Latest Rental Market Summary from Kate Faulkner

publication date: Dec 17, 2012
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Latest Summary and Analysis of Rental Reports

There are five regular reports on the rental sector, some cover the UK and some that cover just England and Wales. Here is a summary of the report headlines and latest data and Kate Faulkner’s comments below to help landlords and tenants understand the implications of these reports for them:-

Report headlines:-

Paragon Mortgages “Young couples and families are top tenant types” – (England, Wales & Scotland)
Homelet “Difference between Greater London rents and rest of the UK higher than ever”
England, Wales, Scotland & NI)
Acadametrics/LSL BTL “Rent rises slow, but October sees record of £744 per month” – (England & Wales)
RICS “Demand buoyed by rising number of would-be first time buyers”  – (England, Wales,
Scotland & NI)
Savills “The payment of rent rather than mortgage interest is now the focus for many
'Generation Rent' households unable to raise the capital needed for a mortgage
down payment” – (England, Wales, Scotland & NI)

Average Rents

Rental Index October 2012

Kate Faulkner comments:

“The make-up of the tenant is changing and although this is partly due to the credit crunch, an increased number of people are choosing to rent rather than buy and have been doing so even when they were in a position when they could have bought. There is lots of news about ‘rents being at their highest’ but many of these reports relate to the time their index has measured the market as opposed to over time. Other reports suggest renting is much more expensive than buying, but consumers should be aware that the way these reports are calculated can be misleading. For example, Zoopla’s rent versus buy comparison compares buying with a 100% interest only mortgage – as this isn’t achievable, renting versus buying is still cheaper in a lot of areas when you compare buying with a repayment mortgage”.

Landlords' Buy to Let Yields/Returns

Buy to Let Yields/Returns

Kate Faulkner comments:
“Yields for landlords are starting to look better year on year. This isn’t a major surprise as property prices have, in the main fallen, so as rents have remained stable in many areas, then its natural average yields should increase. However, its important landlords are aware that average yields really need to be at the 7% plus level to survive the inevitable increases in interest rates over the next few years”.

Capital Growth for Landlords

ARLA “The overall average capital asset value of rented houses has risen by 1.9% over the
last three months, 
the second increase in succession, taking the average value  of a
rented house to its highest ever level”
Acadametrics/LSL BTL "As a result in improving property prices in October, landlords saw an average total
annual return of 
6.6% on a rental property in October, up from 5.9% in September”
Savills "Our forecasts suggest the best medium term investment prospects are in urban
areas in London and 
the South East. These markets have seen the strongest levels
of both rental growth and capital growth. 
In other markets, income yields are
typically higher, but capital growth prospects lower.”

Kate Faulkner comments:
“For those investing for capital growth as opposed to income, it is essential to look to force capital growth in a property by getting a property at a discount or by finding a way to add value. Securing capital growth is going to be tough over the coming years. Most forecasters estimate that properties bought in 2007 at the height of the market, will take until the late 2020s and even 2030 or beyond to recover (including the impact of inflation). Many landlords will need to take a serious look at any existing properties or new ones to make sure they can achieve capital growth and that this increases in line with inflation”.

Demand for Rented Properties

Paragon Mortgages “All the market data is telling us that demand for rented property remains very high and in
key areas is outstripping supply by some margin”
ARLA “During the last three months, demand in the rented residential property sector has seen a
small reduction in terms of the overall proportion of respondents saying that there are more
tenants than properties available for them, with the figure falling from 58% to 55%”
RICS “Demand from tenants rose at a greater pace over the period, with 15% more surveyors
indicating demand rose rather than fell. The increasing level of demand is exerting sustained
upward pressure on rents, and this in turn is attracting would-be sellers into the lettings market”
Savills “On the demand side, there is a long term growth trend in the numbers and concentration
20-34 year olds living in major cities, while the inaccessibility of mortgage finance means
the number of those trapped in renting has increased sharply over the past five years.”

Kate Faulkner comments:
"Demand for properties to rent can only increase over the coming months and years. Approximately 250,000 new households are being formed every year. We aren’t building enough homes to meet this need and as lenders make it difficult for people to borrow with a small deposit, tenant demand has to rise. However we do know that there are areas where demand and supply for rental properties is matching and in the main, despite an increase in demand, tenants can only afford what their wage packets will allow them to spend.

“From a landlord’s perspective, more money can be secured for properties which are well maintained and in good locations, and from a tenant’s perspective, it is worth looking to agree your monthly rent as soon as possible and agree any increases either in line with inflation or just under if you can. For new tenants, renting sooner rather than later will help you to secure a better property than you might be able to towards the end of the year.”

Supply of Rental Properties

CML “The stock of buy-to-let mortgages continues to grow. At the end of the third quarter, the number
of outstanding loans totalled 1,444,000, worth £164.3 billion (up from 1,414,000, worth £162.5 billion,
at the end of the second quarter, and from 1,367,000, worth £156.7 billion, a year earlier)”
RICS “The increasing level of [tenant] demand is exerting sustained upward pressure on rents, and this in
turn is attracting would be sellers into the lettings market. Indeed, new instructions [from sellers]
rose in the quarter after being broadly stable in the previous three months. Higher rental levels attracting
new landlords from sales market”
Savills “On the supply side, the high capital values set by owner-occupiers have kept yields low, deterring
income-seeking investors. Low levels of housing development, and a focus on building for more
mature owner-occupier households, have reduced flows of new lettable stock”
Rightmove “The widening gap between tenant demand and rental property supply over the last few years has
fuelled upwards pressure on rents”

Kate Faulkner comments:
“The supply of rental properties in the UK is going to tighten severely from 2013. What tenants, government and industry are not taking into consideration with enough urgency is the potential sell off of huge numbers of properties which have been rented out by frustrated sellers who will put them back on the market as soon as property prices and the sales market pick up. This doesn’t mean that rents will necessarily rise as the market shows they are tied to wage rises – or falls. Rents in the main have been static according to the Belvoir Lettings Index, apart from London since 2008, despite inflation rises. Rents will however rise for the best maintained properties in the best locations once wages allow.”

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