Better rent (May 2019)

[Published on Centre for London blog, 23 May 2019]

In our world of clone towns, megabrands and oligopolies, we understandably venerate the small business, the sole trader or micro chain. Renting somewhere to live may be an exception. If smaller doesn’t mean better, could larger landlords help pacify London’s wild west rental market?

Private renting is heavily dominated by smaller operators: a 2016 UK-wide survey found that more than 50 per cent of rented homes were owned by landlords with three properties or fewer. Most small landlords are not professionals: they may have put spare cash into rental property to generate retirement income, or have retained homes as they have moved up ‘the housing ladder’, or in some cases may be owning and letting out property in one place, while themselves being renters in another.

Not all small landlords are rogues, but many have a bad reputation for good reason. Landlords and letting agents are blamed for shoddy conditions and delayed repairs, for inflated charges and deposits withheld without good reason, for taking advantage of ‘no fault’ evictions to change tenants and boost rents every year. In a landlord’s market, many of these practices are consequence-free – there’s no corporate reputation to defend, and unhappy tenants have limited recourse apart from moving on; there’s always someone ready to take their place.

Against this backdrop, the arrival in London of professional ‘Build to Rent’ landlords, who build flats, and let them directly to private renters, should be good news. Build to Rent landlords are professionals. They have corporate reputations to consider, and actively market their properties on the basis of the quality of accommodation and of the service that they can provide (albeit at a price).
Recent estimates suggested that around 50,000 Build to Rent apartments have been built or given planning permission since 2009. Their developers are an interesting mix: they include joint ventures, housing associations, traditional commercial developers, and institutional investors looking for long-term financial returns.

The Build to Rent sector only accounts for around five per cent of the one million private sector rentals in London, but the numbers are steadily growing. (Calculated from Housing in London 2018 tables.)

The sector may even be starting to have an impact on rental levels. Rental growth has slowed in recent years. Government data cited in the most recent edition of Centre for London’s quarterly The London Intelligence showed that rents are now static, having shot up from the end of 2010 to early 2017. Figures compiled from a Dataloft survey of new lettings tell a subtly different story. These figures show rents continuing to grow, with larger properties showing the fastest growth and one-bed flats showing the slowest.

Rival explanations for the deceleration of rent increases include suggestions that lower international migration levels are having an impact on demand, as well as arguments that recent completions are leading to a moment of over-supply – particularly of flats – before the market slowdown puts the dampers on new development.

But could the growth in Build to Rent have helped too? Many Build to Rent landlords offer three-year tenancies, with index-linked rent increases, as standard. Even if rents catch up with the market as a whole at the end of three years, these new tenancies could be helping to damp down growth right now. They may also explain the difference between continuing growth in rents for new lettings, and a more subdued picture overall.

This market moderation comes – whether by coincidence or not – just as the issue of rent control is rising back up the agenda. While government backed off proposals for minimum three year tenancies last year, it has proposed abolishing ‘no fault’ evictions. This may partly be in response to Mayor of London Sadiq Khan suggesting that rent control could be a key plank of his re-election campaign – though this would still require government support through legislation.

Build to Rent landlords say that heavy handed rent control will simply kill off their business model. They already struggle to make schemes stack up, they say, competing for land against developers building for sale, who can afford to pay 30 per cent more for land.  Removing their ability to charge what the market can afford in rent will push scheme viability even deeper underwater.

But ‘rent control’ can take a number of forms, from formal setting of private rents, to simply index-linking rises during the course of longer tenancies. If more and more Build to Rent property is offered on the basis of three-year tenancies with index-linked rent rises, the sector may be able to offer a self-regulation solution. This may not tackle all the issues of affordability in London’s rental market, but could forestall the need for legislation, sidestep parliamentary battles, and sustain sense in London’s rental market without stifling a sector that is just finding its feet.