Growth in the PRS remains subdued despite rising yields

Warren Lewis
12th July 2019
To Let 690

The latest data and analysis of the UK's Private Rental Sector from Kent Reliance has revealed that despite improving yields for landlords, the growth of the PRS is subdued on the back of government intervention and the economic impact of Brexit uncertainty.

According to the figures, the value of the £1.3trn PRS grew by £6bn in the last year, as the expansion of supply dwindled and property prices weakened in several parts of the country. The value of the average rental property has risen by 0.3% in the last year, with Brexit uncertainty gripping the wider housing market, although average property prices fell in four regions. The biggest annual decline occurred in London, which took a disproportionate toll on the overall value of the sector.

Meanwhile, reforms to the tax treatment of mortgage interest and tighter lending rules, combined with continued regulatory changes, have hit landlords’ confidence, undermining the supply of properties within the sector.

According to a survey of 827 landlords run in association with BVA BDRC, landlord’s confidence has dropped to the second-lowest level on record. Just 37% of landlords hold a positive outlook for their portfolio, compared to 41% a year ago. Reduced confidence is limiting new investment into the sector, and therefore the supply of rental properties. The number of homes is estimated to have grown by 11,000 properties per year, a rise of 0.2% with 5.4m properties currently in the PRS. This contrasts starkly to 2015, prior to the tax reforms announced in the Summer Budget, when the sector was expanding at a rate of more than 3%.

The number of mortgaged properties in the PRS mirrors this slowdown. There are currently 1.9m outstanding buy to let loans, according to UK Finance data, up just 1.4% compared to a year ago.

Rising yields present buying opportunity for professional landlords

Rising yields provides better news for investors, especially those considering adding to their portfolios. Rents have hit a new record high at an average of £896 per calendar month, with growth accelerating to 1.3% a year. As a result, yields have hit a two-year high. The average yield now stands at 4.5%, its highest since the first quarter of 2017.

In London, rents have only risen by 0.5%. Nonetheless, with property prices falling, yields in the capital have reached 4.1%, their highest level since the end of 2015.

As the costs of property investment rise, (whether larger tax bills or those associated with tighter regulation), landlords may seek to recoup these in higher rents to preserve their profitability. Around a quarter (24%) of landlords, already expect to raise rents in the next six months, nearly five times the number that expect to reduce them. Improved finances among tenants is also allowing more leeway. Wages are currently rising at 3.4%, up from 2.9% a year ago and well in excess of inflation.

Professional landlords are not just seeking to recoup higher tax costs in the form of higher rents. Many now operate via limited companies to mitigate the impact of the changes to mortgage tax relief. Analysis of Kent Reliance for Intermediaries’ mortgage data shows that in the first quarter of 2019, 72% of buy to let mortgage applications were made through a limited company, significantly higher than in 2016 (45%).

Andy Golding, Chief Executive of OneSavings Bank, comments: “Landlords have rolled with the punches as best they can, but there is no escaping that growth is subdued in the private rented sector following four years of government intervention. Brexit uncertainty has only compounded this issue, having the obvious knock-on-effect on landlords’ confidence.

The positive news is that for those landlords looking to expand their portfolios, underlying market conditions seem to be changing. Yields are climbing as rents rise faster than house prices, providing further opportunities for committed investors.

Professional landlords haven’t stood idle either. Holding property in a limited company structure is increasingly popular for landlords adding to their portfolio, while many are also remortgaging to fix outgoings by taking advantage of historically low rates.

However, it’s clear the private rented sector now holds less appeal for amateurs.

Without some policy stability, there is the tangible risk that the supply of homes will contract, and rents will become less affordable. Rents are already rising, and will continue to do so as landlords come to terms with higher set up and running costs, on top of larger tax bills. Neither outcome suits tenants, nor helps with the ultimate issue of housing affordability.”

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