Private rental sector reforms: What are the changes and how will they affect the market?

Suggested reforms of the UK's private rental rules have caused some consternation among landlords, but the changes could present opportunities for progressive living models.

Proposed new legislation affecting 11 million private renters and 2.3 million residential landlords in England is continuing its passage through the UK parliament.

The proposals have created controversy among some landlords who fear having their hands tied by reforms designed to give more protection to tenants, while others view the bill as a long overdue overhaul of the private rental sector (PRS), that favours progressive providers.

In this blog, we consider:

• The changes that the Renters Reform Bill seeks to make;
• Its implications for tenants and landlords
• The wider effects the proposed changes could have on the residential real estate market

Key changes

The Renters Reform Bill has been put forward by the UK government's Department for Levelling Up with the aim of delivering a fairer rental market for tenants, without being unduly punitive for landlords.
Some of the key features of the bill include:

• To abolish so called "no fault evictions". Currently under section 21 of the Housing Act 1988, a landlord can end an assured shorthold tenancy by serving a valid notice on the tenant(s) without having any reason or establishing any fault of the tenant. The bill seeks to remove this mechanism of eviction so that tenants can only be evicted on certain "fault-based" and other legal grounds.
• To expand the "fault-based" and other legal grounds upon which a landlord can rely to evict tenants, including for anti-social behaviour, repeat rent arrears, or where a landlord wishes to sell their property or move close family into the property.
• To limit the frequency of rent increases to once per year with a minimum period of two months' notice.
• To replace fixed-term tenancies with periodic tenancies, thereby allowing tenants to move out at any stage of their tenancy so long as they give two months' notice.
• The introduction of a new Ombudsman for the PRS to the reform landlord/tenant dispute resolution process. The bill plans to make it compulsory for landlords to join the new Ombudsman scheme to provide a quicker and cheaper means of resolving a dispute. The court process, which applies only to a small proportion of evictions, will rely more on digitisation with the hope that this will reduce delays.

Implications of the bill

Responses to the bill have been mixed. Some landlords are concerned that the changes are unduly tenant-friendly and place an additional administrative burden on landlords, potentially reducing their profit margins.

Specific concerns have been raised about the bill's impact on the student lettings market, which relies on students moving into their rented property at specific times of the year to align with term dates.

The Higher Education Policy Institute's response was that on the one hand, abolishing fixed-term tenancy agreements would provide students more flexibility. On the other hand, it creates a significant risk of housing instability or student homelessness if the yearly cycle of student properties coming onto the rental market is interrupted.

It is thought the bill may be amended to allow the fixed-term model of renting to continue to apply to student lets.

The bill does not include extensive controls to deal with unaffordable rents (such as rent freezes), so is likely that rising rents will continue to pose an acute issue for tenants notwithstanding the bill.

Even so, the housing shortage is not just felt in the PRS but throughout the residential property market with increasing focus on delivering more residential developments to provide much needed homes.

Effects on the wider residential property market

Increased regulatory strain may discourage buy-to-let landlords from continuing to invest in the PRS.

This, coupled with rising interest rates making buy-to-let mortgages more expensive and the increased tax burden on acquiring and holding PRS investments, is already causing an exodus of private investors from the sector.

This is not good news for private renters. Currently, it is estimated that there are 500,000 fewer properties available to rent when compared with 2019, and 1 in 9 properties on the market today are being offered by landlords selling up.

An exodus of landlords from the property investment market is likely to increase competition for limited housing supply, make the situation worse for tenants, where the primary concern is escalating rents. 

Others have argued that a release of properties from the rental market could create supply for first time buyers to purchase homes that were once rented out, reducing the number of renters.

However, another concern is that the reforms will turn off investment from buy-to-let investors in new housing stock, who often buy off-plan and provide cash injection for the initial build of a residential development.

New opportunities?

Many of the principles embedded in the Renters Reform Bill are reflected in existing practices across the Build-to-Rent and Co-Living sectors where the emphasis is on a fair rental market for tenants and high quality homes. 

"Build-to-Rent" refers to property developments designed to specifically appeal to those who wish to rent rather than prospective homeowners.

In a "Co-Living" accommodation model, occupants share communal living facilities (kitchen, living room areas) and often benefit from numerous other amenities such as co-working spaces, an on-site gym and organised events.

Proponents of these and other new kinds of progressive living models have hailed the reforms as a welcome step towards encouraging a modern approach to renting, in which properties can be optimised for renters and managed efficiently to ensure a positive experience for residents while delivering healthy returns for investors.

However, these sectors have expressed disquiet that abolishing minimum fixed terms of tenancies and thus creating uncertainty about the length of occupancy will prevent meaningful communities being established, undermining a core advantage of the build to rent and co-living model.

What next for the rental market

Whether and to what extent the proposed rental reforms become law remains uncertain, particularly amid rising mortgage interest rates, an insolvency-ridden construction sector and opposing pressures from both landlord and tenant lobbies.

If the government succeeds in implementing its reforms, its effects on the rental market and wider residential property investment will be closely monitored and the market is likely to respond quickly to new conditions.

In the context of favourable demographic and economic fundamentals, there remains appetite for residential property investment generally, with the potential for growth in alternative rental sectors such as Co-Living and Build-to-Rent.

This article was authored by Lily Barker, Solicitor, and Samantha Palmer, Associate in the Real Estate Finance Team at Fieldfisher.