Click here for the full paper: Opinion: Residential Investors Should Not Fear Rental Regulation
With the property industry rocked by the COVID-19 pandemic, the residential sector has proven resilient. Figures for Q3 rent collection across Europe have generally been above 90% for residential – significantly ahead of office, industrial and retail.
And yet the broader effect of the pandemic cannot be ignored. The World Bank predicted over the summer that the global economy would shrink 5.2% this year, representing the deepest recession since the Second World War, while Oxfam has suggested that coronavirus could push half a billion more people into poverty.
At the same time, the majority of Europe continues to face a housing crisis, caused principally by supply of new places to live failing to keep pace with growing urban populations. About 82m Europeans are overburdened by property costs, and house prices are rising significantly more quickly than incomes in most EU member states – especially in major cities. CBRE Global Investors research has shown that in Dublin, Berlin and Amsterdam, for example, real house price growth outstripped income growth by 64%, 55% and 47%, respectively.
While the obvious answer to the rising cost of housing should be to encourage more homes to be built, some local and national governments are taking a more complex approach. Berlin has grappled with the concept of regulation in the private-rented sector for some time. With monthly rents in the city state having risen by 54% over the past seven years according to data from CBRE, Berlin’s parliament passed a law in January to freeze rents for five years.
Other countries have reacted similarly: the Dutch government is talking about capping rental increases, while Amsterdam has introduced rules that prevent private individuals renting out new-build homes; Spain has introduced longer leases and annual rent increases at the rate of inflation; Denmark has brought in new laws to reduce rent increases; and the mayor of London has suggested that bringing in rent controls would be a key priority if he were to win a further term in office.
These steps are being taken in spite of a growing body of evidence indicating that regulation rarely has the intended effect.
A March 2019 Stanford University paper, ‘The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco’, found that while rent control prevented displacement of incumbent renters in the short run, the lost rental housing supply as developers and investors focused on unregulated markets would ultimately most likely push rents upwards. Other evidence suggests that regulation can also lead to poorer quality housing, as landlords cut maintenance and capital expenditure to preserve margins.
And yet the political need to be seen to be doing something to control spiralling rents often seems to take precedence over more pragmatic solutions to encourage and accelerate supply.
For many investors, the prospect of rental regulation is, understandably, a cause for concern. Yet, if regulation is responsive to market forces and predictable, it should not be feared. Berlin took its position at the top of the list of investment hotspots in PwC and ULI’s latest Emerging Trends in Real Estate Europe report despite increasing regulation.
The mere fact that regulation is being imposed highlights exceptionally high levels of demand, which should, under normal circumstances, attract investors. While investing in a regulated market may make short-term returns less exciting, it does make them more predictable and less risky, given that rents in these markets are less likely to fluctuate and average tenancies tend to be longer, meaning fewer void periods.
Meanwhile, where regulation has been introduced, investors should bear in mind that it may not be around forever. Governments and policies regularly change and, where regulation has been introduced, it may well end up being superseded by initiatives that instead focus on attracting investment and accelerating housing delivery.
This highlights that investing in regulated markets, alongside those where there is no government intervention, can diversify risk, providing stable and predictable returns, coupled with more interesting long-term prospects.