STAY CONNECTED!
    
newsletter-button

OTHER FEATURES

ValPal
What next for the rental market in 2017?

The rental market has had to face a raft of changes over the past year, including the introduction of the 3% stamp duty surcharge, the scrapping of the 10% ‘wear and tear’ tax relief, a growing number of licensing schemes, not to mention Right to Rent checks.

It’s fair to say that 2016 was something of an annus horribilis for landlords, and the market looks set to get bumpier as 2017 unfolds.

With the phasing out of mortgage tax relief from this April, coupled with the introduction of more stringent buy-to-let mortgage lending conditions as the Prudential Regulation Authority seeks to cool existing lending practices in the sector, it is difficult to think of a period when there have been so many external interventions in the private rental sector, which will inevitably push some landlords out of the market.

“2017 is going to be an interesting year and I think we are yet to really see how potential changes are going to impact the rental market,” said Bevan Smith, director of BPM Estates. 

“Brexit and the US elections aside, it is likely to be changes to landlord taxes and mortgages that will really influence the market place.” 

What next for the rental market in 2017?

Smith (right), who hopes to see a continued clamp down this year on “dodgy landlords and irresponsible letting agents”, added: “Investing in residential property is becoming increasingly expensive and I wouldn’t be surprised if we see landlords sell of parts of their portfolio.” 

“This could be good news for the buyer-occupier market, but will likely mean less supply for the rental market, which could in turn lead to higher rents.” 

There has already been a sharp fall in the number of buy-to-let transactions following the government’s outright assault on buy-to-let landlords, with haart recently reporting that the volume of buy-to-let transactions across England and Wales had more than halved over the past 12 months.

A survey conducted by Simple Landlords Insurance found that planned tax increases are the top concern for landlords in 2017, with most expressing a desire to keep buy-to-let tax relief on mortgage interest payments and see an end to higher stamp duty charges. 

Jenny Mayes from Simple Landlords Insurance is among those urging the chancellor Philip Hammond to listen to landlords’ concerns.

She said: “Landlords should be supported and recognised for their contributions in providing affordable housing, rather than burdened with unfair tax measures that will see them having to take considerable cuts to their income and being forced to pass some of this to their tenants.”

Housing shortfall 

Analysis published by accountancy firm PwC suggests that by 2025, 7.2m households would be in rented accommodation, compared with 5.4m in 2015 and 2.3m in 2001. 

It predicted that a quarter of those tenants would be living in private rented accommodation, reflecting the fact that the private sector has taken over from councils and housing associations as the biggest provider of rented homes in this country. 

What next for the rental market in 2017?

“Demand for rented accommodation will remain robust, as the myriad threats of rising house prices, falling real incomes and rising inflation affect the ability of aspiring homeowners to get their foot on the housing ladder and save for a deposit,” said John Goodall (left), CEO and founder of Landbay.

But while demand from tenants continues to grow, research by RICS has found that there has been a significant drop in property investors’ appetite to add to their buy-to-let portfolios after changes to the stamp duty rules last April.

“Despite measures to try to address it, one of the biggest issues across the property market in 2017 is going to be a lack of supply, both for buyers and renters,” said Simon Heawood, of property ISA Bricklane.com. 

In fact, the UK is facing a shortfall of 1.8m rental properties unless the government acts fast to slow a sharp drop in the number of available homes, according to RICS, which has already called on the government to reverse stamp duty changes on second homes. 

Jeremy Blackburn (below), head of policy at RICS, said: “The private rented sector became a scapegoat under the previous prime minister, and because of that it suffered. Yet with increasingly unaffordable house prices, the majority of British households will be relying on the rental sector in the future.

What next for the rental market in 2017?

“We must ensure that it is fit for purpose, and the government must put in place the measures that will allow the rental sector to thrive. Any restrictions on supply will push up rents, marginalising those members of society who are already struggling.”

Simon Gerrard, managing director of Martyn Gerrard, predicts that rents could rise by up to 10% in 2017. 

