Scottish rent freeze bill seen as ‘lose-lose’ move for market

Jan 11, 2023 - 11:05

On the face it, it is hard to object to the Cost of Living (Protection of Tenants) (Scotland) Bill passed by the Scottish parliament last week. After all, the emergency legislation aims to increase protection for tenants from rent rises and eviction action during the cost-of-living crisis.

But the bill sent shockwaves through the property sector in Scotland, with some describing it as a “lose-lose” situation for landlords.

The legislation gives ministers the temporary power to freeze rent rises for private and social tenancies from 6 September 2022 until 31 March 2023, with further power to maintain or vary the rent cap over two further six-month periods. It also introduces a moratorium on evictions.

Riccardo Giovanacci, managing director of Scottish-based agency Newton Letting, believes the legislation is essentially a political manoeuvre, rather than a genuine attempt to solve the problems in Scotland’s rented housing sector.

“This is about trying to win votes and not deal with the problem at hand,” he says. “We don’t have enough property and that is what they should focus on. This is no longer democratic but just the government saying ‘we are doing what we are doing’. The SNP has taken it further than it needs to. It has jumped the gun and pulled the trigger too soon.”

Giovanacci says it is a “lose-lose situation for landlords”.

Over the weekend, Scottish first minister Nicola Sturgeon drew criticism for telling the BBC “I detest the Tories” when asked if she would prefer to see a Labour or Tory prime minister.

Ed Crockett, director in the operational capital markets and build-to-rent teams at Savills, says the timing of the new legislation cannot be ignored, given the ongoing tensions between the Westminster and Holyrood administrations.

No consultation

“The way it was released, with no real consultation through emergency measures, and then effectively withholding the bill from scrutiny until the night before it went to parliament, means the sector as a whole is now having to play catch-up to mitigate the worst of the negative impacts on investors, landlords and tenants,” he says.

“Everyone in the sector is striving for a healthy, functioning lettings market that increases the number of homes for rent that Scotland badly needs. This piece of legislation will have the opposite effect.”

Charles McCosh, head of Edinburgh residential lettings at Savills, believes the bill is already affecting the market. “A lot of landlords and investors have seen the headlines and it has created uncertainty in the market,” he says. “They are asking: ‘What can I do and what can’t I do?’ The headlines have put new investors and landlords on hold.”

Crockett echoes this view: “This softens the supply and hardens the demand. It has been clearly rushed through with a lack of consultation. Measures introduced because of Covid-19 are now being applied to this new crisis for political ease rather than anything else.

“The focus is on tenants’ concern that rents are going to go up in line with the wider inflationary environment. But the government is ignoring its own research that found 60% of tenants have no rent increase during the life of their tenancy and only 20% see an increase every year. This will have no material impact on tenants whatsoever.

“The wider issue is the concern the headlines have produced for landlords about whether they choose to offer their units into the rented sector. The destabilising effect of this could be that they have a created a far worse problem than the one they are notionally solving.”

To illustrate the point, McCosh points out that there have historically been around 1,100 properties available for rent in Edinburgh in September on property website Rightmove, but that figure dropped to 250 properties last month.

He adds that three rental properties launched recently on the site on a Sunday had attracted around 1,000 enquiries by the end of Monday.

Among institutional investors, Savills’ Crockett says the main reaction has been frustration.

“There was a pause on a number of schemes and investments as they waited to see the detail of the legislation,” he says. “With clarification, the feeling is the legislation is messy but workable.

“With the rent cap, we’re going to have to pull back our spending”

Jason MacGilp - Cairn

“Most institutions wouldn’t expect to see large increases in a tenancy period. The initial six-month rent cap is fixed at zero but after that looks likely to rise to 3%, and that is in line with what most institutional investors would expect. So those [paused] deals are likely to be picked up again and progressed.

“But in the simplest terms, no landlords can look at this environment and say ‘it has got better for me; I’m more likely to invest’.”

McCosh agrees: “As an investor, if you are looking at Scotland or other markets and you see these headlines, there are more things you will have to take into account unfortunately.”

The social housing sector is also watching the impact of the rent freeze closely, fearing it could affect its ability to build in the future.

Jason MacGilp, group chief executive of housing association Cairn, says: “Even in the year 2022-23, to protect our cash position, we’re looking at rescheduling planned maintenance works we might have carried out in the next six months because clearly with the rent cap, or rent freeze next year, we’re going to have to pull back our spending.”

Developments under review

He adds: “We are also looking to review our proposed developments. Across the sector, if many, or most, housing associations are having to review their investment programme, that must mean the net spend on planned investment programmes is likely to be reduced or certainly delayed.”

MacGilp says because of this, an unintended consequence of the rent cap legislation could be that it reduces the long-term supply of good-quality homes.

So far, governments in other parts of the UK have resisted introducing measures to protect tenants during the coming months. But could this change?

Crockett expects to see some action across the UK to tackle rent pressures, with either one or both of the main Westminster parties adopting policies in this area. However, he doesn’t feel this will unduly concern investors: “If there is a national rate where in-tenancy rent can only grow at a certain amount, then most investors would be comfortable with that.”

But in Scotland, Giovanacci warns that the market is already starting to suffer.“Tenants have so many rights now, which is the right thing to do. However, we will reach a breaking point where new landlords don’t come into the market, [existing] landlords will leave and supply will dry up.”

*Original Report Property Week