On average UK landlords anticipate that rents will increase by 1.7% in the coming year, a sharp slowdown from the current rate of annual rent growth to a steadier trajectory. According to the latest Buy-to-Let Index from Your Move and Reeds Rains, average residential rents across the UK climbed 3.7% in the year to March 2015, the fastest pace for two years.
The proportion of landlords who will not raise their rents in the next twelve months has increased from 56% in September 2014 to 60% currently. Only a minority of four in ten landlords (40%) intend to increase their rental prices before March 2016.
Supply and demand growing together
Over the last six months, 45% of landlords have witnessed an increase in tenant demand – rising from 41% of landlords in September 2014. There has been a boost in lettings activity recently, with new tenancies agreed across England and Wales climbing 6.9% in the month to March 2015. As a result, the proportion of landlords who expect tenant demand to grow further now stands at 63%, up from 56% in January 2014. Only 3% of landlords currently anticipate demand for rental properties to fall within the next two years.
However, strong demand for homes to let is a considerable factor encouraging further investment into the private rented sector. Three in five landlords (60%) now believe that it is a good time to invest in buy-to-let – a rise from 54% of property investors in September 2014. The main reason underpinning this increase in confidence is that buy-to-let offers better capital returns compared to other forms of investment, cited by 54% of landlords who think it is a prime time to purchase a rental property. Meanwhile 40% of property investors perceive now to be an ideal time given that current market conditions offer the opportunity to buy properties at more attractive prices, as price growth has stabilised.
Nearly one-fifth (18%) of landlords have already expanded their buy-to-let portfolio in the last year, and a further quarter (24%) of landlords expect to purchase another rental property in the next twelve months – an uplift from 22% in September, in a sign of rising optimism in buy-to-let as an investment.
Adrian Gill, director of Your Move and Reeds Rains, comments: “Demand for homes to rent isn’t going to dissipate. First-time buyers have been thrown a lot of floating aids in the past year – most recently the reform of stamp duty and Help to Buy ISA – but the private rented sector is still vital in plugging a hole until more households can get their finances above water. Saving for a deposit is like swimming against the tide while rates on savings are sinking, and in addition to this, there is a separate pool of people depending on the flexibility of rental accommodation for their careers. This supply-demand imbalance has previously caused a strong tide of rent rises, but this looks set to ebb away to calmer levels with a fresh fleet of rental properties on the horizon.
A perfect storm of factors is clearly drawing more and more investment into the sector. Competition for available homes to let is supporting buoyant yields, as well as sheltering landlords from the volatility of void periods – ensuring stability and peace of mind with regards to rental income. And with house price growth consistently cruising forward and propelling longer-term capital gains, awareness of buy-to-let as an alternative investment to other mainstream assets has soared. The current divergence between yields and interest rates places buy-to-let head and shoulders above the low returns on other asset classes. Existing landlords have certainly caught the buy-to-let bug, and with extensive reforms to pension annuities now in place, investment is cropping up from new players too.”
Buy-to-let mortgage finance becoming more affordable
Overall 22% of landlords have found their buy-to-let mortgage payments becoming cheaper over the last twelve months, a jump from 14% in September 2014. Over the same period, the proportion of landlords who thought buy-to-let mortgage payments were becoming more expensive has almost halved, falling from 39% to just 21%.
Of those who have tried to raise mortgage finance in the last twelve months, 14% believe it is now easier to secure funding than a year ago. This marks an improvement from just 8% in September.
With rock-bottom interest rates keeping mortgage rates low, 21% of landlords list the availability of cheap finance as a crucial motivation to invest in rental properties at the moment – which has risen significantly from just 11% in Q3 2014.
Adrian Gill comments: “The sun has come out on landlords in the last year, and buy-to-let lending has flourished as the fastest growing slice of the mortgage market year-on-year. Buy-to-let investors are making the most of diving mortgage rates, and greater choice of cost-effective products competing on the market.
The affordability of future rent rises rests on the accessibility of buy-to-let finance. While the plight of first-time buyers may grab the headlines, tenants are relying on landlords being able to continue to unlock attractive mortgage finance too. A short-term flurry of buy-to-let investment won’t be enough to face up to a deep-rooted housing shortage, so the mortgage market needs to keep its door open to landlords.”
Landlords and their priorities
While returns on buy-to-let properties may be a key motivation for initially investing into buy-to-let in the first place, for the vast majority of landlords (62%), the most important factor when letting out a property is to have tenants they trust. The second most important factor was to have tenants that pay their rent on time (cited by 25% of landlords).
Securing the highest possible rental yield was actually ranked bottom of landlords’ priorities about their buy-to-let investment, the most important for just 4% of those polled.
Of those who intend to raise rents in the next year, covering the cost of inflation is the principle motivation for 43% of landlords. Paying for maintenance work is the second most significant reason behind having to increase their rental prices, cited by 35% of buy-to-let investors.
Tenancy legislation
Ahead of the general election, 41% of landlords surveyed do not support proposals to ban charging fees to tenants, with only 32% in support. The key reason behind this is that abolishing the fees risks allowing tenants with less stable finances to rent properties they cannot afford, cited by 61% of concerned property investors. A quarter (25%) of landlords are also worried that tenants would move house more often if they don’t have to take these one-off tenancy fees into account, giving landlords less stability and making them susceptible to void periods.
Overall, the majority (36%) of landlords prefer one year to be the maximum length of rental tenancy. Of those who are against proposals to enforce mandatory longer-term tenancies, the majority (86%) say this is because it puts landlords at risk of having to stick with undesirable tenants.
Adrian Gill concludes: “Whatever the outcome of the General Election, the private rented sector doesn’t need more intervention. Rent rises look to be settling into an affordable rhythm by their own accord. Benefitting from reliable rental yields, landlords largely appear to be taking a pragmatic view of their investment, with any rent increases reflecting outgoings and overheads. Any artificial regulation – be it rent caps, mandatory longer-term tenancies or banning charging fees to tenants – could derail this course. In Scotland we saw the abolition of tenancy fees in 2012 cause an unnatural spike in rent growth – which had been largely flat until that point – and the market has only just recovered from this hiccup.
A lot of UK landlords are not career landlords – and excessive red tape and legislation may put potential investors off considering buy-to-let as an alternative nest egg for retirement or way to supplement to their salary. If investment washes up, ultimately it is only the nation’s tenants that will be left high and dry.
Any new government that emerges in May would be better placed to focus the attentions of their housing policy on building more homes, to ease the competition on property stock at the bottom of the market between landlords and first-time buyers.”
