Rent control law to ‘knock £11bn’ off commercial property
New legislation introducing rent controls could lead to £11bn being stripped from commercial property values, fresh analysis has shown, in the latest blow to the confidence for investors.
The government is proposing a ban on upward-only rent hikes on commercial property in a bid to support small businesses with costs.
The proposed ban can be found in an amendment to the English Devolution and Community Empowerment Bill, which is still passing through parliament.
Whereas rent costs only rise or stay the same in leases with upward-only rent reviews, a ban would mean that a fall in commercial property market valuations – determined by lease references to open markets and changes in indexes including inflation measures – would also have to translate into a fall in rent costs for firms.
But fresh modelling by WPI Strategy economist Martin Beck, a former Treasury analyst, has suggested that outlawing upward-only rent reviews for all properties could lead to a fall in commercial property values by around 15 per cent, representing a loss of up to £11bn in the sector.
Beck argued that fresh rent controls could lead to unintended consequences for up to thousands of businesses that have upward-only rent review leases.
Businesses use upward-only rent reviews to ensure income streams remain predictable to attract capital investors, including pension funds, and maintain reliable conditions.
Rent controls will ‘undermine investment’
Beck argued that outlawing the type of lease could weaken investor confidence in the commercial property market as they would have to take more risk into account for large commercial leases due to less certainty over income streams.
Lower valuations could also make refinancing more challenging and leave pension funds worse off, with an impact of up to £4bn less in overall economic growth each year.
Beck said the ban should be contained to small businesses with fewer than 50 employees which may struggle with rising fixed costs while larger developments, including data centres and local regeneration schemes paid through upward-only rent reviews, should be spared from the ban.
“The ban represents a form of rent control introduced for political reasons and inserted into a Devolution Bill without the scrutiny that a major change to commercial property markets should have,” Beck said.
“Had ministers intended to protect small businesses from rent volatility, a targeted ban on upward-only rent reviews for SMEs would have covered 99 per cent of firms in the UK.
“Instead, the measure applies indiscriminately, undermining essential investment in larger property schemes and, in doing so, weakening the conditions for growth.”
A government spokesperson said: “Upward only rent clauses price small businesses out of our high streets and make companies vulnerable to economic shocks.
“Our English Devolution and Community Empowerment Bill will abolish these outdated clauses in new and renewed leases, so we can boost job opportunities and unlock growth.”