The Right to a Roof

It could:

• evict institutional investors from the residential property market

• reset zoning restrictions to allow housing density in desirable locations

• allow conversion of underutilised offices into residences

• cap tax breaks for investors

• incentivise letting of unoccupied homes owned by foreign investors

• address malpractice amongst property magnates

• limit or restrict short term rentals

• develop bespoke financing for social and affordable housing projects

• encourage private capital investment in buy-to-let projects

• address homelessness

Background

Housing supply is failing to maintain pace with population growth in most parts of the world. The combination of low interest rates, immigration and a persistent preference for working from home has made prices soar and escalated calls for reform on policy agendas around the world.

With industry and financial experts predicting that increasing incomes over time, rather than a price crash, will bring about a rebalancing in terms of affordability and suggesting a timeline of 3.5 years to see the results - it’s time to look at whether lawmakers can make progress in relation to housing security, without getting stuck in another round of YIMBY -v- NIMBY debate.  

Whilst many of the policy proposals presented by governments are ostensibly put forward with the objective of tackling housing security and affordability issues, the detail often reveals them to be political placebos, designed to create the perception of action. Within the fray, legal angles are available to tackle aspects of it. Will they make a dent in the problem?

Temper Investors

Institutional Investors

In the US, the End Hedge Fund Control of American Homes Act proposes a tax on hedge funds that hold excess single family residences. The idea is to encourage divestment as a means of housing supply for would be home owners, with the alternative generating taxes that could be invested in new housing developments. Similar tax policies are currently proposed or under consideration in other parts of the US (California, North Carolina and Minnesota).

Estimates suggest that institutional investors hold 3% of all US single family rentals, and some regions, a far stronger concentration. MetLife predicts this may rise to 40% by 2030. Whilst these legislative proposals have generated enough commentary to prompt PR teams at institutional funds, like Blackrock, to set the record straight, there has been no slowdown in appetite for acquisitions. Private equity firms are well versed in how to ‘leverage efficiencies’ in this sector, .

Blocking these funds from bidding against would-be buyers might allow new buyers to participate in the market, but the likelihood of the legislation passing, and the impact of the additional tax that would be payable by these funds if these changes were to pass, may just be absorbed as a cost of operating in this sector.

Small Investors

In some parts of the world, income tax breaks that can be generated through property investment, are sacred. Curbing the tax incentive for investors who out-compete would-be home owners could free up the market. Elections turn on these concessions. In general, the political will cannot be mustered to address the impact of negative gearing wholesale, as Baker McKenzie notes in its Australian analysis of the market.

Foreign Investors

In an effort to create immediate supply, foreign investors who hold property for capital appreciation, but do not lease them, may find new levies being applied. Allens explains the Australian approach here.

Zoning

NIMBY and YIMBY continue to play a role in this landscape. Even when legislation does pass, legal battles to intervene are not far away, as is evident in Montana, where the courts have issued injunctions to prevent developments under new density planning laws.

Creative alternatives are sprouting, which look to work the angles entirely, but starting a new city. In California:

• California Forever aims to turn 50,000 acres of rural property into an urban zone, complete with new models of housing, transport and commerce; and

• moves to allow religious groups and nonprofit colleges to build affordable housing on their land without compliance with zoning regulations are afoot, as Venable explains.

Short term rentals

The theory goes that (despite popularity with tourists, and to the delight of the hotel industry), if airBnB were outlawed or limited, properties currently being used as short-term inventory, would become available for long term leases.

• In parts of the US, registration permits are being used to restrict the number of short term rentals in supply and body corporates are permitted to make rules prohibiting them. AirBnB’s challenge to NYC’s Local Law 18 as extreme and oppressive was dismissed.

• In Canada:

  • an Alberta court decided that AirBnB’s terms of service create a license, rather than a lease and for that reason, it is within the scope of a body corporate’s rule-making capacity to set rules that prohibit occupancy which is not covered by a a lease. Reynolds Mirth Richards & Farmer explains here.

  • British Columbia is phasing in restrictions on short-term rental over the next two years. These rules will limit hosts to using their primary residence, plus something akin to a granny flat for short term rentals. Dentons explains here. These laws appear to be having the desired effect, as owners seek to sell properties that are now restricted from short-term letting usage.

• The European Parliament reached a provisional agreement on the regulation on data collection and sharing related to short-term accommodation rental services. Broadly, it serves to bring short-term rentals within the control of city ordinances, and makes registration data sharing rules to facilitate monitoring. The data shows that cooperation between regulators and booking platforms is key to better managing these rentals, but does not show that regulation lessens supply.

• In Italy, an increased tax rate applies to residences used for short-term letting (after the first one). Ashurst explains here.

• In the UK, the current regulatory approach is to use registration and licensing regimes to manage the adverse impact of short term lettings. Forsters explains here.

• In Australia:

  • NSW hosts must be registered, and limits apply to cap the total period in which a dwelling is rented on a short term basis, as Legal Vision explains here.

  • Victoria has introduced a levy on short stay hosts, in an attempt to address the long term housing supply shortage, as Baker McKenzie explains here.

Protecting Tenants

Whilst new housing supply requires significant capital investment, and long lead times, legislators are taking steps to address affordability and security, via restrictions on terms that can be applied to tenancy agreements, including:

• in the UK:

  • a proposal to abolish ground rents, so as to reverse the recent trend of amounts in excess of a peppercorn being levied, as Boodle Hatfield explains here.

  • a newly established Property Ombudsman will address consumer protection concerns in the lettings process, including discrimination and repairs, as Travers Smith explains here.

  • the Renters Reform Bill proposes a range of changes, some of which enhance basic tenancy rights, whilst others may have unintended consequences, as Addleshaw Goddard explains here.

• Across the US, RealPage is facing litigation (along with landlords that use its software) to address the use of software to inflate rental prices in the regions where the landlords held properties. Cohen Milstein explains here.

• In Australia, the courts have held that landlords can be liable to tenants for distress or disappointment in connection with a tenancy, as Wotten & Kearney explains here.

Homelessness

Bans on enforcing penalties arising under city ordinances for camping and rough-sleeping may be further addressed in the US courts, in a challenge to rules which restrict the enforcement of these rules in locations where local authorities do not provide sufficient homeless shelters. Sheppard Mullin explains here.

In the UK, petitions seeking to mandate that councils provide shelter to the homeless are numerous and persistent.

Financing Supply

Any discussion around supply usually involves a look at the level of public funding to be allocated to support new construction projects. Housing advocates, developers, policymakers and others have responded by looking for new ways to support the housing needs of this “missing middle” population. Orrick explains its take on how tax exempt bonds could be used to fund middle income housing, here. Gilbert & Tobin outlines the Australian approach to Build To Rent housing developments here.

Interesting models are emerging in this context. Adam Neumann’s newest venture, Flow, seeks to include renters in the capital upside of home ownership (among other community related benefits). The projects are interesting because they represent a spin on the private equity models that have proven successful for Fundrise, RealtyMogul and others like it.

… and Evergrande

And whilst countries in the west grapple with a supply shortage, Evergrande’s bankruptcy dominates housing supply talk in Hong Kong. Des Voeux Chambers explains the order for winding up here.