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Is renter protection bad for landlords – The case of Section 21

The announcement of the Ministry of Housing, Communities & Local Government (MHCLG) plan on April 15th 2019 to end unfair evictions and ban Section 21 is positive step towards better renter protection in the UK. The government plans to have a consultation on a new legislation to abolish Section 21 evictions, which essentially allows landlords to evict tenants for no reason with two-month notice. Public interest in Section 21 has increased over time; Exhibit 1 shows how Google keywords such as “Section 21” and “evictions” have trended in England from 2004 to present. Although searches on Section 21 declined during the global financial crisis, they have been on the rise since the recovery period began and real estate prices have skyrocketed, and the instance of no-fault evictions has increased.

Exhibit 1: Google trends on “Section 21” and “evictions”

While the recent announcement by the MHCLG seems to provide a rare victory tenants, very quickly news has started spreading that landlords will stop letting if Section 21 were to be abolished. The question is – will this announcement really be that bad for the landlords?

In a recent working paper entitled “Renter Protection and Institutional Investment in Multifamily Rental Housing”, Dr. Meagan McCollum from the University of Tulsa and Dr. Stanimira Milcheva from UCL assess how differences in protections offered to renters across US states affect landlords. Renter protection refers to laws that protect tenants’ rights in rental agreements. For example, states have different statutes on maximum security deposits landlords may request, minimum amount of time a landlord must wait before evicting a tenant for non-payment, and protections against retaliation for tenants if they request repairs or make complaints against landlords. (Renter protection is not the same thing as price controls; outside of a few large cities with their own stricter laws, landlords are not restricted on the rent they can charge.) Exhibit 2 shows state-level variation in the levels of renter protection across the US; the darkest states have the highest tenant protection.

Exhibit 2: Renter protection across US states

In particular, McCollum and Milcheva look at the net revenue stream (net operating income) of institutional landlords, who own the majority of rental properties in the US, over time and how it is affected by tighter renter protection. They examine these differences across neighbourhoods with varying housing affordability and eviction rates. The article finds that the effect of renter protection depends on the neighbourhood where the property is located. If a rented property is located in a less affordable area or an area with high poverty or high share of minority residents, actually landlords benefit from an increase in renter protection. What do they mean by that?

The article finds that buildings in states in which renter protection is higher have higher NOI than buildings in states in which renter protection is low, if those buildings are located the poorest areas of that protectionist state. The opposite is true if the property is in the wealthiest neighbourhoods of the protectionist state. Why is that – how can the effects of renter protection can actually lead to better landlord performance over time? One way to explain this is through less voids – happy tenants may stay longer and there will be less periods of void – in which landlords do not receive any rent in the search of the next tenant. During periods of voids, in addition to not receiving rent landlords may experience more refurbishment costs to make the unit attractive to the next tenant as well as marketing costs to advertise the unit. Landlords actually may prefer a case where tenants feel secure and are less likely to move away as that given stable and predictable rental income. Furthermore, landlords may engage in more stringent pre-screening of tenants when they are located in the less-affluent areas and be able to select more reliable tenants thus and improve their properties’ financial performance. Overall, while the most affluent and high-priced neighborhoods, the NOI of an institutional landlord may decrease if renter protection is high, the opposite effect is observed for the landlords who cater to the more affordable areas. So, for these landlords, the removal of Section 21 and instituting higher levels of renter protection in England and the UK as a whole may be actually led to a positive contribution to the bottom line.

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