Demand for rental accommodation has accelerated quickly over the past decade and there is little to suggest this trend will slow down anytime soon. With supply constraints possible in the medium-term, it’s likely there will be additional upward pressures on rents over the next five years. In a nutshell, the UK’s private rented sector is flourishing.
Dominating the market are the younger age groups, with almost half of all 25 to 34-year olds privately renting in England. This has risen from just over 20% ten years ago according to JLL Residential.
Current trends also suggest that the number and proportion of private renters will rise further in the medium-term, despite political rhetoric in support of more owner-occupation.w
Housing unaffordability and onerous deposits are the main drivers of this trend.
Government initiatives such as 20% discounted starter homes offer some hope for would-be young homebuyers, but this is unlikely to reverse or alter the strong upward march of the private rented sector.
2019 Sees a Highly Active Private Rented Sector with Rising Demand
Unsurprisingly, given both the high moving and buying costs in the owner-occupier market and the greater number of renters, the most active part of the national housing market is within the private rented sector.
Of the 2m or so household moves in England in 2013-14, as estimated by the government’s English Housing Survey, around half were moves within the private rented sector. If households new to the sector are added in, 65% of all house moves were to private rented accommodation.
Private rented sector insiders are also expecting economic influences as well as demographic and social trends to lead to greater private rented demand over the next five years.
A strong and stable UK economy, including higher employment and salaries, is anticipated in the medium-term, albeit with some international risks. These conditions will undoubtedly lead to greater demand for rental accommodation from young people starting work or wanting to move out of the parental home.
An increasingly pertinent point is whether there will be enough rental accommodation to house this considerable demand, especially given the recent tax relief changes which have proved detrimental for many buy-to-let investors.
Rental Ownership Changes
The vast majority of private rented properties across Britain are owned by private landlords, but many of these were dealt a blow in the Chancellor’s budget in July 2015.
In an initiative that was aimed at levelling the playing field with owner-occupiers, the government announced that higher rate mortgage tax relief on private rental income was going to be phased out by 2020.
As the vast majority of private landlords are higher rate tax payers, the impact proved significant, leading to a sizeable sell-off of properties, especially those which are highly geared and therefore most affected by this tax change.
However, it should also be noted that approximately 65% of rental properties are owned outright, rather than being reliant on a buy-to-let mortgage, meaning that the Budget changes make no difference to them.
Mixed Outlook for Private Landlords in 2020
All-in-all, it’s unlikely that private landlords will sell-off rental property over the next few years, especially as we see both prices and rents rising steadily. However, there may be slightly less exuberant enthusiasm from new investors, which may have a longer-term impact on rental supply.
There are also changes afoot in the institutional investment market.
For the past few years, investors have shown more interest in the PRS. It has taken time for this to come to fruition, but genuine enthusiasm and action is now happening in London and in several towns and cities across the country.
Overall, despite believing that demand will increase and available supply will remain constrained, most analysts anticipate only moderate positive rental growth on a national basis over the next five years.
The main limiters are that tenants will move to smaller properties or to cheaper areas in order to ensure their rental costs suit their financial aspirations which frequently will include setting aside sufficient funds to save for a housing deposit.
Investors to Seek Alternatives to Buy-to-Let
The combination of changing tax regulations and property prices has served to oust investors from the sector with a low appetite for risk. This has led to a shift in the way investors are entering the lucrative private rented sector which requires much less capital than buying a rental property outright.
This means there are more opportunities for private investors to enter the market at a time when exponential growth is highly anticipated. Diversified Properties is at the forefront of the alternative investment market, providing a gateway between retail investors and lucrative opportunities in the private rented sector. To discover opportunities to invest, contact the team at Diversified Properties today.