He said: “The government’s changes to stamp duty and the tax regime for landlords mean fewer rental properties coming onto the market. This can only lead to one thing, and that’s rent increases.” 

Sarah Bush, director at Cheffins, also expects to see rents continue to increase throughout 2017.

She commented: “On a national level, there will always be a need for housing, and with house prices continue to rise in parts of the country, renting remains the only option for many and as a result I would expect to see rental prices continuing to increase throughout 2017.”

North London estate agent, Jeremy Leaf, concurred: “We expect rents overall will rise faster than house prices as landlords sell or decide not to expand their portfolios. Their decisions will be partly down to higher stamp duty and, more significantly, reductions in tax relief and additional legal responsibilities.” 

Higher fees 

Another major issue that private landlords in England may soon have to contend with is that of additional letting agency fees.

Following the announcement during the chancellor’s Autumn Statement of an outright ban on letting agents’ fees to tenants, most agents are hoping to be able to shift the costs on to landlords, which in turn would also potentially push up rents.

“The ban on letting agent fees to tenants will only put more upward pressure on rents despite affordability constraints,” Leaf added. 

A recent poll of letting agents conducted by ARLA specifically highlighted the potential adverse impact that a ban on letting agent fees may have on the market in 2017, with 80% of agents surveyed stating that they expect to see rents rise in 2017. 

What next for the rental market in 2017?

David Cox (left), managing director, ARLA, commented: “The buy-to-let market is becoming less attractive for investors as the ban on fees, combined with the scrapping of mortgage interest relief and the stamp duty increase on second homes push costs up for landlords.”

Landlords are already facing a tax and mortgage squeeze, and now with the possibility that tenant fees will also be passed on to them, many will need to recoup the costs elsewhere, with most experts forecasting that this will inevitably be through higher rents, ensuring that 2017 is a pretty raw year for tenants too. 

James Davis (below), CEO and founder of Upad, said: “After the chancellor revealed fees are to be banned in the Autumn Statement, following on from the tax changes effective from April, I foresee rents increasing for tenants.

What next for the rental market in 2017?

“As such, rent arrears will be the biggest issue in 2017, with pay increases at an average of 1%, inflation at 2% and rents increasing 5%, there is a growing void between what tenants can afford with their pay.”

“I think landlords will also look to make savings elsewhere, as rent increases are risky, and there will be a rise in self managing landlords avoiding high commission charges with letting agents,” he added. 

Rental prices

Although the general consensus among most letting agents is that rents will rise further this year, there was a major change of sentiment during the course of 2016, with rental prices slowing across the UK during the second half of last year. 

In the first half of the year, rents across the UK consistently rose at rates above 4%, according to HomeLet’s Rental Index. But since the summer months, rental price inflation has slowed considerably, with annual growth slowing to just 1.7% in December. 

December’s data, revealing that the average UK rent for a new tenancy starting in December had dropped to £892pcm, reflect a continuation of trends which the HomeLet Rental Index has been tracking for several months. 

While landlords have been able to edge rents up, the amount of the increase been slowing for a number of months, which suggests landlords understand that tenants have, or are, reaching an affordability ceiling, particularly given the uncertain economic climate, according to Martin Totty (right), chief executive of Barbon Insurance  Group, HomeLet’s parent company. 

What next for the rental market in 2017?

He said: “While demand for rental property remains strong, landlords always have to be mindful of tenants’ ability to pay higher prices.

“The data recorded by the HomeLet Rental Index during the second half of last year suggests we have now begun to approach an affordability ceiling, particularly in areas of the country where rental price inflation was previously highest.”

Regional breakdown 

Despite the slowdown in rental price growth, the latest HomeLet Rental Index shows that rents increased in 11 out of the 12 regions surveyed over the year to the end of December, with the East Midlands the only region to see annual rents fall, down 0.4% year-on-year.

Across the UK as a whole, rent accounted for an average of 28% of tenants’ household income before tax, down slightly on last December’s figure of 28.4%. In London, the equivalent figures are 31% and 31.2%.

