Scottish government rent control attempts have backfired for the student market
In September 2022, Scotland's government declared its housing crisis crisis a 'humanitarian emergency' and began moves to freeze rents and ban the majority of evictions. In January 2023, the rent freezes were replaced with a 3% increase cap, but the eviction ban was kept in place.
It would appear that these rent controls have not had the intended effect. Bruce Patrick, head of commercial development in Scotland at Savills, reports that the supply of new private rental stock has dwindled dramatically as investors are now choosing to fund development projects elsewhere. As a result, he states that some of the best build-to-rent (BTR) developments are 'consequently sitting on ice waiting for clarity on the rent control issue'.
Around 2,000 units of stock are set to be completed in the next six months, which represents the first phase of BTR schemes funded before these rent controls came into effect. Following this period, there will likely not be any further private rented sector BTR schemes completed for occupation before 2027. Patrick states that 'this creates a significant gap in the market in terms of supply, which will likely further increase the upward pressure on rents'.
In the year since emergency rent controls were introduced in Scotland, overall rents in the country have increased by over 12%, with Edinburgh seeing a 14% increase. As a result, a large number of applicants for new rental housing developments in Edinburgh have been made homeless by private landlords leaving the market. Edinburgh has now reached homelessness rates of 1.4%, more than three times the UK average of 0.4%.
Introducing rent controls for the private buy-to-rent market in Scotland has also had significant knock-on effects for the student market. Duncan Garood, CEO of Empiric Student Housing, states that, 'A number of houses in multiple occupation (HMOs) that would normally have offered accommodation for rent have opted out entirely from student contracts, further exacerbating a stretched supply/demand equation'.
The supply of PBSA schemes in Scotland is further limited by the planning environment. For example, in Edinburgh, sites over 0.25 hectares designated for student housing must allocate at least 50% of the area for residential housing. As there is limited land available, viability can become a significant challenge.
Another proposed initiative suggests limiting the share of studio units in each PBSA building to 10% and designating the remaining 90% for clusters. This could ultimately limit future supply and increase rents in existing buildings due to rising construction costs and growing debt expenses.
Head of Research at StuRents, Richard Ward, states, 'Scottish legislation, particularly around rental caps, affordability percentages and cluster requirements, tends to deter investment and can be counterproductive. Similarly, the 90% cluster requirements add an additional level of complexity and, combined with high construction costs and debt expenses, make bringing new stock online even harder'.
StuRents data has identified strong demand growth in Aberdeen, Dundee, Edinburgh, and Glasgow. Demand could outstrip supply in these cities by as much as 48,000 units by 2026. Edinburgh faces a shortage of nearly 10,000 beds, which could grow further, with only 4,000 beds currently in the development pipeline.
Furthermore, ending fixed-term tenancies for students has resulted in a further reduction in supply for student HMOs as landlords face higher void risk, and units may not necessarily be available at the beginning of the student accommodation letting cycle. This can also cause landlords to raise rents to cover the void risk during the summer months.
With all these issues, Garrood states that the 'only solution' to Scotland's student housing crisis is the 'removal of rent controls from the market'.
Read the full article on IPE.