Residential rents in Gibraltar.

The cost of residential rents in the Gibraltar private rented sector has increased significantly in the last 12 months. If this continues, Gibraltar could price out those that it seeks to attract, that is, every day workers.

According to Gibraltar estate agent Chesterton, the average rent in the one and two bedroom property market in the private rented sector has increased by some 10% in the last 12 months. This is well ahead of wage inflation.

For many, the cost of renting is reaching half of their take home income. It is not surprising therefore, that some tenants are calling for rent controls, either mandatory limits on rent, or, a means to prevent landlords from increasing rents so much above inflation at each renewal.

The problem is easily summarised: if prices (ie rents) are going up, that means that there is a scarcity of available properties to let.

The demand for properties in the private rented sector, especially in the one and two bedroom market has been strong for a number of years. However, it was this time last year when the strong demand became a surge in demand.

Spain introduced its Form 720, which required Spanish residents to report all owned overseas assets to Hacienda. Form 720 doesn’t impose new taxes, however, there was a fear that it was the prelude to a new aggressive tax regime. A significant number of cross-border workers chose to move to Gibraltar as a result.

More recently, Gibraltar has encountered deteriorating border issues with Spain which has impeded the free flow of cross border workers from Gibraltar back to their homes in Spain. The result has been a further influx of workers into rented accommodation in Gibraltar because the daily commute has become too burdensome.

Ten years ago, there were some 14,000 jobs in Gibraltar (of which 5,000 were filled by non-Gibraltarians). Today, the number of jobs is around 22,000 (of which 12,000 are filled by non-Gibraltarians), an increase of 8,000 jobs (which in itself is a success story for Gibraltar) of which 7,000 have been filled by non-Gibraltarians.

Although anecdotal, it is probably safe to say that many of these new jobs have gone to non-Spanish nationals who have already moved into Gibraltar (and some in private rented accommodation) or have moved to Spain and become cross-border workers, but are now part of the influx from Spain to Gibraltar and forcing up private sector rents.

In the same 10 years as the above jobs growth, I would estimate that the number of private sector properties built in Gibraltar to be around 2,000, many of which are luxury apartments well beyond the budget of the average employee.

This somewhat crude and anecdotal analysis of the numbers, demonstrates that whilst Spain continues to lose its attraction as a home base for Gibraltar employees, the strain on the private rented sector is going to continue, which means higher rents.

The way to tackle the rising rent issue is to reduce demand, increase supply or meddle with market forces and bring in rent controls.

The main argument against rents controls is that in the short term, the quality of the existing private rented housing supply deteriorates as landlords do not consider it viable to maintain properties where there is an insufficient return on their capital. Landlords are not charities, they are investors and have choices into which asset class they invest. Some of the old rent controlled residential properties around town suffer due to this situation.

In the medium to long term, rent controls deter investment into new housing stock completely as investors lose the confidence that they will achieve an acceptable level of return on their investment. And investors shy away from investments where governments can change their investment returns depending on the political climate of the day.

Another side impact of rent controls in the private rented sector is that those who reside in a rent controlled apartment have a higher valued tenancy than those who do not. This distortion creates unfair inequalities amongst tenants.

Thus to avoid rent controls, there needs to be reduced demand or an increased supply of rental property.

Recently the Government has announced that it is has bought back the Eastside project for £28m and the land will be made available for development. Furthermore, in September 2013, the Government announced the tender award for 528 apartments on the Ariel Farm site and 380 apartments on the existing coach park site. This increase in supply in the Government housing sector is to be welcomed and should have some knock on effect into the private rented sector.

However, what Gibraltar also needs, in order to limit future rental price growth is for the private rented sector to respond to the housing shortage. This means rolling out the red carpet to developers and funding banks, to support an increase in housing stock, much of which will supply the workers that Gibraltar attracts, with affordable rented accommodation.

If Gibraltar cannot increase its supply of rental property, rents will continue to rise, making it increasingly difficult for local employers to attract and retain staff. With just one month to go before Christmas, it would be a shame for Gibraltar to have a sign on its door “No room at the inn”.