With daily doom and gloom in the press around the energy and cost of living crises, and predictions of a recession, you might be forgiven for thinking that investing in real estate is a bad idea. Amid the gloomy predictions though, there appears to be continuing light in the build-to-rent and beds sectors, where demand outstrips supply. However, in recent months new legislation introduced across the UK threatens these buoyant sectors.
Cost of Living (Tenant Protection) (Scotland) Act 2022
The first is the Cost of Living (Tenant Protection) (Scotland) Act 2022, which came into force in October 2022 and only applies to Scotland. It was introduced as emergency legislation and, accordingly, limited consultation was carried out, resulting in much consternation from landlord groups. Effectively, the legislation introduces rent control and makes it more difficult for landlords to evict a tenant.
During the period to 31 March 2023, rent increases are prohibited and evictions suspended. The recently announced extension of COLTP will continue this moratorium on evictions until 30 September 2023 (and potentially a further six months thereafter), although rent increases of 3% (which can be increased to 6% where a landlord can demonstrate that it has increased costs) are now allowed.
Notably, the recent extension is only intended to apply to private residential tenancies, not to social housing or student accommodation. A private individual is therefore protected by the rent cap, while a social housing tenant is not. Conversely, where social landlords are encouraged to invest in their stock, private landlords are disincentivised. Further, the legislation only applies to existing tenancies, meaning that there is no rent cap for new tenancies. Accordingly, there is nothing requiring new housing brought to the market to be at affordable levels (or even comparable with existing stock).
So what does COLTP mean for the BTR and beds/affordable housing sectors generally? The Scottish Property Federation reported that, when COLTP came into force in October 2022, hundreds of millions pounds of investment, predominantly in the BTR sector, was put on hold. The SPF highlighted the chronic undersupply of rental housing and suggested this legislation would likely frustrate new housing, which instead should be prioritised. In parliament, the Scottish government rebuffed these suggestions and indicated that it did not foresee the rent cap impeding investment as the rent freeze does not apply to new supply.
Notwithstanding the Scottish government’s position, given the reaction from landlord groups (who have applied to the Court of Session to judicially review the government’s decision to introduce the legislation), it seems reasonable to assume that the extension of the cap (albeit at an increased level) and the disparity in application to different landlords is likely to create continued uncertainty.
Building Safety Act 2022
Another recent piece of legislation affecting the residential sector is the Building Safety Act 2022. While it predominantly applies to England, it does extend in part to both Wales and Scotland (largely around offences and changes to the prescription periods for works in the latter case).
The BSA is set to revolutionise how tall structures are designed, constructed and managed, and will apply to all building works which are subject to building regulations. It also introduces the requirement for registration with a Building Safety Regulator and, from April 2024, a building assessment certificate containing information about steps the developer will take to prevent building safety risk. These additional compliance requirements potentially create financial hurdles which, in conjunction with increased supply costs, may reduce the appetite for new residential supply to be created. It also seems likely that, where safety is concerned, we will see similar provisions introduced in Scotland.
Economic Crime (Transparency and Enforcement) Act 2022
No article on this topic would be complete without mentioning the Economic Crime (Transparency and Enforcement) Act 2022, introduced predominantly to counteract money laundering via increased transparency in land ownership. At first glance, this has nothing to do with the BTR/residential market. However, it is now a criminal offence for overseas entities to own (or transact) with property in the UK without having registered in the Register of Overseas Entities, so potential overseas investment in the BTR and beds sectors could suffer as a consequence of the new compliance regime. Not only is an initial registration to be made, but ongoing compliance requirements also have to be met to retain registration. This alone may not significantly deter an overseas investor. However, the additional hoops (especially where criminal sanctions are involved) are unlikely to increase the attractiveness of the UK market for overseas investment.
That being said, not all regulation is bad. Within the industry, there appear to be many calls for more to be done to address the short supply of good quality affordable rental accommodation. A major stumbling block is the time it takes to go through the planning process. If legislation could be introduced to streamline the process, we might see the BTR and residential rental market reach its full potential. As with so much at the moment, it is a case of watch this space.
Alexis Condie is a counsel at Dentons
