Cultural shift towards renting set to continue in 2013, predicts Belvoir
A cultural shift in favour of renting property rather than buying looks set to continue into 2013 and beyond, predicts Dorian Gonsalves, CEO of Belvoir Lettings.
“When looking back on 2012, the rental market performed well in some areas and not in others. The Belvoir rental index shows that average rents in November 2012 were £682 per month - just £1 less than rents in November 2011.
“However, when we look at rental figures on a regional basis we can see that only London, South East and South West rents have improved over the last five years. Most regional rents are still recovering from falls experienced in 2008 due to an oversupply of accidental rental accommodation.
“In the last few years Belvoir has expanded throughout Scotland and Wales. Figures produced in the Belvoir five-year rental Index shows that Scottish rents have remained fairly static over the last five years, while rents in Wales have remained fairly static over the last 12 months.”
Throughout 2012, there were several major economic influences on the rental market. These included:
“How the economy performs affects the rental market in two ways,” says Gonsalves. “Firstly key factors such as inflation, wages and unemployment will impact on what tenants are able to afford. Secondly, the economy’s performance impacts on consumer confidence. The lower consumer confidence is, the less likely it is that people will buy property and the more likely it is that people will rent to enhance their mobility.
Inflation and wages
“This is a key factor, which affects rental income for both tenants and landlords. From a tenant perspective, if wage growth is higher than inflation, they can afford to pay more. If it is lower, their disposable income is restricted so it is tougher for tenants to afford rent increases.
“From a landlord perspective, inflation and the ability to increase rents in line with inflation is an important factor over the lifetime of an investment, which in the case of Buy to Let (BTL) is typically around 20 years. If a landlord doesn’t or can’t increase rents in line with inflation, then what that rental income will purchase is eroded over time.
“Unemployment rates fell in 2012 and, according to the Office for National Statistics (ONS), are currently at 7.8%. Despite the doom and gloom around the economy and debt, unemployment actually fell in 2012.
“Forecasts for 2013 are mixed, with some suggesting that unemployment will continue to fall, while others predict a rise. The Centre for Economics and Business Research (CEBR) predict and stress how regional unemployment figures will be. For example, they suggest that unemployment will rise across all regions to 2016, bar the South East, East and London. Northern Ireland, Wales, Scotland and the North East of England will continue to suffer jobs wise due to the loss of public sector employment.
“For 2013, it is likely that unemployment will not rise so much that it will cause too many tenants or landlords a problem during the year; however it is unlikely to fall so much that it gives enough confidence to consumers to decide to buy versus rent.
“Any increase in unemployment in 2013 is likely to increase the number of people that choose to rent, as buying a home won’t be the first thing on their mind.
“From a landlord perspective, particularly if cash flow is right, an increase in tenants that defaults on their rent could result in an increasing number of repossessions. To avoid this it is advisable that landlords build in a contingency plan to help fund tenant defaults or void periods. Working with a specialist lettings agent such as Belvoir is likely to help landlords minimise the risk of void periods.
Economic impact on rents for 2013
“In 2012, the economy went into a double dip recession and now there is talk of a ‘triple dip’ recession. From a rental perspective, talk of a further recession and at most slow growth in 2013, is likely to ensure that renting versus buying remains a popular choice in the New Year, so demand for rental property is unlikely to slow and newly formed households will continue to choose the rental market as opposed to buying.
“From the perspective of inflation versus wages, most predictions for 2013 suggest there is likely to be a small rise in disposable income. The CEBR (http://www.cebr.com/
“As we head into 2013 inflation seems to be leveling off. HM Treasury’s summary of forecasts suggests CPI will run at 2% and RPI at 2.6%. This will to some extent help tenants, as in theory it does improve their disposable income if wages rise above this rate.
“However, it is important to be aware that utility bills are a large part of a tenant’s household expenditure – next to their rent. So although the average increase in rent may be low, big increases in utility bills restrict a tenant’s ability to pay more rent.
2013 from a tenant perspective
“Looking at the rental market from the perspective of tenant demand, it is likely that demand will continue to grow for the sector as economic uncertainty continues to reign. From an affordability perspective, economic indicators suggest that tenants will not be able to afford large increases in rents in 2013 and as we have seen rental growth subside this year, rents overall are unlikely to see any large hikes.
2013 from a landlord perspective
“For landlords, the key metrics are being able to increase rents in line with inflation and ensure that voids are minimised throughout the year.
“Most landlords have been pretty sensible and are choosing, in the main, to keep any rental increases to a minimum. Over short periods of time, it is better landlords keep a good tenant than try to increase rents by re-letting the property for more money in the short term, but risk renting to a tenant who ends up not paying rent.
“From a BTL perspective, for some property types and areas, prices do seem to have stabilised and are even continuing to rise, suggesting that the market has bottomed out. As the economy improves over the next few years, prices should hold and improve in these areas as long as mortgage lending continues to grow.
“In other areas, such as the North East and Northern Ireland, property prices are continuing to fall. This has the advantage for investors of a market where they can pick up a bargain, but holds the risk of further falls, which could impact on investors’ equity and it is important during these tricky times, to achieve better mortgage rates to have 25% equity in investment properties.
“I would advise any investors that are considering increasing their BTL portfolio in 2013 to seek free specialist financial, tax and professional advice from their local Belvoir agent. For contact details visit www.belvoirlettings.com/
Belvoir’s full rental index report is available on www.belvoirlettings.com/