Revealed - How Residential Rental Market will perform...

The latest lettings market forecast from Savills says average UK rents to end 2023 at up 9.5 per cent year on year – lower than 2022, but higher than any other year on record.

This will mean that typical rents have risen 26 per cent since March 2020.

And there’s only modest respite next year , when a near record rise is anticipated.

Savills forecasts that the imbalance between supply and demand means UK rents will rise a further 6.0 per cent in 2024 before hitting the ‘affordability ceiling’ in 2025.

A greater supply challenge and stronger economic outlook means that London rents will begin to rise more strongly than the UK average by the end of the forecast period: the South East and South West will see the highest five year growth, as lower yields mean stock constraints will prevail for longer.

Emily Williams, director in the Savills residential research team, comments: “Homes to rent continue to be in significant short supply. The end of a series of national lockdowns sparked increased rental demand in mid-2021 that has consistently outstripped supply ever since. At the same time, the rising cost of debt has impacted the profitability of many mortgaged landlords. This, together with a changed tax and policy environment, is forcing an increasing number to sell their properties.

“As a result, competition for stock is tough, and tenants are having to bid upwards to secure a tenancy, supported – but only in part – by a strong growth in incomes, fuelling rents upwards in the short-to-medium term.

“It’s very difficult to see where an increase in rental supply will come from in the next couple of years. Higher borrowing costs will also keep would-be-buyers in the rental sector for longer, underpinning demand, and while some landlords will be able to transact in cash to avoid the higher cost of debt, this is unlikely to move the dial on supply. Any significant increase in stock in the sector will be delayed until 2026 and beyond, when interest rates have fallen more substantially.”

But any increase in rental stock in London specifically will be further delayed, Savills says.

With rental yields already lower in the capital, it will take a longer time for a significant premium over the risk free rate to emerge.

This supply challenge, in addition to a slightly stronger economic outlook for London over the rest UK, means Savills expects London rental growth to begin to show stronger rental growth again by the end of the five-year forecast period.

However Savills is warning that despite strong income growth, rising rents are stretching the finances of those in the private rental sector.

Savills now estimates that the average PRS household is spending 35.3 per cent of their income on rent, up from 33 per cent in 2021/22.

This is forecast to be stretched further in 2024, but thereafter rents will have reached an affordability ceiling, and further increases will not exceed income growth.

But renters will still be left spending a higher proportion of their income on rent than at any point in the last 18 years.

But the market is already feeling the impact of hitting an affordability ceiling in London, where rents already take up a much higher proportion of income – at 42.5 per cent according to Savills.

Rents in the capital have grown 31 per cent in the last two years, and as a result, renters have already exhausted their capacity to bid upwards. As a result, month-on-month rental growth has fallen from an average of 1.2 per cent in 2022 to 0.6 per cent so far in 2023 – and is likely to remain lower than the UK average over the next 18 months.

According to the agency, more stock coming to the market, against steadying demand has caused prime rents to simmer. But there is a mismatch in landlord and tenants expectations. While more than half of landlords in London are still expecting five to 10 per cent rental increases, just a third of tenants only expect to pay up to five per cent more.

Savills adds that struggles for individual private landlords suggest that institutional landlords and the Build to Rent sector will play an increasingly important role looking forward.

Even so, it’s not plain sailing for BTR.

Jacqui Daly, director Savills research and consultancy, says: “The private rented sector appeals to institutional operators because it offers a secure long term income stream which is likely to rise with inflation and also ticks the social value box by providing a much-needed source of new housing.

“With the pool of renters expected to widen, there are opportunities for investors to provide both urban flats and suburban family housing to rent in the multifamily and single family markets respectively.

“However, the degree to which the Build to Rent sector can grow in influence will depend on how easily schemes can get funding in a challenging debt market and get planning consent in an arguably even more challenging planning environment.”