Region

Average rent: Dec '16

Average rent: Nov '16

Average rent: Dec '15

Monthly variation

Annual variation

Northern Ireland

£602

£601

£565

0.1%

6.4%

North East

£530

£519

£505

2.1%

4.9%

Wales

£605

£599

£583

1.0%

3.9%

Scotland

£603

£610

£581

-1.1%

3.8%

East of England

£895

£897

£874

-0.2%

2.5%

Greater London

£1,508

£1,532

£1,478

-1.6%

2.0%

West Midlands

£663

£666

£650

-0.5%

1.9%

South East

£998

£995

£981

0.4%

1.7%

Yorkshire &Humberside

£614

£618

£606

-0.7%

1.2%

North West

£668

£678

£663

-1.4%

0.8%

South West

£784

£776

£779

1.1%

0.7%

East Midlands

£585

£590

£587

-0.8%

-0.4%

UK

£892

£898

£877

-0.6%

1.7%

UK excluding Greater London

£744

£745

£732

-0.1%

1.6%

Notes:

Based on new tenancies in December

Based on new tenancies in November

Based on new tenancies in December 2015

Comparison of average rent in Dec '16 and Nov '16

Comparison of average rent in Dec '16 and Dec '15

London 

In Greater London, rents on new tenancies rose by 2% over the year to December to reach an average of £1,508, but this represents a sharp fall from the 7%-plus annual growth recorded 12 months earlier. 

Jackson-Stops & Staff predict that rental prices in the capital will increase by around 3% this year, and despite uncertainty forming amongst financial services, driven by concern over job security in the run up to the triggering of Article 50, they predict there will be a rise in tenants from high growth sectors such as tech, media and telecommunications. 

What next for the rental market in 2017?

Nick Leeming, Jackson-Stops & Staff Chairman, commented: “The longer term five year outlook for rents in London is stronger than the sales market, as some people who would otherwise have bought will continue to rent due to uncertain market conditions. 

“Some savvy investors will see 2017 as a good time to invest, with the pound’s depreciation in value making London property ripe for the picking.” 

Southern England 

Growth in rent in the south of England is being fuelled partly by an increase in the number of people who are leaving London, seeking more affordable areas within the commuter belt. This is particularly so for young professionals and families and is likely to continue in 2017 and the foreseeable future.

What next for the rental market in 2017?

Michelle Niziol (right), managing director of IMS Property Solutions, said: “More than four million households rent privately in the UK and this figure is set to grow as people continue to struggle to get on the housing ladder.

“However, there's also the growing trend of people choosing to rent because of the flexibility it offers them. This means that despite the government having announced a series of policy changes aimed at landlords, investing in bricks and mortar will remain a worthy asset class.”

Northern England 

A growing number of buy-to-let landlords seeking high rental yields are expected to invest in northern regions, with places like Merseyside and Lancashire in the North West of England identified by Rightmove as offering some of the best rental returns. 

Bootle in Merseyside currently offers a yield of 9.3%, Birkenhead is 7.5% and in Lancashire Burnley’s yield is 7.2%, while Accrington is 7.1%, according to the property website.

“Investors looking for the strongest yields could consider investing in certain areas in the North West where both demand and yields are high,” said Sam Mitchell, Rightmove’s head of lettings.

Paul Smith (below), CEO of haart, is among those that believe more buy-to-let investors will ‘naturally gravitate north’ in 2017. 

What next for the rental market in 2017?

“The buy-to-let market has been severely stung by the government’s war on landlords,” said Smith. “In some parts of the country, especially London, a buy-to-let property no longer makes the same return it once did.”

“Investors will naturally gravitate north where values are cheaper and yields are higher - you can pick up a portfolio of two-bed terrace properties in Doncaster for the same price as a one-bed flat in a new London development,” he added. 

Stuart Law (below), owner and founder of Assetz, agrees that the UK’s rental sector has experienced what he described as “a sea change” over the past year as “canny investors recognise that the north, not London, is where the best yields can be found”.

