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Article: Published in Squarefoot e-Magazine by Elizabeth Kerr

28th Oct 2019

Promises and Pitfalls:

Investors are often landlords until kids go to school or retirement - and they must be attuned to shifting worldwide rental controls.

Owning an investment property often involves becoming a private landlord, and a great deal has changed in the last few years in terms of protecting tenant rights, with regulations becoming increasingly complicated. From restrictions on annual increases to prohibiting Airbnb, leasing rules can be a minefield, yet having a firm grip on those rules is crucial.

The ability for investors to earn an income return on their investment is determined by local rules on leasing which vary significantly by country,” begins Knight Frank’s global head of research, Liam Bailey. In addition to controls, leasing rules can govern lease lengths, rental reviews and landlord obligations as a start. Rupert Smith, managing director of Complete RPI concurs. “Owing to case law and mandatory legislation changes, which are often, it is vital to keep up to date with these as stiff penalties apply,” he adds.

Rental laws are traditionally created at the municipal level, but are frequently state/province measures aimed at rent stabilisation. But trends are shifting in favour of tenants, potentially impacting investor-landlords, especially in Europe and North America. So far in 2019, Barcelona, Berlin and New York have all implemented increase caps, freezes and other guidelines. Though Bailey thinks rigid rent controls are unlikely, and some evidence suggests rent control results in less supply, investors need to keep abreast of local policy headwinds. “There seems to be a general trend towards protecting tenants’ rights and limiting rental increases,” theorises Bailey. Here are the basics that investors in Hong Kong’s preferred locations - the UK, the US, Canada and Australia - need to be aware of.

The UK:  In the UK, Margaret Thatcher’s Conservatives deregulated private rental housing in 1980 and created the Landlord and Tenant Act in 1985 that consolidated and amended previous acts. Some council housing maintains rent controls, but overall, the UK is an open rental market, at least with regards to term limits, though Smith notes new tenancies generally raise rents between 3% and 7%. London mayor Sadiq Khan is currently advocating for rent controls of some kind, or open-ended tenancies. Smith, however, disagrees on tenantleaning trends, citing property fundamentals. 

A change of government (in the event new PM Boris Johnson is defeated) and Labour makes good on its rent control promises. “Landlords have been hit hard with many legislation changes over the past decade and most recently with Selective Licensing,” Smith argues. “The simple fact remains that there is a huge demand versus undersupply and the UK planning system is in denial.”

Additionally, rumours that tenancy fees would be banned were realised. Until now it has been common for letting agents to charge tenants for negotiating a lease agreement, like the half-month each party pays for a rental in Hong Kong. “This is now not permitted and means that landlords need to bear these costs,” explains Bailey. “In reality it means rents have risen slightly to accommodate these costs.”  

The US:  Just under 200 cities in the US have some form of rent control, and all are in states with key gateways and high costs of living: New York, California, New Jersey, Maryland and Washington, D.C. In March, Oregon became the first in the US to implement state-wide rent controls limiting annual rent increases to 7% plus the consumer price index increase. California’s contentious 1995 Costa Hawkins Rental Housing Act is essentially pro-landlord and prevents cities like Los Angeles and pricey San Francisco from imposing rent controls, though 15 cities currently impose some form of regulation.

New York is perhaps the most famous example of rent control in the world. Rents for tenants living in buildings pre-dating 1947 in continuous residence since 1971 are tightly controlled, but flats in that category are vanishing. In the event one of these few remaining flats is vacated, it becomes a “rent-stabilised” unit, subject to Rent Guidelines Board rules capping rent hikes at 1.5% for one-year leases and 2.5% for twoyear leases. In addition, the 2019 Housing Stability and Tenant Protection Act bans tenant blacklists, limits deposit amounts and fines and increases the threshold for co-op conversions among several strict, tenantfriendly new measures. 

Australia:  In Queensland, the location of the fastgrowing city how rentals work. In Queensland, there is no official rent control, though tenants can appeal to a tribunal in cases they feel involve excessive rent increases. The rules are similar in New South Wales. There have been recent changes in Victoria: effective in June, rental increases were limited to once per year, and as of June 2020, there will be no more unspecified evictions and cancelled tenancies, and rental bidding will come to an end among other measures. 

Canada:  Like Australia, rent controls and regulations are applied from province to province. In Ontario, new Premier Doug Ford’s government passed a bill last year that eliminated rent controls on newly built units and additions to existing residential buildings. Current rental increases in Ontario, where the vacancy rate is a paltry 1.6%, are limited to 1.8%—good news for investors purchasing new product in key gateway Toronto. Time will tell if it’s good for tenants, or if it will even last. Rent controls in Ontario have been enacted and eliminated regularly since the 1980s. 

In British Columbia, including Vancouver, rental increases cannot be more than once yearly (as in Victoria), and must adhere to the law—roughly 2.5% based on the provincial Consumer Price Index—or an amount preapproved by an arbitrator. The same goes for Ontario. 

 

 

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