A cultural shift in favour of renting property rather than buying looks set to continue into 2013 and beyond, predicts Dorian Gonsalves, CEO of Belvoir Lettings.
“An analysis of data from Belvoir offices confirms that there has been a change in cultural attitude towards renting property in the UK and that this change is likely to be permanent,” says Gonsalves. “Belvoir Lettings predicts that the private rental sector (PRS) is likely to remain a popular choice for 2013, with demand for rental property unlikely to slow and newly formed households continuing to choose the rental market as opposed to buying. We also predict that renting will continue to offer good value for money for tenants and advise landlords to seek specialist advice and adopt a realistic approach to rental increases to ensure that they are in line with inflation and any void periods are minimised.
“When looking back on 2012, the rental market performed well in some areas and not in others. The Belvoir rental index shows that average rents in November 2012 were £682 per month – just £1 less than rents in November 2011.
“However, when we look at rental figures on a regional basis we can see that only London, South East and South West rents have improved over the last five years. Most regional rents are still recovering from falls experienced in 2008 due to an oversupply of accidental rental accommodation.
“In the last few years Belvoir has expanded throughout Scotland and Wales. Figures produced in the Belvoir five-year rental Index (the full report is available on www.belvoir.co.uk/belvoir-rental-index) shows that Scottish rents have remained fairly static over the last five years, while rents in Wales have remained fairly static over the last 12 months.”
Throughout 2012, there were several major economic influences on the rental market. These included:
Economic performance
“How the economy performs affects the rental market in two ways,” says Gonsalves. “Firstly key factors such as inflation, wages and unemployment will impact on what tenants are able to afford. Secondly, the economy’s performance impacts on consumer confidence. The lower consumer confidence is, the less likely it is that people will buy property and the more likely it is that people will rent to enhance their mobility.
Inflation and wages
“This is a key factor, which affects rental income for both tenants and landlords. From a tenant perspective, if wage growth is higher than inflation, they can afford to pay more. If it is lower, their disposable income is restricted so it is tougher for tenants to afford rent increases.
“From a landlord perspective, inflation and the ability to increase rents in line with inflation is an important factor over the lifetime of an investment, which in the case of Buy to Let (BTL) is typically around 20 years. If a landlord doesn’t or can’t increase rents in line with inflation, then what that rental income will purchase is eroded over time.
Unemployment
“Unemployment rates fell in 2012 and, according to the Office for National Statistics (ONS), are currently at 7.8%. Despite the doom and gloom around the economy and debt, unemployment actually fell in 2012.
“Forecasts for 2013 are mixed, with some suggesting that unemployment will continue to fall, while others predict a rise. The Centre for Economics and Business Research (CEBR) predict and stress how regional unemployment figures will be. For example, they suggest that unemployment will rise across all regions to 2016, bar the South East, East and London. Northern Ireland, Wales, Scotland and the North East of England will continue to suffer jobs wise due to the loss of public sector employment.
“For 2013, it is likely that unemployment will not rise so much that it will cause too many tenants or landlords a problem during the year; however it is unlikely to fall so much that it gives enough confidence to consumers to decide to buy versus rent.
“Any increase in unemployment in 2013 is likely to increase the number of people that choose to rent, as buying a home won’t be the first thing on their mind.
“From a landlord perspective, particularly if cash flow is right, an increase in tenants that defaults on their rent could result in an increasing number of repossessions. To avoid this it is advisable that landlords build in a contingency plan to help fund tenant defaults or void periods. Working with a specialist lettings agent such as Belvoir is likely to help landlords minimise the risk of void periods.
Economic impact on rents for 2013
“In 2012, the economy went into a double dip recession and now there is talk of a ‘triple dip’ recession. From a rental perspective, talk of a further recession and at most slow growth in 2013, is likely to ensure that renting versus buying remains a popular choice in the New Year, so demand for rental property is unlikely to slow and newly formed households will continue to choose the rental market as opposed to buying.
“From the perspective of inflation versus wages, most predictions for 2013 suggest there is likely to be a small rise in disposable income. The CEBR suggest families will take home an increase of 0.7 to 1.5% and the same in 2014 and 2015.
