Rents are set to rise in 2023 and 2024, adding to the cost-of-living pressure on tenants. But this comes at a time when landlords are facing cost pressures and some are therefore considering quitting the rental market.
Their departure will further aggravate the shortage of homes to let. But it could also bring new opportunities for other landlords with a business-like mindset.
This year, rents have increased by an average of 6%, faster than expected. But Hamptons is forecasting continued growth of 5% in 2023 and 4% in 2024, even as house prices flatline due to turbulence in the economy.
Aneisha Beveridge, head of research at Hamptons says: “Rents will go up as landlords - who are being hit by higher borrowing and servicing costs - seek to pass these on to tenants. The cost of living squeeze will act as a constraint on increases, of course. But interest rate hikes will make it trickier for would-be first time buyers who are renting to leave the sector, adding to demand.”
Beveridge adds: “Landlords will have to confront the changed conditions. The tax system and the legislative regime are getting tougher. Some will judge it’s time to hang up their keys.”
Catherine Westerling, Hamptons head of lettings, says that the rental sector is about to become more professionalised: “I sense that, in a couple of years’ time, there will be fewer landlords, with each owning more properties. More of them will be operating through limited companies. I would say that any landlord who has not taken legal advice about the structure of their business should think about doing so now.”
In the months ahead, Westerling predicts a close focus on the direction of rental yields.
She comments: “Yields will be increasing because house price growth is weakening and rents are getting more expensive. We estimate that the average gross yield, that’s before any costs are accounted for - will rise from 6.1% today to 6.7% by the end of 2025.”
Currently the average rental yield in the North is 7.4%. The average yield in the South is 5.2%, meaning that there is a 2.2% gap.
But Westerling senses that this gap is set to narrow to 1.8% between now and 2025. She explains: “Lower yielding areas, London and the South East in particular, will likely record the fastest rental growth as landlords pass on extra costs to tenants. This will close the gap with traditionally higher yielding parts of Northern England where returns can hit double-digits.”
She adds: “Although some landlords are almost certain to sell up, others will be able to use equity from other places to shift things around and ensure the sums still stack up. However, on balance, we’re likely to see the supply of homes shrink further, pushing up rents still more.”
Some landlords will sell properties in lower yielding areas to invest in locations where the returns are better. But only those able to put down larger deposits are likely to be able to secure finance thanks to lenders’ more exacting affordability stress tests.
Westerling suggests that anyone wishing to take advantage of the more generous returns should not delay. She says: “At Hamptons, we are forecasting that house price growth will resume in 2024, so investors looking to purchase new buy-to-lets may find it beneficial to buy in a less competitive market in 2023.”
