Changing face of the rental market ; are rents set to increase?

Is the Tide Turning on rental prices?

Over the last 30 years we have seen the private rental sector mature as a sector with 70 percent of the stock being supplied by private landlords.

Yet recently there has been a marked reduction in rental stock. According to Rightmove there was a 19% decline in the number of rental units being listed in the last quarter of 2017 – the biggest drop in 7 years. The Association of Residential Lettings Agents (ARLA) reported an 8% drop in the supply of rental properties from December to January alone (see ARLA Private Rented Sector Report for January). London rental stock was 46% below the national average at the start of the year according to an ARLA poll of Letting agents.

Landlords have been hit hard in the past 2 years with stricter regulation, 3% Stamp duty tax hike, and a phasing out on tax relief for buy-to-let mortgage payments. All this compounded with a climate of economic and political uncertainty has driven some Landlords to cash in and sell up and put potential new Landlords off from entering the sector. If this exodus continues rents look set to rise.

Rents in London have been falling over the past couple of years; by 2.1% in the year to February, according to Knight Frank research with annual rent increases below annual wage increases and below the rate of consumer price inflation for last year. Rents have fallen in 26 of the 33 London boroughs according to the Mayor’s ‘Housing in London’ report. This was partly due to the glut of properties on the market after investors rushed to buy Buy-to-Let properties before the increase in Stamp duty came into effect. But with supply now constricting these rental value declines look likely to go into reverse. The Tenant market may be coming to an end.

As supply levels decline demand for rentals seems to be on the increase with 20% more enquiries being reported. Getting on the property ladder has become unaffordable for many which makes renting a lifestyle choice; more people will be renting for longer periods of their lives and households in the rental sector are likely to grow.

Members of The Royal Institute of Chartered Surveyors predict that rents will rise by 3% a year for the next 5 years with private rent rises likely to outpace house prices.

One area of the rental market that appears to be booming is the “Super prime lettings”. High net worth individuals are increasingly renting properties in excess of £5000 per week to avoid paying Stamp duty, as a wait and see on the sales market or with a new option ‘Try-before-you-buy’ (Tom Bill – Knight Frank ) whereby a Tenant requests a Clause in the tenancy Agreement giving them first refusal to buy at the end of the tenancy. 2017 saw a record number of Super Prime Lettings according to Lonres data.

What is next?

Big investors are hoping to bridge the gap in Britains’ housing shortage with Build to rent developments. For pension funds owning rental homes is a good way for them to get steady, reliable income to pay their pensioners so a growing number are keen to invest. More and more Build to Rent Developments have been springing up around Britain. What is unique about these developments is that they are exclusively for rent. Institutional investors and build to rent landlords are expected to invest £70bn pounds in the sector by 2022 up from £25bn in 2016 (Knight Frank) with 13,000 homes already constructed and a further 56,000 planned.

But that doesn’t solve the supply issue in prime central London. There is opportunity for corporate investors to take advantage of the soft buying market to collate a portfolio of well managed rental properties.

Bonified rental investment companies are charged a different rate of stamp duty compared to other non-natural persons providing the property purchased is let for a minimum period of 3 years.

For many, particularly the younger generation, renting may come to be seen as the only viable long-term alternative.

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