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The Scottish rent control experiment: how not to do it – Will Scarlett

SNP rent control policies have made Scotland a “no-go zone” for investors.

Rachel Reeves, all but certain to be the next shadow chancellor, has said she is in favour of councils having the power to cap rents, as opposed to a national policy. An independent report commissioned by Labour has recommended capping rent rises. It proposed placing a “double lock” on rent increases so they would not be allowed to rise faster than local wages or inflation, whichever is lower.

Westminster’s new Government should look to Scotland for a case study in how not to implement rent control.

Because SNP rent control policies have made Scotland a “no-go zone” for both UK and international investors. The country is now facing a six-to-eight-year supply gap in the construction of large-scale rental developments from 2022, when rent control was introduced, to 2027 when the current Housing Bill is scheduled to pass through parliament.

Even if the resulting rent control mechanism is deemed acceptable to investors, it would take a further year to negotiate a funding deal and two more years to build out a large scale development. That means no practical completions before at best, 2029.

An important lesson

So, what could Labour learn from Scotland?

Firstly, consultation must be real, not a token gesture. Investors require transparency and predictability. One of the biggest deterrents to investment in Scotland is the way the government went about the imposition of rent control: overnight, instantaneously and without consultation.

Investors require certainty. The main investors in large scale rental developments are UK and international pension funds. What they love is slow, steady growth in an environment of political and regulatory stability. What they hate, and will actively avoid, is uncertainty.

Rent control can work but needs to be structured in a manner that investors can accept, tracking inflation as a minimum and only applied to sitting tenancies (new tenancies). This means rent can be reset to open market levels in between tenancies (after a minimum period of say 12 months). This is a red line for investors.

Furthermore, if implemented, controls must be applied universally across local authorities as a binary, yes or no decision. It cannot be left to each local authority to apply a different rent control regime.

Exemptions could also be considered, for instance for housing using only renewable fuels, that is professionally managed, or that meets higher EPC thresholds, to help encourage continued investment in the best BTR homes.

Unintended consequences

Meanwhile, the list of unintended consequences is extensive. Controls have done the opposite of what they were intended to do.

“Day one” rents in Scotland have risen faster than anywhere else in the UK as landlords have increased them disproportionately in order to compensate for subsequent caps and deal with rising operational costs.

Investment into existing stock has fallen as investors – perhaps more in the PRS – have been less able to afford to maintain stock due to rising costs and stagnant rents. Meanwhile the supply of new, sustainable homes, free from fossil fuels, with low running costs and managed by conscientious institutional landlords, has been radically reduced, even killed.

Rather than starting on site and being built out, consented BTR schemes in Scotland, which total over 7,000 homes, currently fall into one of three categories: stalled, switched, or sold. Several consented BTR schemes have now switched to other uses, such as student housing, due to the uncertainty of rent control.

The best thing the Scottish Government could do is scrap rent control altogether. The result would be instantaneous investment in housing supply – estimated at some £3.5bn. If rent controls across the UK are politically unavoidable, then a Labour Government needs to get it right and not make the mistakes that the Scottish Government has made.

A “growth economy” (as required by Labour to pay for their manifesto pledges) needs to encourage private investment in housing, not deter it. In Scotland rent control has been a disaster; things can only get better. In the rest of the UK, Labour must ensure that things do not get worse through unintended and damaging consequences of a well-intended policy.

Will Scarlett, Founder and Director

Published: Green Street News, 27 June 2024