Asking rental growth slowing in UK, especially London and South East

Rent growth in the UK is slowing, particularly in London and the South East, but up overall 3% in October year on year, the latest index shows.

New tenancy rents were on average £902 per month, according to the HomeLet rental index which suggests that landlords appear to be balancing affordability with returns.

It was the second month in a row in which the index data recorded an annual increase of only 3%, suggesting that the pace of inflation in the UK’s rental market has started to slow. As recently as March this year, rents were rising at an average annual rate of 4.5%.

Landlords appear to be doing what they can to balance rents with regard to what tenants can afford with the income they need to generate, including for those with mortgage repayment obligations, according to Martin Totty, HomeLet’s chief executive officer.

‘Landlords are aware of the need to find a balance between what tenants can afford and the returns they require on their investment. While many landlords are facing higher costs themselves, including the impact of higher stamp duty on their property purchases since April, our data suggests that they have so far been cautious against a more uncertain economic environment,’ he said.

‘We know wage growth has lagged rental price inflation and it could be that we are approaching an affordability ceiling whereby landlords can’t attract tenants able to afford higher rents,’ he added.

The index also shows that the average duration of a tenancy is rising and has now increased to 28 months on average. Totty explained it suggests that landlords are valuing the security of a reliable tenant and accommodating their wish to remain in the property for longer and this is reflected in the rent.

A breakdown of the figures shows that in Greater London rents on new tenancies rose by 2.5%, much lower than the 7% growth recorded a year ago while in the broader South East region rents rose at 2.7%, down from 4.3% recorded by the index in October 2015.

Even in those areas of the country where annual rental price inflation is at its highest, rents fell back in October. Both the West Midlands, where rents were 5.1% higher than in October 2015 and the North West, where rents were 4.4%, there were small falls compared to September.

HomeLet believes that landlords and tenants alike will need to monitor the market closely in the coming months. Landlords will be aware that tenants’ incomes could come under pressure, with predictions of higher inflation next year and slowing economic growth thereafter.

Totty believes that landlords should consider protecting themselves from unexpected defaults in the event that tenants’ circumstances change unexpectedly. Correspondingly, tenants understand the supply of rental property remains constrained. ‘This may lead to renewed rental price inflation as demand is likely to continue to exceed supply for some time, especially if home ownership remains an aspiration that is a longer way off for many renters,’ he pointed out.

In the medium to longer term, the firm expects that the rental sector will continue to be increasingly important as house prices are now more expensive relative to peoples’ incomes than at any time since 2008 and demand for rental accommodation will therefore continue to remain high.

‘With a period of greater economic uncertainty predicted, with potential impacts on inflation, interest rates and growth, rental property ownership presents both risks and rewards,’ said Totty.

‘Reassuringly, the private rental sector has plenty of experience and expertise to advise property owners on products and services to protect their asset as well as their rental income in the event of an unexpected change in the circumstances of their tenant,’ he added.

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