Cultural shift to renting in the UK set to continue in 2013 say lettings experts

A cultural shift in favour of renting property in the UK rather than buying looks set to continue into 2013 and beyond, it is forecast.

An analysis of data from lettings franchise Belvoir’s nationwide 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.

‘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,’ said chief executive officer Dorian Gonsalves.

‘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,’ he added.

The firm’s research shows that the rental market performed well in some areas and not in others in 2012. 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,’ explained Gonsalves.

‘Figures show 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,’ he added.

Throughout 2012, there were several major economic influences on the rental market. These included economic performance, inflation, wages and unemployment.

‘How the economy performs affects the rental market in two ways. 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,’ said Gonsalves.

He also said that inflation and wages affect 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 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,’ he pointed out.

Despite the doom and gloom around the economy and debt, unemployment actually fell in 2012 but forecasts for 2013 are mixed, with some suggesting that unemployment will continue to fall, while others predict a rise.

‘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,’ said Gonsalves.

‘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,’ he added.

Looking ahead to 2013 at the rental market from the perspective of tenant demand, the business believes 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,’ said Gonsalves.

‘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,’ he said.

‘From a buy to let 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,’ he added.

He also pointed out that 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.