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The case of Section 21 – Dr Stanimira Milcheva explores new legislation to abolish evictions

26 July 2019

The announcement by the Ministry of Housing, Communities and Local Government on 15 April to end unfair evictions and ban Section 21 is a positive step towards better renter protection in the UK – or is it? School lecturer Dr Stanimira Milcheva investigates.

Stanimira-Milcheva
Institutional investors play a large role in providing and managing rental housing in the US. It is a growing market in the UK with the so called Private Rented Sector (PRS). Given that the UK government is seeking to solve the housing unaffordability crisis by encouraging the private sector to engage in the provision of affordable housing, understanding institutional investors in the context of the rental markets is essential.
- Dr Stanimira Milcheva

The Ministry of Housing, Communities & Local Government (MHCLG) announcing a plan on 15 April 2019 to end unfair evictions and ban Section 21 is a positive step towards better renter protection in the UK. The government plans to have a consultation on new legislation to abolish Section 21 evictions, which essentially allows landlords to evict tenants for no reason with a two-month notice. Public interest in Section 21 has increased over time as seen in the table below.

Exhibit 1 shows how Google keywords such as "Section 21" and "evictions" have trended in England from 2004 to present.

Google trends on “Section 21” and “evictions” 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. 

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

In a recent working paper titled Renter Protection and Institutional Investment in Multifamily Rental Housing, Dr Meagan McCollum from the University of Tulsa and I assess how differences in protection 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 concept 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.

Renter protection across the United States of America

In particular, we 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. We 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 of where the property is located. If a rented property is located in a less affordable area or an area with high poverty or high number of minority residents, landlords actually benefit from an increase in renter protection.

What does this mean? The article finds that buildings in states where renter protection is higher have a higher NOI than buildings in states where renter protection is low and if those buildings are located in 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 actually lead to better landlord performance over time? One way to explain this is through fewer voids – happy tenants may stay longer and there will be less periods of voids (where landlords do not receive any rent in 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 may actually prefer a case where tenants feel secure and are less likely to move away as it provides stability 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 and improve their properties’ financial performance.  

While the NOI of an institutional landlord may decrease if renter protection is high in the most affluent and high-priced neighbourhoods, the opposite effect is observed for the landlords who cater to the more affordable areas. 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 lead to a positive contribution to the bottom line.