Demand for rented accommodation is increasing just at the same time as the number of homes for rent is decreasing. On the one hand, social changes are leading more and more young people towards renting rather than committing to a mortgage. Increasing numbers of retired people are also joining the rental market. Research by Scottish Widows suggest that one in eight retired people in the UK will be living in rented accommodation in the next 15 years, trebling the existing number to over 1m.
All this comes at a time when the number of properties for rent is falling. According to residential database specialist Home.co.uk, the supply of rental properties in the year to November 2017 fell by 16 per cent. That shouldn’t come as a surprise considering the National Landlords Association admitted that 20 per cent of its members plan to reduce the number of properties in their portfolio within the next year. There are significant regional variations however. London property prices are keeping yields low, while capital appreciation is patchy. This will discourage new supply at a time when there are signs of increased demand. There will be locations still offering growth potential, notably in areas likely to benefit from the Crossrail line, but if supply slows as demand increases, the inevitable result will be upward pressure on rents.
It's outside the south-east of the UK that the better returns can be found. Population growth in Manchester, for example, means that supply is going to lag demand by a significant margin, while high city centre values will push tenants into the outer centre regions. That’s good news for landlords because property prices are that much lower. Much the same can be said for Birmingham and Liverpool, where economic growth has attracted workers to stay rather than emigrate to the south.
And these regions offer better value than life inside the M25 motorway. In over half the country outside the south-east, houses prices adjusted for inflation have actually fallen from 2007. The downside is that an attractive rental yield is not so attractive when the asset is losing value. So, finding the right area to invest in in vital.
Raising capital through a mortgage for landlords was made more difficult as lenders tightened the ratio between rental income and mortgage repayments. However, a handful of lenders are now allowing landlords to include other income to make up any shortfall in rental income.
Despite all of this, it is hard not to conclude that the government has taken a hostile attitude towards private landlords. So, if supply is to be increased, where do the new homes come from? One avenue might be the build to rent market. With a growing number of conduits to link the build to rent builders and the supply of institutional money, this relatively small sub-sector looks likely to grow rapidly. Even here the Treasury’s grubby hands have made an appearance by levying more tax on non-residential investors. However, there are some big domestic operators such as Legal & General (LGEN) who are taking advantage of the investment opportunities generated by predictable rental revenue and capital appreciation over the longer term.
There are nearly 100,000 build to rent units completed, planned or with planning consent in the UK of which over half are located in London. Potential tenants will find these new schemes very much different to many private landlords. In Wembley Park, for example, a build to rent complex will be let on the basis of no agency fees, a reduced deposit, ultra-fast broadband and all utility bills included in the rent. The idea is to simplify the renting process both for tenants and the landlord. Significantly, around one third of these will be made available at affordable rents.
This will go some way towards narrowing the gap between demand and supply, but the market rent on build-to-rent properties is relatively high, even though you get a lot thrown in for your money. Ultimately though, there will remain a place for the smaller private landlord simply because the pace of new build will not on its own solve the housing shortage.
