According to a report from the Royal Institution of Chartered Surveyors (RICS), 61 per cent of property industry experts believe that more landlords will exit the residential rental market in the coming 12 months than enter it. This is indeed a serious concern for many lettings agents and with demand for rental properties still extremely high, many are wondering where the tenants will go and what choices they have. For many, the literal rise of Build-to-Rent (BTR) developments that are springing up across the United Kingdom, brings interesting opportunities for investment.
If you take the RICS UK Residential Market Survey as a barometer on the state of the rental sector, you’d be forgiven for thinking that confidence in the market is dropping. Not only did 61 per cent of respondents believe there would be fewer landlords in a year’s time, just over half also said there would be a net reduction over the next three years.
This comes at a time when 20 per cent of all UK households – the equivalent of around 4.5million people – are living in the private rental sector. As home ownership becomes seemingly unattainable despite numerous Government initiatives, demand for rental properties is only expected to grow.
We’re not on course for a stampede of landlords leaving the PRS. We see a more organic shift as older rental properties go back to the market.
It is of course, all too easy to speculate on the reasons behind the RICS’s headline figures. The Government and Local Authorities over the past few years have increasingly started to meddle with the Private Rental sector introducing new legislation – all of which will have the effect of increasing the costs and barriers of entry into the sector. Such changes include the recent changes to the tax system on how rental income is recognised, capital gains tax changes and an increasing number of accreditation schemes with some local authorities charging over £600 per property just to allow you to let it out.
‘Accidental’ landlords, who have acquired or inherited property, are now starting to leave the market as increasingly the financial models don’t add up as well as they once did and legislative red tape scares them off. The prospect of further legislation is making many small and large-scale investor think very hard before they make future decisions.
EXODUS OR GROWTH?
It should be stressed, however, that we are not expecting a mass exodus of buy-to-let landlords any time soon. Some will simply drift away over the next five to 10 years, gradually being replaced with more professional mid-level property firms and build-to-rent (B2R) schemes.
At the moment, institutional property investment only accounts for around one per cent of the private rental market (approximately 200,000 homes) but this is steadily increasing. These landlords are rarely interested in buying existing housing stock; they want purpose build ‘clean’ units that offer predictable yields, rather than a mixed bag of older properties in multiple locations.
Growth in the rental sector isn’t restricted to the young, as we are seeing more renters in their late 20s and older than we did in previous generations looking to rent. This is for a variety of reasons ranging from those unable to save enough for a deposit – to those making a conscious decision to rent due to lifestyle factors of convenience and enabling them to live somewhere better than they could afford to buy – there is a growing population who want it all now and not are prepared or willing to wait.
At the other end of the market, B2R also meets demand from retirees who want to release the equity in their homes and live off the proceeds while renting. Once again, newbuild apartments require little upkeep and since some are designed with this demographic in mind, they can help tenants feel part of a strong community.
We’re not on course for a stampede of landlords leaving the sector, or unsustainable growth in B2R schemes. Instead, we believe that there will be a more organic shift as older rental properties are released back into the market and bought up to specification by owner-occupiers. This means that B2R can play a crucial role in replenishing this housing stock, while offering homes that meet the changing needs of renters.