The UK government's plan to ban upward-only rent reviews for commercial leases could wipe a staggering £11bn from the sector's value, according to fresh economic modelling. The proposal, aimed at supporting small businesses, is facing warnings of severe unintended consequences for larger investors and developments.
Modelling Predicts a 15% Value Drop
Analysis conducted by WPI Strategy economist Martin Beck, a former Treasury analyst, suggests the proposed legislation could lead to a 15 per cent fall in commercial property values. This would equate to a loss of up to £11bn across the sector.
The proposed ban is contained within an amendment to the English Devolution and Community Empowerment Bill, which is currently making its way through Parliament. The change would outlaw clauses that currently allow rent to only stay the same or increase during a lease review. Instead, rents would also have to fall if market valuations drop, based on open-market references or changes in indexes like inflation.
Investor Confidence and Pension Funds at Risk
Beck argues that the blanket ban will have far-reaching negative effects. He states that upward-only rent reviews are used by businesses to ensure predictable income streams, which in turn attracts capital investment from sources like pension funds.
"Rent controls will 'undermine investment'," Beck warned. He explained that removing this certainty forces investors to account for more risk in large commercial leases, weakening overall confidence in the market. Furthermore, lower property valuations could make refinancing harder and leave pension funds worse off, potentially reducing overall economic growth by up to £4bn each year.
Calls for a Targeted Approach
The economist criticised the scope of the proposed ban, suggesting it was driven by political motives and inserted into a devolution bill without proper scrutiny for such a major market intervention. He proposed a more targeted solution.
"Had ministers intended to protect small businesses from rent volatility, a targeted ban on upward-only rent reviews for SMEs would have covered 99 per cent of firms in the UK," Beck said. He recommended the ban be limited to small businesses with fewer than 50 employees, while sparing larger developments like data centres and local regeneration schemes that rely on these lease structures for funding.
In response, a government spokesperson defended the policy, stating: "Upward only rent clauses price small businesses out of our high streets and make companies vulnerable to economic shocks. Our English Devolution and Community Empowerment Bill will abolish these outdated clauses in new and renewed leases, so we can boost job opportunities and unlock growth." The debate sets the stage for a significant clash between supporting small enterprise and maintaining the stability of large-scale property investment.
