A comprehensive review of the rental market in 2014 by Belvoir reveals that market conditions, combined with the likelihood of interest rate rises and uncertainty over Government policies following the general election is likely to result in static or low rental increases in 2015, reports Dorian Gonsalves, Belvoir's Director of Commercial and Franchising.
“Rental rises are likely to be restricted by factors such as continued low disposable income, anticipated interest rate rises and a forecast of economic development in 2015 that is expected to be lower than this year,” says Dorian, who commissioned property expert and analyst Kate Faulkner to study data from all of Belvoir offices across the UK that had traded for over seven years.
“Our study shows that rents when we first started tracking the index in March 2008 were £698 per month,” continues Dorian. “Rents fell to £678 in 2009 and fluctuated around this level at +/- 1% until 2014 when we saw them rise to £691 per month year to date.
“On average, after seven years, Belvoir offices that have traded consistently have seen little or no growth in rents, albeit there have been falls and rises during this time. For the Belvoir group however, average rents have risen due to an increase in the number of new offices joining Belvoir in higher rental areas south of the Midlands.
“Rents for the whole group, including new offices, were £707 per month in 2008, recovering to £715 per month in 2012 and 2013, seeing an annual average of £735 per month year to date - a 4% rise for the group over the last seven years.”
Average rents by country
Regionally, in England, rents vary from £570 in the East Midlands to nearly £1,500 per month in London. The majority of Belvoir offices in Scotland are either seeing rents flat or slightly falling outside of Edinburgh and Aberdeen, with rents ranging from £500 to just over £600. In Wales, rents have been relatively static since offices opened, with average rents varying from just over £500 to £700 per month.
North/South divide
Belvoir's research shows that over the last seven years London rents are up around 20%, while the South East is up 7%, West Midlands 6% and Yorkshire +3%. Rents in the South West are on a par and rents in East Anglia have nearly recovered. In contrast, rents in the East Midlands are still 5% lower while in the North West they are down by 4% versus 2008.
Year on year, rents are up in most areas, reflecting the tightening of stock levels versus high demand and better economic performance, which helps tenants to afford to pay more rent.
However, areas such as Yorkshire, the North West and East Midlands have seen a fall year on year, suggesting the 'North/South' divide in England is impacting on rental performance.
Forecast for 2015
“From a sales and property price perspective, this year saw a continued recovery of the property market,” says Dorian. “However, price rises and recovery were driven largely by activity in the London and the South East. After 18 months of rapid growth, the rise in London seems to have stopped while other areas around the UK achieved 5-10% growth. Schemes like 'Help to Buy' have not impacted on either the rental market or property prices as predicted and most people who have benefited from the scheme are outside London and the South.
“From a property price perspective, 2015 will be new territory for predictions. So far the market recession and recovery in the house price market has pretty much mirrored that of the 1990s. However, things are different now. Back in 2000, mortgage rules and regulations were relaxed, expanding lending, and allowing prices to spiral. Since the summer of 2014, we have entered a new era of mortgage restrictions, as stronger powers are given to the Bank of England to curb lending. Talk of this and the end of buyers' 'pent up demand' from the recession has meant price rises/recovery have slowed.
“Analysis of rents in 2014 across the Belvoir group revealed patchy recovery in some areas, with rents certainly not rising at the same levels as property prices. For new investors, this means yields are being squeezed unless properties are bought at a discount.
“With pressure on companies to increase wages, potential interest rate rises and landlords realising their income is being eroded if they don't increase rents annually, rents are likely to be static or increase up to 3% in 2015. Rental rises are likely to be restricted by continued low disposable income rises and with economic development in 2015 expected to be lower than this year, it is unlikely that changes to rents will vary much more than 2014 versus 2013.”
Impact of pension reforms
“BTL is likely to be boosted in 2015 by continued property price growth and increased rents, while higher costs from rate rises and new entrants into the build to rent market could mean supply and demand matching more closely, putting pressure on returns.
“The market supply of BTL may be boosted by the impact of pension reforms in April 2015. Unfortunately this has led to a bizarre rhetoric about people cashing in their pensions either to spend on Lamborghinis or property! However, rental income should not be viewed as a replacement for pension income, as the two are completely different. Pension income tends to be low risk and index linked to rise with inflation while rental income, without mitigation, can be risky as a tenant can stop payments and rental income typically doesn't grow in line with inflation.
“BTL is likely to feature heavily in the media for 2015, which will continue to promote the sector, along with news of property prices and rents rising."
Interest rate rises
“In contrast, landlords will be hit by pending interest rate rises, which are expected in autumn 2015. To date, low rates have helped existing landlords to remain profitable and means that new investments are more likely to be cash flow positive, even when rents haven't increased.
“Once interest rates start to rise and landlords realise that they cannot pass on these costs due to a lack of wage growth, it may cause some existing landlords to sell up, and new landlords may find it more difficult to make BTL cash flow positive as yields are squeezed."
Build to rent schemes
“For other landlords, the new 'build to rent' government initiative in 2013 could impact negatively on returns in the short term. This will be very localised though around individual sites, especially if they are rented out at 80% of market rent. But due to the huge increase in demand expected in the sector, long term, these projects are unlikely to damage returns and could help to lead to a better quality, more professional sector."
General election
“In addition to interest rate rises and build to rent initiatives, the future of BTL will hang to some extent on policies at the next election. The current Coalition seems to be supportive of the market, introducing rules and investment initiatives to drive a more mature and professional market, although it refuses to regulate. In contrast Labour is proposing regulation, likely to be similar to the scheme planned for Wales, along with a plethora of initiatives such as rent controls while the Liberal Democrats are talking about increasing capital gains from 18 and 28% to 35%.
“It remains to be seen how these changes will impact on the market overall, but it is highly likely that BTL will continue to provide much needed property stock as demand for quality rentals continues to increase and many BTL landlords have invested for the long term. Those investing for 10 or more years have already seen some positive returns.”
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