Labour's plans for rent control by stealth will cost £4.2bn a year, according to a new analysis. An upward-only rent review ban on commercial property, which has been shoehorned into a devolution bill, will have massive unintended consequences, warns Martin Beck, chief economist at WPI Strategy.
The Policy and Its Hidden Origin
Last year, the then-housing and local government secretary, Angela Rayner, quietly and unexpectedly inserted a rent control policy for commercial property into the English Devolution and Community Empowerment Bill. The measure has nothing to do with devolution and is a ban on the use of upward-only rent reviews in new commercial property leases. Ministers present this as “help for small businesses.”
Some on the left of the Labour Party have long wanted to see rent controls in residential property, and this version on the commercial side is likely a first step towards that end. While help for small business sounds great, the policy was bolted into the Devolution Bill, now in its final stages in Parliament, and received minimal impact analysis and no consultation with industry.
Unintended Consequences
This is where the problem lies. As currently drafted, the upward rents ban may indeed help small businesses, but with a massive unintended cost elsewhere. The Bill simply bans upward-only rents in commercial property leases, which for large developments like community and town centre regeneration projects, removes a key investment tool used to attract and pay back the up-front capital used to fund construction.
These schemes work by using modest rise in rents over many years as a means to attract investors to fund the infrastructure and building. Pension funds are a big user of this tool and UK pensions currently hold around £100bn of UK commercial property, over a third of which is held by public service pensions, including for local government workers.
Immediate Losses of £11bn
I decided to do an impact analysis of the measure in HM Treasury style (I worked at the Treasury for over a decade). Even using very conservative scenarios, my finding is that the policy will cause large commercial property developments to fall in value by around 15 per cent, leading to fairly immediate losses of around £11bn across the sector.
The longer-term impact is much worse. As a result of the above impact, and again using conservative assumptions, I predict at least £2bn a year less investment going into UK commercial development and regeneration, which will in turn take around £4.2bn of growth out of the economy every year.
I have compiled this analysis into a short report and made it available to MPs and peers by submitting it to Parliament as evidence, and have also sent the work to MHCLG and others across government. I hope somebody reads it.
Before I suggest what the solution is, I want to make absolutely clear I have no interest in commercial property myself, nor do I work for any landlords who will be affected. I do work with investment clients in areas like pensions and infrastructure, and I genuinely want community regeneration schemes and other developments funded by rental mechanisms to be able to continue. The alternative is simply less investment going into vital real estate and infrastructure.
A Simple Solution
The answer to this is remarkably simple. If the clause enabling this policy in the Devolution Bill was confined to banning upward-only rents for small businesses, as ministers intended and using existing definitions already in use for all property, it would cover 99 per cent of companies in England and Wales, which is where the policy applies. And it would leave investors and local authorities free to keep building and regenerating.
This is Labour’s first step towards rent controls and it is incredibly poorly conceived policy, shoehorned into a devolution bill by Angela Rayner without any apparent relevance to devolution. She of course subsequently resigned over her tax affairs, but it remains in the Bill, having received hardly any scrutiny in its passage through Parliament.
I hope someone in government notices this before it is too late!
