Towards the end of last week London Mayor, Sadiq Khan, announced two proposals both of which, if implemented, may well have a negative effect on new residential development in London.

The first proposal

The first relates to rent controls – which the Labour party has been talking about for many years. Such controls could include setting a cap on the amount landlords can charge for a property, for instance by ensuring rents in the private sector are similar to those for social housing, limiting increases in rents to increases in RPI, or even freezing rents for some or all types of property.

There is no official measure of what constitutes an “unaffordable rent” but it has been suggested that it be no more than 30% of income although many have observed that in some parts of the Capital that percentage is much higher – in some areas over 40% – and should be reduced. Khan has stated that the controls are needed to “fundamentally rebalance London’s private rented sector” and make it “fit for purpose”. Under Khan’s proposals, each London Borough would be able to assess where controls were required and have the power to implement such controls.

Since the Housing Act 1988 was implemented in 1989, no new tenancies are subject to regulated rents. However, rent controls exist in many other European capitals in order to keep housing as affordable as possible. Some observers believe that if they work in other capitals then they should work in London. Rent controls are currently being introduced in Berlin (although they will not apply to social housing or new builds). Some other cities where rent controls do exist also exclude new build properties from the regime. But it would seem unlikely that such an exclusion would be permitted in London.

However, many economists think that ultimately rent controls do not work. They can force out responsible landlords for whom renting out properties no longer constitute a viable business and deter future investment in the private rented sector. The quality of stock could fall as landlord’s sought to maintain profit by reducing repairs. The attractiveness of new build schemes to overseas buy-to-let investors would diminish.

A leading economist at the the political think tank, Adam Smith Institute, has described Khan’s proposals as “economically illiterate”. He claims that rent controls would wreck London’s housing market by discouraging developers to build homes as the poor rate of return on the cost of development due to rent controls would make it financially unattractive in the extreme.

And he has a very valid and simple point – a reduction in the supply of new build stock is never going to alleviate the housing shortage in the capital, which is the main driver of increasing rents.

The second proposal

The second of Khan’s announced proposals relates to the ending of the “poor door” phenomenon. It is increasingly common that as a condition of the local authority granting planning consent, developers have to provide affordable housing within the proposed development as opposed to elsewhere in the borough.

Often the affordable housing units are in one cluster – e.g. in one wing of a new build block that is usually on the least desirable side of the building e.g. north facing or with the poorest view. The specification of the affordable housing units are less than those of the private units in the rest of the development which are often marketed at substantial premiums.

In order to divide the two types of housing, there is often a separate entrance door for each type of housing. As one might expect – the entrance area for the affordable housing units will be plainer than that for the private units. Moreover, facilities afforded to the owners of private units – such as gyms and private receptions rooms – are often not available to owners of affordable units.

Whether this form of segregation provides any bad feelings on the ground is not evidenced. Owners of affordable units may not want to face the high service charges that owners of private units have to pay to cover the provision of such facilities. However Sadiq Khan has described it as an “appalling form of social segregation”.

But what developers will be concerned about is whether more integration between private and affordable housing owners in the same block will result in reduced marketability for the sales of private units.

It remains a fact that some owners of private units will regard a prestigious development as one which contains only high-end luxury housing. And no matter how unpalatable it sounds, a building where social housing units are fully mixed in with private units may be less attractive and therefore less marketable.  This is the problem for developers looking for optimum profits from a development.

A way round this would be for developers to lobby local authorities to relax their policies prescribing a certain proportion of units in a new build development must be for affordable housing.  Developers may be prepared to accept more onerous planning obligations in exchange for the provision of affordable housing units to be off-site. But if Khan has his way then this would seem unlikely, with integrated housing in even the most luxury developments becoming a thing of the future.

If you have any questions regarding this topic, please contact Rosie McCormick Paice, or any other member of the Property team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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