for higher rental levels and more predictable returns. Indexing rents could also make the valuation of future development proposals, including the price to be paid for the land, more robust. Operationally, less churn means fewer licks of paint and new carpets to attract replacement tenants.
There could be casualties from BTR’s buccaneering first wave, mainly in regional cities, due to wild assumptions on feasibility. A more robust model in London might boost housebuilding volumes, however – contrasting with what critics see as Khan’s pretty woeful record to date.
Alastair Stewart is an equities analyst and consultant