Average residential property rents are set to rise sharply over the next few years, according to research by the Royal Institute of Chartered Surveyors. And while the findings indicate that many smaller landlords are opting to get out of the market as new taxes kick in, for those that remain, demand for properties will remain high.
In its 2018 Residential Property Market report, RICS notes a sustained change in what it describes as the mood music surrounding the residential property rental market. In particular, tax changes that are still being implemented have had a negative impact on small landlord sentiment. That has manifested itself in a reduction in ‘new landlord instructions’ in the first quarter of the year. This wouldn’t necessarily represent a trend (or the harbinger of one) but the fall in instructions has now continued for nine consecutive quarters.
Or to put it another way, the supply of residential stock to the marketplace is becoming increasingly constrained.
Flip over to the other side of the equation, however, and it is clear that demand is unabated. These are tough times for those who are seeking to step onto the housing ladder for the first time. Depending on the location, house prices are either slipping back a little, stagnant or growing at a relatively sluggish rate. However, buying residential property remains hugely costly and purchasers have to save at least 5.0% for a deposit and probably more, if they want to secure a good deal. Consequently, many are forced to rent – at least for a time – and others may choose to. In the first quarter, the rental demand indicator stood at +11.
So according to RICS, expectations for rental growth are once more on the rise. The Institute is therefore predicting that in the short term – over the next twelve months – rents will rise by an average of 2.0%.
Look to the medium term, however, and the rental increases are set to accelerate. Indeed RICS is predicting an increase of 15% between now and 2023, with East Anglia and the South West set to experience the sharpest growth.
So what does all this say about the prospects for investors?
Well, the first thing that has to be said is that changes to the mortgage interest tax relief system will see many landlords paying more tax and that is one of the factors causing many to think twice – either about going into the buy to let market in the first place or continuing to make mortgage repayments on properties that are being rented out. Incoming regulations requiring landlords to offer three year tenancies and even the arrival of new data protection rules are all taking their toll on sentiment.
But looking to the positive, at a time of significant economic uncertainty, a combination of factors makes it likely the rents that landlords can command will not only rise, but rise more quickly than inflation.
So for those that can absorb the tax changes, the residential rental market remains a sound investment.
The Devil in the Detail
That’s the big picture, but the devil is in the detail. A landlord is not necessarily focused on the headline figure of monthly rent but on the actual yield. That is dependent on what the property costs to buy and (to complicate matters further in terms the economic benefit to the landlord), the monthly mortgage, maintenance and administrative outgoings, plus the taxes on incomes. It is rising costs in those areas that are deterring small landlords.
But there are ways of mitigating at least some of those costs and maximising yield. Most obviously, it makes sense to choose properties where the purchase costs are low relative to the rents that can be commanded. As things stand, investing in the North and Midlands often offers better yields that in the South of England where high purchase costs are not necessarily counterbalanced by commensurately high rents.
Equally, an investor might choose to invest in a block of apartments rather than one or more large houses. This can reduce the stamp duty liability and the maintenance costs. Pooling an investment with others, provides a means to gain exposure to apartment block developments.
But assuming that property represents an attractive investment opportunity, arguably the best course of action is to seek advice on the options available in order to match investment strategy with factors such as the sum allocated for investment (either cash or through a mortgage) and the desired outcome in terms of yield and projected growth.
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