Risks and Opportunities
The owner-occupied market tends to get all the headlines regarding the impact of economic and political shocks such as wage growth, inflation and uncertainty, but the rental market is affected by these risks too.
In addition to demographics and the economy, the supply and demand for rental property is partly determined by what is happening, particularly on price, in the owner-occupied sector. But on top of this, new policies on tax and landlord affordability as well as wider economic conditions also affect the likely path of rental market growth.
The introduction of the 3% SDLT surcharge in April 2016 led to a surge in purchases of second homes, adding to the supply base in London and the South in particular, softening rental growth. Additional supply coming to market in 2017 from new builds, especially in London, will also help to subdue rents. The latest data from the taxman shows demand held up during 2016, despite the tax changes, adding to the supply of rental stock too. But that does not mean rents will fall. Tighter household finances reduces the incentive to borrow, but also makes passing lender’s affordability tests more difficult, pushing would-be buyers to rent.
Overall the prospects for the rental market are fairly robust, but there are risks. These are mainly to do with the uncertainty about the availability of credit and additional taxation on purchase, sale and ongoing tax reliefs which have still to play out.
Nevertheless, we expect demand for rental property to remain strong, but for additions to supply in 2017 to slow given the additional costs of purchase and slightly weaker expectations about capital growth in London and the South. In other parts of the country, the effect of stamp duty may be less of a concern for investors due to higher yields and lower capital outlays. But for others, the changes to policy are likely to reduce incentives to invest, once again balancing the scale of rental growth.Overall we expect rents to rise broadly in line with income growth, but with differences across the regions. We expect rents to begin to accelerate in London, but to cool in the East. Further North the balance of supply and demand will be important, but in urban centres in the North the importance of the rental market will help to support growth. Of
Overall we expect rents to rise broadly in line with income growth, but with differences across the regions. We expect rents to begin to accelerate in London, but to cool in the East. Further North the balance of supply and demand will be important, but in urban centres in the North the importance of the rental market will help to support growth. Of course there is a wide range of uncertainty around the forecasts, given the lack of detail about the impact of the transition to Brexit and the associated negotiations so important for the health of the economy and household incomes.
A Future for Build-to-Rent?
The way the government counts the number of homes built has changed remarkably little over the last 50 years. A new home is still defined as either private or social, a distinction which does not really reflect the realities of tenure today. And as a result, there are not any official statistics which count the growing number of homes delivered by build-to-rent investors, a figure which is by our estimates at least on par with the number of new homes built by councils. Countrywide’s analysis of planning data shows that at the end of 2016 around 2% of private renters had an institution rather than an individual as their landlord.
2017 is set to be another year of growth for build-to-rent providers, potentially at the expense of some smaller landlords. The growth of build-to-rent has been supported by government policy while, smaller landlords have been hit by higher stamp duty alongside an increase in the amount of tax they pay. A slowdown in the housing market across London and the South East has seen developments originally destined for the sales market sold to several large investors with deep pockets and let out. At the same time, more institutional investors are building homes that are designed for private renters from the very beginning.
It is likely that institutional investors will drive a large chunk of the rental sector’s growth over the next few years. But exactly how big is the market for build to rent and how large can it grow? While the sector is still in its infancy, growth so far has come on the back of successfully appealing to a relatively small tenant demographic who tend to be young, childless and affluent.
But this group of people make up a small proportion of today’s private rented sector. If build-to-rent providers continue to go for a similar demographic, they have the potential to capture around one in five renters, or 960,000 UK households. Four in 10 of these live in London, with the rest spread across large towns and cities, markets that so far remain relatively untapped.
On current trends, big investors still have plenty of room to grow. Tenant satisfaction tends to be high and the service professional. The number of tenants with an institutional investor as their landlord will carry on rising, potentially at the expense of some smaller landlords. But the number of tenants willing and able to pay for the existing proposition is finite. There will come a point in the future where institutional investors will have to diversify their offering if they are serious about making inroads into the private rented sector. While such a diversification has the potential to drive up standards for more private renters, it is likely to require a degree of government subsidy and support.
A Change in Direction?
It has long been the case that most people setting up home start out renting. Ever since the English Housing Survey started recording the tenure of newly formed households in the late 1990s, it has shown the majority have gone into the private rented sector. The numbers moving straight into home ownership or social housing are lower.
The growth of the private rented sector over the last decade has been driven by the growing proportion of new households renting, rather than more existing owner-occupiers moving into the private rented sector. Each year somewhere between 1% and 10% more existing private tenants buy than homeowners chose to rent. Even during the depths of the 2008 downturn, the net flow of tenants becoming homeowners remained positive.
The number of new households starting out in the private rented sector peaked in 2009/10 at 70%, coinciding with the fastest growth in the number of renters. But since then the proportion of new households buying rather than renting their first home has crept up in four of the five subsequent years. In 2015 a higher proportion of the newly formed households bought than in 2005.
While the private rented sector is unlikely to stop growing any time soon, if the number of new households buying rather than renting continues on an upward trajectory, its growth will probably slow. Fewer new tenants is also likely to put a degree of downward pressure on rents. Given most people do not move home all that often, changes in tenure play out over years and decades. But if current trends persist, tenants might just find themselves with a little more choice in the next few years.
|A Changing Environment||Stamp Duty Surcharge||The Changing Landlord||Yields||Rental Forecasts|