Tuesday, January 27, 2015
2014: A year of two halves for the UK rental market
• Growth in average UK rents increases during the second half of 2014 and total growth for the year is 1.8%
• 14% of households that moved in England last year, moved between the owner occupation and the private rental sector, broadly in equal numbers
• Trends to watch for in the private rented sector in 2015 and beyond
Growth in average UK rents
Despite the first half of the year traditionally being the busiest for the rental market, a product of school and university terms, 2014 proved to be an exception, according to research by Countrywide Residential Lettings, the UK’s largest letting agent.
A slowdown in the sales market during the last six months of 2014 saw a demand for rental accommodation grow, with 7% more would-be tenants registering during the second half of the year than they did during the traditionally busier first half. Movement of households between the sale and rental markets has had an impact on shaping growing demand in the second half of the year. 14% of households that moved in England last year, moved between the owner occupation and the private rental sector, broadly in equal numbers.
The increase in demand from tenants for rental properties is reflected in the growth in average rents. For newly let properties, the rate of annual growth ran at an average of 3.7% during the first six months of 2014, rising to 4.2% during the final six months. It was a similar story for sitting tenants for whom rents increased from 1.7% to 1.8% over the same period. 26% of tenants who chose to renew their contract at the end of 2014 saw their rent rise 2.9% over the year.
Seasonal changes in the rental market
Alongside the relationship with the sales market, the nature of the lettings market means it is highly seasonal. Much activity is concentrated within a few key times of the year. In city centre markets, the summer months tend to see particularly high levels of activity, the time when students seek property for the forthcoming year. In the heavily dominated student markets of Birmingham, Bath, Cambridge, Oxford and Liverpool, over a third of lets are made during just two months in the summer. For many investor landlords, this represents the best time to market their property to let.
Outside of the city centre, where three times the proportion of homes are let to families with children, activity in the rental market is closely correlated to school terms. Given the longer timescales involved, properties have to be secured well in advance of the September term. April, May and June represent the three months when 35% of lets are made in the year. Conversely, half terms and the first few weeks of September see activity levels decrease, with the number of registering tenants, viewings and agreed lets all running at two thirds of the average over the year.
Commenting Nick Dunning, Group Commercial Director, Countrywide plc, said:
“The sales and rental sector are closely linked with thousands of households moving between the two tenures every year. In the second half of 2014, we saw a decrease in the number of tenants actively looking to buy. This has kept demand for rental accommodation at a high, allowing more landlords to stand firm in the face of attempted negotiation on rent.
“For investor landlords, understanding when the best time to let a property is key to reducing void periods and securing the highest rent. Landlords looking to rent a flat to students in November will find it considerably more difficult than if they were letting it in July. Conversely, tenants who have a degree of flexibility are potentially able to bag themselves a bargain by looking to rent outside of the busiest times.”
What to watch out for in the Private Rented Sector during 2015 and beyond
1. Growing institutional investment market boost returns
While only a handful of large institutionally funded private rented schemes are now in existence, the year ahead looks set to see their numbers proliferate. One of the key advantages of such schemes is that many are achieving significant economies of scale meaning the difference between gross and net yields has narrowed. This has been achieved through an increase in market led design, which has seen a reduction in non-fee earning floor area, and more efficient property management made possible by units being located within a single building. This year looks set to see net yields growing this sector as the number of well-designed and managed build-to-rent schemes proliferates.
2. ‘Generation rent’ continues to grows up
If the private rented sector continues to grow at the same rate as in 2013, around half the speed that it did in 2008, an additional one million households will be renting privately by the time of the next Census. While institutional investment will continue to provide more choice to tenants in city centres, many tenants in their 20s and 30s today will be tenants in their 40s and 50s tomorrow. Demand for high quality rental accommodation designed around families will take a different form and be found in different, more suburban locations to most of the privately rented homes today. Meeting this new demand will present new opportunities to developers and investors in the future.
3. Gradual proliferation of landlord licensing schemes
It has been two years since Newham in London became the first council to introduce a mandatory borough wide landlord licensing scheme back in January 2013. 2014 saw a second local authority introduce compulsory landlord licensing scheme, leaving two active schemes. As we enter 2015, there are a total of 15 local authority wide schemes under consideration, and around30 schemes which target specific areas. The scale of any future roll out seems likely to depend on the experience of existing schemes, rather than the outcome of the General Election. Two years after Newham introduced the schemes, many local authorities are watching extremely closely.
Concluding Nick Dunning said:
“The outlook for the rental market in 2015 seems to favour landlords. With lower rates of house price growth expected in 2015, a tenant thinking about buying seems likely to be in less of a hurry to do so than they were a year ago. While the growth of the private rented sector has slowed somewhat in recent years, a product of better access to finance, it still seems likely that 100,000 people (net) will still become tenants in 2015. This rate of growth will continue to place upward pressure on rents for the foreseeable future.”
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