“As we head into 2013 inflation seems to be leveling off. HM Treasury’s summary of forecasts suggests CPI will run at 2% and RPI at 2.6%. This will to some extent help tenants, as in theory it does improve their disposable income if wages rise above this rate.
“However, it is important to be aware that utility bills are a large part of a tenant’s household expenditure – next to their rent. So although the average increase in rent may be low, big increases in utility bills restrict a tenant’s ability to pay more rent.
2013 from a tenant perspective
“Looking at the rental market from the perspective of tenant demand, it is likely that demand will continue to grow for the sector as economic uncertainty continues to reign. From an affordability perspective, economic indicators suggest that tenants will not be able to afford large increases in rents in 2013 and as we have seen rental growth subside this year, rents overall are unlikely to see any large hikes.
2013 from a landlord perspective
“For landlords, the key metrics are being able to increase rents in line with inflation and ensure that voids are minimised throughout the year.
“Most landlords have been pretty sensible and are choosing, in the main, to keep any rental increases to a minimum. Over short periods of time, it is better landlords keep a good tenant than try to increase rents by re-letting the property for more money in the short term, but risk renting to a tenant who ends up not paying rent.
“From a BTL perspective, for some property types and areas, prices do seem to have stabilised and are even continuing to rise, suggesting that the market has bottomed out. As the economy improves over the next few years, prices should hold and improve in these areas as long as mortgage lending continues to grow.
“In other areas, such as the North East and Northern Ireland, property prices are continuing to fall. This has the advantage for investors of a market where they can pick up a bargain, but holds the risk of further falls, which could impact on investors’ equity and it is important during these tricky times, to achieve better mortgage rates to have 25% equity in investment properties.
“I would advise any investors that are considering increasing their BTL portfolio in 2013 to seek free specialist financial, tax and professional advice from their local Belvoir agent. For contact details visit www.belvoir.co.uk/find-an-office”
Regional Forecasts
These forecasts are for guidance only, and are based on analysis of rental growth/declines from 2008, assessing Belvoir’s advertised rents throughout 2012 and looking at national and regional economic forecasts for 2013. Throughout each region, individual areas (and properties) will go up or down based on local supply and demand factors so it is advisable for landlords to visit their local Belvoir Lettings office to get a more detailed view of what is happening in their local area.
In the main, from a tenant perspective, renting sooner rather than later and securing a property from a landlord who legally lets is wise for 2013.
From a landlord perspective, seek advice from your local office about rental increases to existing and future tenants. If possible, increase your rents in line with inflation, but not at the expense of losing a good tenant and/or risking further voids.
East Anglia
2012 current trend: Annual average £671
November rent: £671
2013 trend: Static to rising, maximum 5% increase
East Midlands
2012 current trend: Annual average £570
November rent £570
2013 trend: Static to 2% rise
London
2012 current trend: Annual average £1,407
November rent £1,397
2013 trend: Rise of up to 5%
Potential issue to watch out for in London 2013 is the sale of properties currently rented by accidental landlords. If property prices rise, they are likely to sell which could reduce stock while demand continues to increase.
Tenants are wise to rent sooner rather than later in London 2013. Landlords need to ensure they have a well vetted tenant and the rent is covering their costs.
North East
2012 current trend: Annual average £627*
November rent: £564
2013 trend: Static
*Data slightly skewed due to Newcastle. Sunderland and Tynedale have been static throughout the year
North West
2012 current trend: Annual average £613
November rent: £623
2013 trend: Static to rising by up to 2%*
This would mean rents recover back to their 2008 heights.
*Some areas such as Chester may increase further.
South East
2012 current trend: Annual average £863
November rent: £866
2013 trend: Static in some areas rising by 5% in others
Exceptional cases may see 10% rises, particularly if rental stock is reduced through sales of accidental landlord properties. Tenants should secure a property early in the year.
South West
2012 current trend: Annual average £728
November rent: £745
2013 trend: 2% to 5% rise
West Midlands
2012 current trend: Annual average £626
November rent: £623
2013 trend: -2% to +2%
Yorkshire
2012 current trend: Annual average £607
November rent: £599
2013 trend: Static
Scotland
2012 current trend: Annual average £550
November rent: £549
2013 trend: Static
Wales
2012 current trend: Annual average £615
November rent: £644
2013 trend: Static to small rise
