Yielding Rentals
With new rental controls in Ontario, and California set to vote on expanding controls in the state, where do investors stand?
安大略省與加州將實施新租管措施，投資者將何去何從？
Say “rent control” to most renters and they're likely to be in favour of them. State mandated rent control, as in Germany for example, is a tenant's best friend. It keeps them from losing their home to market forces that can often be volatile, and often prevents them from spending more than is healthy on housing. For landlords and investors, it's not such a cheery concept, as it often means limitations on how much can be charged—market conditions be damned. Many analysts argue rent controls actually create or exacerbate supply shortfalls.
In two of the world's most popular investment locations—the United States and Canada— rent control is back on the news: New York's famous rent control, which mostly applies to rents in older buildings and below a threshold of roughly US$2,500 per month (HK$19,500), is currently guided by the Rent Act of 2015, which expires in 2019; California is gearing up for a rent control referendum in the November mid-term elections that would see controls in 15 cities including Los Angeles and Santa Monica expand statewide; British Columbia continues to struggle with a two-tiered rent control policy that allows landlords to demand new leases after a year on an existing lease and hike rents as much as they like, contrary to provincially mandated limits per year (4% in 2018); and Ontario implemented new rent controls in 2017 to include condominiums and other private housing that was previously exempt,
and limit existing lease increases to match the consumer price index each year (1.8% for 2019).
In many cases, critics argue that rent control negatively impacts supply, could potentially impact development, and make things worse. “Before the expansion of rent control, especially in Toronto, tenants who lived in private apartments, condo units and houses that were built or first rented out on or after November 1, 1991 were not subject to rent control protections,” explains Jennifer Kay Chan of Forest Hill Real Estate in Toronto. “These tenants sometimes faced arbitrary, and sometimes massive, rent increases each year, and if the increases were beating their budget, they had to move out. One of the unintended consequences of rent control is that tenants moved less. This reduced supply.”
The private and condo rental sector in Toronto swelled 231% between 1998 and 2016, and it stepped into the gap when the Province of Ontario got out of the purposebuilt rental housing game. Private rentals now make up the majority of rental supply. Additionally landlords facing 5% to 7% in annual maintenance fees will see yields dwindle, and poor returns could result in owners reluctant to rent out apartments. “The consequence is that rents have shot straight up. And they will continue to increase in price,” warns Chan.
British Columbia's two-tiered rental rules appeared egalitarian at first, ironically offering fixed-term tenants no protection, but limiting increases to 2.5 to 3% for month-to-month renters. Critics called the “loophole” that allowed a landlord to hike rents 15, 20, 30% or higher after completion of one-year lease (sounds like Hong Kong) outrageous, and the hole was closed in 2017.
South of the border, lawmakers want to repeal the Costa Hawkins Rental Act, which set rent controls in 15 California cities. This time around, a reversal means each city can enact—or not—its own rent controls. Costa Hawkins protected the landlord's right to raise rents, prevented municipal caps on properties built after 1995, and exempted condos and houses. As of January, median two-bedroom apartment rents in Los Angeles were sitting at $1,798, and $3,377 in San Francisco. Landlords argue the law, Proposition 10, will limit new supply because it will cap potential revenues, and banks will
be reluctant to lend to commercial landlords for the same reasons. California has created 180,000 jobs in 2018 so far, and its housing demand isn't going away. “Rent control is a feel-good idea. A quick fix to a complicated problem. But it is not very effective at protecting poor or vulnerable tenants,” wrote San Jose's Mercury News in August. “And, more significantly, rent control discourages new rental home construction, the very thing we need to ease the state's housing crisis.” Anti-repeal voters also point out rent control will depress property values, the kiss of death for investors.
Finally, in New York, perhaps the most famous rent control city in the world, it is technically defunct—representing under 2% of all rental housing—but remaining rent controlled flats often expire only upon death. “Rent control absolutely still exists in New York. I just recently saw a one-bedroom apartment for sale listed approx $200,000 below the current market rate in the heart of the Upper West Side,” says Bernadette Mastrangel at KWNYC'S Tribeca office. “It was rent controlled and the tenant would still be living there after the sale. It is a very difficult sale to make because that tenant, or their family members, could possibly live there forever.”
More common is the New York City Rent Guidelines Board's Rent Stabilization law that protects tenants with long-term leases from radical increases by capping them at renewal time. The affected apartments are in buildings built before 1974, among the most in-demand in the city. It also changes every year, and for October 2018 to October 2019 increases cap at 1.5% for one-year leases and 2.5% on two-year agreements. That said, for decontrolled units the limit is 39%.
Ultimately, locations like New York, San Francisco, Toronto and Vancouver remain popular investment locations for the longterm, for lifestyle alternatives, relocation, retirement and education. “Mainland Chinese investors [invest] to move capital, and some investors don't need the rental income. They count on appreciation,” notes Chan. North American transparency and legal stability (yes, even under the Trump administration) reduce risk and attract investors despite less than impressive returns. On top of that, with some exceptions, tenants do indeed move around, and once a lease expires it's subject to market forces.
Nonetheless existing tenants and local rental laws can throw a spanner in the works for investors. “It absolutely affects whether an investor is going to consider the purchase. It decreases the price. The element of not knowing if the apartment will ever return to market rate is a huge factor for investors,” states Mastrangel. Like Toronto, rent stabilisation applies to new construction as well, though rent control is becoming less of a fear each passing year. “We are starting to see the population age out, so [there's] less of it here in Manhattan,” she finishes. Chan recommends making vacant purchases or alternatively simply buying new-build developments. “If you have vacant possession when you buy … the landlord can set the market rent, which is high right now.”