A mixed picture for rent levels in 2018

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Rental Growth:

Although buy-to-let (BTL) for small-scale landlords will still face significant challenges next year, rents are set to continue to rise modestly in 2018.

Supply is coming under pressure as some BTL landlords divest right across the private lettings market in the face of increased regulation and tax rises, but this has the effect of holding and even increasing rents in many locations.

Simultaneously, new BTL investors face the hurdles of the 3% stamp duty surcharge on buy to let purchases, and much tougher mortgage lending criteria. These policy changes are having a significant effect, reducing the attractiveness of BTL, at least in the short-run.

One report points out that during the year leading up to the stamp duty premium introduction, the number of buy to let mortgages being advanced averaged 10,000 per month, while over the following 18 months the number of buy to let mortgage approvals has dropped to an average of 6000. However, some of this could be accounted for by the rush to secure a mortgage prior to the surcharge introduction.

The RICS UK Residential Market Survey, which is used by the government, the Bank of England and other key institutions, including the IMF, is a good indicator of current and future conditions in UK residential sales and lettings. RICS professionals’ input into the survey which gives valuable contemporary market information from across the UK. Here is just a selection of comments:

Midlands based Bletsoes say – Stock of rental properties has been decreasing as landlords move out of the market and are not being replaced. This means rents are rising as demand remains the same.

Midlands based Doolittle & Dalley say – Sustained and constant demand for all types of properties, particularly for 2 & 3 bedroom houses. Demand still exceeding supply.

South East based Gates Parish & Co – Rents remain static but a slight upsurge in the number of completed lettings has occurred during the last month. However, the number of available properties is now quite low.

South East based Elgars – Even with Christmas approaching, the interest in new lets is keen with tenants still being quickly found for the few properties that are available.

South West based Stags of Exeter report – The lettings market remains brisk in the Exeter area. BTL investors are still active and more properties required to meet strong tenant demand, particularly in the city.

Norfolk based Jackson-Stops – Quality and good presentation wins every time as long as the rent is at the right level. The smaller properties let very quickly.

Edinburgh based Dove Davies – There remains a shortage of good quality 1 and 2 bedroom flats within central Edinburgh. Those that so come to market let quickly at increasing levels of rent.

The picture nationally remains patchy, but there are positive comments coming out of the report, many respondents reporting steady demand; overall a balanced picture with some respondents reporting declining new landlord instructions as well as flattening tenant demand.

Some reports indicate that unless government policy changes, there could be more private landlords exiting the BTL market than those entering it in the next three years, but as BTL accounts for around 95% of the private lettings sector, it’s difficult to see how the government’s Build-to-Rent initiative can persuade developers to anywhere near plug this gap.

It means that rent levels will still be challenging for many renters, which comes at a time when affordability constraints are taking their toll on demand, as rents coupled with inflation lag wage increases.

Overall therefore, rental growth expectations remain in positive territory, but the pace of average rental growth is likely to moderate from its present level next year.

In the longer term, forecasters are predicting longer term rental growth strengthening to an average of 2% to 3% per year, covering the next five years, as supply issues will remain.

RICS Residual Survey – November 2017

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