What next for the rental market in 2017?

He commented: “I expect we'll see overall growth of rents of 4% in 2017 as landlords seek to cover the impact of the new mortgage interest tax and capitalise on some potential reduction in the size of the rental property market.”

“London investors have been hounded out by a combination of low yields and the curbs to mortgage interest tax relief, or ‘tenant tax’ as I call it. The lesson in 2017 that people must learn is that buy-to-let isn’t dead – it has just gone north,” Law added.

Scotland 

The Edinburgh and Lothians region in Scotland experienced the biggest increase in rent over the last 12 months (6.1%) with the average rent in this location now standing at £645pcm, according to the latest Your Move Scottish Buy-to-Let index.

By contrast, the Highland and Islands region have witnessed an 8.1% decline in rental prices with the average rent in this area now down to £576.

“Landlords have been thrilled with the performance of Scottish rental properties in recent months,” said Brian Moran, letting director for Your Move in Scotland. 

Wales 

Landlords are calling for the Welsh government to amend or abolish the 3% stamp duty surcharge on buying residential properties to let.

The Residential Landlords Association (RLA) see the introduction of the new Welsh Land Transaction Tax (LTT) - which replaces stamp duty in 2018 - as an opportunity to remove the levy where a landlord is adding to the housing supply.

What next for the rental market in 2017?

The Welsh government insists that the revenue made by the higher rate is “essential to the delivery of public services”, but the RLA says the tax will continue to deter investment in the PRS and limit much needed housing supply, placing upward pressure on rents.

Douglas Haig, vice chairman of the Residential Landlords Association and its director for Wales, said: “The government has rightly made boosting the supply of housing, including homes to rent, a priority.

“Whilst we believe the planned levy on homes to rent out will most hurt vulnerable tenants needing a place to live, the assembly has an opportunity to make constructive changes to the bill to rectify this and back the nation’s tenants.”

Difficult decisions 

Landlords across the UK face tough choices as the government’s decision to limit mortgage tax relief on buy-to-let is expected to push around 440,000 basic rate tax-payers into a higher rate tax bracket, while many landlords will simply be forced to hike rents to meet lenders’ tough new conditions on buy-to-let mortgages. 

The combination of increased demand and static or reduced supply will inevitably also exert upwards pressure on rents although the degree of uplift will vary according to submarkets and price bands.

Direct government support and more active promotion of Build to Rent for the first time is also on the cards this year. 

What next for the rental market in 2017?

But while most buy-to-let investors are predicting a stormy ride in 2017, with many expecting legal and tax changes to the sector to have a negative impact on their investments, fears that a flood of landlords will opt to sell up in the coming months is unlikely to materialise. 

Despite changes to stamp duty on second properties and landlords’ tax relief, for many people buy-to-let remains an attractive income investment with impressive returns still achievable, at a time of low saving rates and stock market volatility, and this is reflected by the latest buy-to-let lending figures, which returned to some form of normality during the fourth quarter of 2016. 

The share of lending for acquisitions in the buy-to-let market rose from 28% in the third quarter to 38% in the fourth, which was comparable with the 38% recorded in the second quarter, the latest Mortgages for Business’ complex buy-to-let index found.

Although remortgaging continued to account for the bulk of buy-to-let activity in Q4 2016, it is still encouraging to see that the share of lending for purchase in the buy-to-let mortgage market has improved, suggesting that buy-to-let investors are once again willing to commit to new purchases.

Contacts: 

- Cheffins
- Jeremy Leaf & Co  
- ARLA 
- Upad  
- HomeLet  
- Jackson-Stops & Staff  
- BPM Estates 
- Simple Landlords Insurance 
- Landbay  
- Bricklane.com  
- RICS 
- Rightmove  
- Martyn Gerrard  
- IMS Property Solutions  
- haart 
- Assetz  
- Your Move in Scotland
Residential Landlords Association

*Marc Da Silva is Estate Agent Today and Letting Agent Today Features Editor. You can follow him on Twitter @propertyjourno

imgcollapse