Rent Adjudication (Temporary Modifications) (Scotland) Regulations 2024 – Business and Regulatory Impact Assessment

Technical Annex

Table 16 sets out the detailed calculations which underlie the estimates of foregone rent as summarised in Table 6, i.e. for the central estimate of future rental growth of 8% per annum. Similar calculations underlie the estimates of foregone rent for the high (Table 7) and low (Table 8) future rental growth scenarios.

The following assumptions were used to produce this analysis:

• The calculations are broken down by six-month periods because the 2022 Act was subject to two six-month periods of extension. It should be noted that the first period of the 2022 Act was slightly longer, as it applied to rent increase notices served from 6 September 2022, but this is also treated as a six-month period to simplify the analysis.
• The foregone rent is calculated assuming that the landlord sets the rent to the market level when they increase rents. Evidence suggests that rents for sitting tenants are on average below market rents. To the extent that this is due to landlords not raising rent each year for sitting tenants, this is subsequently factored into total foregone rent across the Scottish private rented sector by assuming different share of landlords who raise rent (see Table 9). However, it could also be due to the landlords not raising rent fully to market levels when they do raise rents – there is insufficient evidence to make a robust adjustment for this, but to the extent that this is true, foregone rent is likely to be below the estimates presented here.
• It is assumed that landlords only raise rents every 12 months.^[60] This is shown in the table by greying out the 6-month period when they cannot raise rent due to this restriction. Note that for tenancies where a rent increase was due in the October 2022 to March 2023 period, due to the 0% rent cap in force at that point, it is assumed that landlords increased rents in the following 6-month period.
• During the period of the 2022 Act, it is assumed that when landlords raise rent they do so in line with the general rent cap. However, some landlords were able to raise rents by more on the prescribed property cost ground.
• Rents are based on average Scottish 2-bed rents as published in Scottish Government statistics.^[61] This is the most common bedroom size. Average foregone rent is likely to be lower for 1-bedroom properties, and higher for 3-or-more-bedroom properties. These are only available on an annual basis, so six-monthly average rents are interpolated.^[62] The most recent statistics are available for the year to end September 2023, so after that point, rents are grown in line with the relevant rent scenario (8% in the case of Table 6).

Worked Example

The following steps show how the foregone rent estimates were derived when the tenancy started in the October 2021 – March 2022 period, or in the same months in earlier years. It is assumed that when the tenancy started (or when the rent was increased when an annual increase was applied for tenancies which started in earlier years) the rent was set in line with the market rent, which is estimated to be £721 in that period. After a year, when the next increase was due, the 2022 Act was in force, and a 0% general rent cap applied in the October 2022-March 2023 period. It is therefore assumed that the landlord raised the rent in the following 6-month period (April 2023-September 2023) when the rent cap was raised to 3%, so the rent set was £721*(1+3%) = £743. After a further 12 months has elapsed, the next rent increase will take place in the April 2024-September 2024 period, when the proposed rent adjudication process will be in force. At that time, it is estimated that under the central rent growth scenario, the market rent will be £926. This is 24.6% above the current rent. Applying the rent taper, the permitted rent increase on adjudication is 12.0%, which means the rent can be raised to £832. The foregone rent is the difference between this and market rent, which amounts to £94 per month (£926-£832).