Government intervention and Brexit slowing expansion of private rented sector
Government intervention and Brexit uncertainty has subdued the growth of the private rented sector (PRS) in Britain which has expanded by just 0.2% a year with 5.4 million properties, according to a new analysis.
But the value of the PRS continues to increase, although stuttering house price growth means the sector has added £6 billion in the last year, the smallest rise since 2009, the data from the Buy to Let Britain report from Kent Reliance, part of OneSavings Bank.
With only 11,000 properties added in the past year, the growth contrasts starkly to 2012, when the sector was expanding at a rate of more than 5%, adding more than 240,000 homes a year, and the 3.3% growth seen in 2015 when 170,000 home were being added annually, all prior to the tax reforms for landlords announced in the Summer Budget.
It also reveals that tenant demand has moderated in the short term, following a modest improvement in first time buyer numbers. However, it points out that improving first time buyer numbers are heavily dependent on the Help to Buy scheme, which is due to end in 2023.
Rents are rising at their fastest annual rate since 2017, climbing by 1.3% to £896 per calendar month and with rents outpacing house prices, average yields have risen to a two year high of 4.5% and in London yields are at their highest since 2015.
But it is not all good news, for example, landlord confidence has fallen to its second lowest level, hitting landlords’ purchase intentions and the stock of outstanding buy to let mortgages has risen by 1.4%, despite reduced house purchase activity as landlords remortgage onto more favourable rates.
Remortgaging activity accounts for three-quarters of mortgage lending in buy to let, as landlords look to lower costs and fix mortgage rates and 72% of UK buy to let mortgage applications for property purchases is now via a limited company.
The report explains that the flurry of regulatory changes for landlords, on top of recent tax reform, has deterred amateurs from entering the market. Importantly, it has also undermined current landlords’ confidence.
Indeed, just 37% hold a positive outlook for their portfolio over the next 12 months, according to a survey of 827 landlords run in association with BVA BDRC. This is down from 41% a year ago and represents the lowest level since the second quarter of 2017, the lowest on record.
As a result, landlords are much less willing to add to their holdings, and many have taken the opportunity to prune the least profitable properties from their portfolios. In the first quarter of the year, those expanding their portfolio outnumbered those looking to divest by just 1%.
Looking ahead, those seeking to reduce their portfolio size in the next 12 months outnumber those looking to expand their holdings by 2% at 18% compared to 16%. Nonetheless, the report suggests that typical portfolio size is likely to increase as the sector continues to professionalise and those looking to sell down expect to dispose of an average of 1.9 properties, while those looking to purchase expect to buy an average of 2.3 properties.
It also says that rental inflation has accelerated since the end of 2018, climbing to 1.3% as all regions registered annual growth. This has seen rents hit a new record high of £896 and bolstered yields.
Rents saw the fastest growth in the East Midlands, where they rose by 2.3%, and in Yorkshire and The Humber, where they increased by 1.8% from a year ago. Across the country as a whole, landlords are collecting a total of £4.9 billion in rent each month. In total, tenants paid landlords £58.1 billion in the last 12 months.
Rents are rising at a much faster pace than house prices, driving yields to a two year high. The average yield now stands at 4.5%, its highest since March 2017, and up from 4.4% at the end of 2018. Gross yields in in London climbed to their highest since 2015.
But rents and yields vary across the country. In London, rents have only risen by 0.5%. Nonetheless, with property prices falling, yields have reached 4.1%, their highest level since the end of 2015. Meanwhile, the North West boasts the highest yields in the country at 6.2% followed by Yorkshire and The Humber at 5.9%.
‘Against a backdrop of political uncertainty that’s driving economic uncertainty, Government policy continues to distort the current housing market. Changes to mortgage interest tax relief and the stamp duty surcharge have pushed up costs, while tighter underwriting rules have made it more difficult for those seeking to expand their portfolio or indeed purchase their first buy to let property,’ said Andy Golding, chief executive officer of OneSavings Bank.
‘These changes have understandably affected the sector’s growth, and investors’ confidence. The expansion of supply has slowed. The good news for landlords looking to expand their portfolios is that underlying market conditions seem to be changing,’ he pointed out.
‘Yields are climbing as rents rise faster than house prices; in London, yields are now at their highest since 2015. For committed investors, buying opportunities are emerging once more where prices have weakened,’ he concluded.