By Richard Bourne, CEO of Martin’s Properties
It has been described as a ‘shock move’ but the Government’s surprise announcement that it waslooking to ban upward only rent reviews was shocking in many more ways.
For a government that wanted to support businesses and encourage entrepreneurial spirit, the decision is confusing at best and damaging at worst. There has been no consultation with the private sector on these plans.
In the residential market, we have already seen clear evidence that unilateral policy changes accelerated the exit of private landlords, exacerbating the lack of housing stock and pushing up rents. The government hurt the very target audience they were trying to benefit. It is unlikely that such an intervention in the commercial market would have a different result.
More recently, there are rumours abound that Rachel Reeves is potentially looking at putting 8% NIC on real estate rental income in the autumn budget, which will be targeted at private residential landlords. This is likely to exacerbate the existing trend, with a loss of private landlords and rents increasing. It appears the government it neither willing to learn, or listen.
One of the first things I learned during my degree was the cruciality of free market economics. Demand and supply will reach an equilibrium. As anyone with a basic education in economics will know, the benefits of a free market are increased efficiency, production, and innovation. The potential disadvantages of a free market include monopolies, poor working conditions, and unemployment. As it stands, employment is up, working conditions are protected and there really aren’t any monopolies when it comes to landlords as the UK property market is diverse in its ownership. There is no valid commercial reason to intervene.
So why do changes to rent reviews matter? It matters because changes to future income profiles affect both the Landlord and the Tenant. For the Landlord, it impacts the value of real estate and changes the way leases are transacted – ultimately impacting both landlords and tenants. Commercial property values are driven by the security of the income, which is ultimately determined by the quality of the location, quality of the building, lease length, covenant (financial health of the Tenant) and potential for rental growth. Changing the profile of how rents will be determined going forward will impact how the landlord market reacts to protect their investment, and this will impact the occupiers through less favourable lease terms – as Landlords have less income certainty and total income over the lease with which to offer benefits and incentives.
Landlords are individuals and businesses that also employ numerous people, have overheads, costs, debts and bills to pay like any other business. They are not simply cash cows. Like any business, increased costs or reduced values will mean Landlords having to pass this impact on to others if they are to survive and remain solvent. The result is that Tenants will be impacted and the likely impacts include:
- Shorter leases to ensure the landlord retains control of its asset and income – This ultimately affects tenants as they are unable to amortise their fit-out costs over a longer period. This affects the risk of potentially writing off large capital expenditure and may affect viability for taking leases on UK real estate.
- Increased rents – Flexibility on shorter leases requires higher rents to compensate for the lack of income certainty.
- Reduced incentives to tenants – Tenants normally benefit from rent free periods or capital incentives to take longer leases as the total income receivable is increased with longer leases. With shorter income certainty, these incentives will reduce.
- Lower choice of stock – Landlords may be unable to justify significant expenditure on buildings or may be forced to sell. This results in a reduction in the volume and quality of stock available for tenants to lease. We have seen the impact of this within the residential sector already.
The potential alternative solutions to shorter leases, higher rents, lower tenant incentives and poorer stock choice include:
- Fixed rent uplifts in leases
- Rent reviews linked to RPI (Retail Price Index) or CPI (Consumer Price Index)
Pension funds comprise around 37% of property ownership in the UK (direct and indirect ownership), so ultimately this decision will affect the pensions of the general public. Pensions require long term, certain income to be able to distribute revenue. Real Estate is one of very few asset classes that offer this. Downwards rent reviews make this investment profile unattractive and changes may impact the performance of pensions in future, unless the landlords react.
Landlords are often seen as greedy and easy targets but it has been quickly forgotten how landlords provided substantial support to their tenants during the Covid-19 Pandemic. Tenants were handed numerous packages of support from landlords who worked tirelessly to keep businesses operating. In our case, this included engaging with each and every customer (tenant) to understand their unique challenges and put in place a bespoke package including managing rent subsidisation or write-offs, drawing up strategies, liaising with the local authorities to maximise al fresco dining and unique shopping workarounds and partnering with organisations to limit the pain points and offer businesses a lifeline. We took our responsibility extremely seriously.
We work hard to retain a positive relationship with our customers and continue to do our best to support them in numerous ways to ensure they are successful, whilst balancing our own commercial business needs. This includes giving our customers the necessary tools and investing in events to drive footfall and curating thriving places that people want to visit and spend money in. If values and market demand for real estate are impacted, landlords will invest less and the benefits to businesses and the community will decrease.
It’s a real shame that this critical period during Covid 19, where landlords stepped up and collaborated is already resigned to a distant memory. Instead, landlords continue to receive far more sticks than carrots, despite the fact we are needed to keep the market commercial. With numerous forms of taxation, increasing costs to maintain, upgrade and service buildings and tenants, inflated insurance and liability premiums – all in the midst of a fluctuating valuation market – the margins are increasingly tight.
We have seen the result of government intervention in various markets already across Europe, with some notable exits from locations where opportunity is curtailed. Intervention that could take some landlords out of the game and disincentivise others at this important point in the UK economy is misguided.
Had the Government consulted on UORR, we could have worked together to produce a better option that’s workable for all. As a country, the UK should be open for business – incentivising investment and growing the economy, allowing the market to balance itself naturally. The proof is that this works – time and time again. Let’s hope Rachel is listening to the property sector and recognises that such interventions are a mistake. Let’s also hope that the rumoured NIC hike is just that, a rumour.