Private residential rent – a UK housing market poised for growth

house value

"We believe that the next decade will be defined by high levels of demand for private rental properties, particularly for single family homes."

Mike Hilton, CEO of real estate asset manager QSix and manager of Phoenix Spree Deutschland

Twenty years of continuous population growth, combined with the ongoing impacts of the pandemic, have resulted in an extraordinary rise in demand for housing, as residents continue to reassess their living situations and personal finances. Critically, the UK’s residential housing market is quickly pivoting towards private rent.

With the current macroeconomic situation causing even further disruption to the UK’s residential housing market, at QSix, we believe that the next decade will be defined by high levels of demand for private rental properties, particularly for single family homes.

During previous high-inflationary periods, real assets such as residential property have tended to outperform, and with the combined impact of immediate term pressures and longer-term trends, the private residential rental sector is poised to do so again.

Historically, Britain has been characterised by a high proportion of homeowners, with 69% of households participating in some kind of housing tenure in 2001.

However, following two decades of structural decline in the affordability of housing in the UK, more people in Britain are now renting a home than ever before; between 2005 and 2020, the overall share of privately rented homes increased from 12% to 19%, as home ownership participation rates fell 5% to 64% in the same period.

With current trends in the UK residential markets suggesting that home ownership is likely to become increasingly intangible, a quarter of all households could be private renters by 2035.

The rapid growth of this sector is influenced by a variety of broader trends across age demographics, growing economic mobility, affordability and government policies. For example, UK life expectancy has never been higher, with a growing number of major life decisions, such as marrying, having children, forming families and retiring now happening later in life than ever before.

The UK population is also highly skilled and educated, with more than 50% of young people going into higher education, compared with 15% in 1980, according to figures from the Department of Education. These major shifts in population dynamics have had a huge impact on the types of properties in highest demand.

Demand for private rent is of course also driven by the challenges many UK residents face in home ownership, with historically high inflation rates impacting mortgages and pushing already stretched household budgets. With the Help to Buy scheme also winding down at the end of this month, more households and families will be looking at the private rental market for greater flexibility and more affordable options.

Perhaps unsurprisingly, younger adults aged 34 and under are also increasingly more likely to rent a home than own one than previous generations, not least as a result of rising affordability constraints – in London it now takes an average of 10 years to accumulate even a 10% deposit.

A growing number of people are also living together in larger households, such as with family or friends. Despite 62% of new homes formed between 2001 and 2020 containing fewer than two people, the average number of people per household has stayed the same – constant at 2.4 people.

Despite the many clear drivers supporting demand for private residential rental properties, the supply of these homes has been limited in recent years, remaining broadly static since 2016. As the cost-of-living crisis continues, supply does not appear to be responding quickly to demand – for example, data from the National Landlords Association suggests that one third of buy-to-let landlords are currently planning to sell some or all of their properties during 2023, the highest level of planned divestment in more than 6 years. Data from the English Private Landlord Survey suggests that one reason for this exodus in buy-to-let landlords has been changes to legislation impacting private landlords.

Whilst this legislation has been crucial in protecting tenants amidst soaring costs of living, it has also driven private landlords away from the sector. Although further rent regulation in the UK may come, we believe that the Government will take its lead from countries such as Germany, focusing primarily on protecting tenants in major metropolitan areas where affordability constraints are most keenly felt, largely leaving suburban areas, where single-family homes are most common, less affected.

With demand continuing to grow amidst this backdrop of limited supply, we believe that private residential rent is one to watch over the next decade. Already one of the fastest growing areas of the UK market, the UK’s residential housing market is quickly pivoting towards private rent, driven by the joint impact of long-term trends and immediate mounting macroeconomic pressures on residents looking beyond home ownership.