UK rents forecast to increase 16% by 2018Rents across the UK have been rising since 2010, albeit at a more modest pace since early 2012. But we see room for rental inflation as earnings growth starts to gain momentum across the UK in the coming years.
There has been speculation that the support offered under Help to Buy could have a significant negative effect on the rental market. While taxpayer subsidies for mortgages may weigh on rental demand and rental growth in some areas over the next two years, high demand for rental property, especially in and around the main urban centres, will mean continued growth in the sector.
Rising interest rates will put some further upward pressure on rents from 2015-16, as affordability levels for homeownership are eroded. Our view is that rental growth from 2016 may start to outpace house price growth, driving yields, and attracting additional buy-to-let investment.
The private rented sector has doubled in size across the UK since 2001, and now accounts for close to 5 million dwellings, or 17% of total housing stock. If this trend continues, the size of the sector will swell to 6 million in 2017.
The sector itself is also likely to develop in the next five years, with a step-up in the delivery of specifically designed rental blocks, in contrast to much of the existing stock which is primarily aimed at owner-occupiers. These new blocks, backed by institutional investment, will be more akin to the new modern purpose-build student property accommodation being built in university towns than many rental flats currently on the market; the apartments are designed specifically for rental accommodation and will come with a range of amenities attractive to tenants. The delivery of largescale private rented units will help boost housing supply, and cement the rental sector as a major part of the UK’s housing stock.
In central London, prime rents have underperformed the national average, with an overall decline of 1.7% in the 12 months to October 2013. The weakness of the financial sector in 2011 and 2012 has been the main cause of this downward movement of rents. Our view is that rents will begin to rise modestly in prime central London in 2014, as renewed job creation an optimism, especially in the City, creates increased demand from tenants.