Rent Control threat to investor yields following legal decision

Yields for buy to let or corporate residential rental investors are likely to be reduced as a result of a legal decision in Scotland.

A case was brought by three property bodies - Propertymark, Scottish Land & Estates, and the Scottish Association of Landlords - seeking judicial review of emergency legislation introduced by the Scottish Parliament which controlled rent rises in the private sector.

The basis for the case was that the legislation seeks to transfer the burden of increasing costs from households to landlords; leaving housing providers potentially unable to cover their costs and facing significant delays to exit a loss-making tenancy.

Legal counsel acting for the three bodies argued that the legislation’s provisions were disproportionate and unfair, failing to recognise that the pressures faced by those in the private rented sector affect not only tenants but also landlords who face steeply rising costs.

However, the challenge was not successful.

The emergency legislation comes to an end in March 2024 and there is now a distinct possibility that there may be some form of permanent rent caps replacing this legislation.

A Scottish Government consultation proposes that rent controls from March next year would apply to increases in rent that take place both during a tenancy and where the rent is set for a new tenant. It also states that the Scottish Government is “considering whether it would be appropriate, in certain circumstances, to allow an increase in rent that is in excess of the rent cap.”

The Scottish Government also acknowledges that “some landlords choose not to increase rents during the course of a tenancy, and instead prefer to increase rents between tenancies”. If rent controls apply both within and between tenancies, the consultation suggests that “landlords may move to increasing rent during tenancies, [which] they would not have done before”. 

However, the consultation also suggests that the Scottish government is considering a rent control exemption for institutional Build To Rent providers, admitting that “some investors may see rent control as a deterrent to investment”.

This may be a response to highly publicised comments by some BTR operators that they were withdrawing their interest in some Scottish developments because of the rent controls which have existed there for the past year.