Spotlight: Rental Britain

Rental Britain
 
Outlook

2 February 2016, by Jacqui Daly

Our expectations for the rental market across the UK.

 

■ Rental Growth: Rents are now on average higher across the UK than a year ago. Data from HomeLet, which records rents on new buy-to-let tenancies, shows that London saw the bigger rent rises of 7.5%. At a national level rents grew by 3.8% in the year to November 2015. This masks the growth seen in the core regional markets such as Manchester city centre, where we have seen rents rise by 7%.

■ Investors’ yields: Competition for investment stock has led to yield compression. The gap between vacant possession values and investment values has narrowed, which has increased the number of sellers looking at block sales as opposed to piecemeal break-up. While yields remain higher outside London, the sheer weight of capital chasing regional opportunities has driven yields down.

UK-wide residential portfolios of existing assets traded in 2015 were priced off a 5% to 5.5% net yield based on a 28% gross to net deduction. New build-to-rent stock in regional cities is being priced off a 4.5% to 4.75% net initial yield, based on a limited number of deals.

■ Looking Ahead: We expect that an undersupply of rental homes, which is likely to be exacerbated by policy changes affecting buy-to-let investors, will continue to underpin rents in markets where demand is strong. These include popular city centres where there is higher value employment and limited options to get on the housing ladder. The prospect of wage growth is likely to support rent rises, particularly among young professionals who are most likely to benefit from an improved labour market.

■ More sharers likely: Despite Government measures to help first-time buyers, we expect to see the traditional rental demographic of sharers and young professionals continue to grow, where the supply of housing is tight, costs are high and options to move into homeownership remain limited.

■ Benefit cuts: Our rental forecasts do not include tenancies that are reliant on housing benefit. Rental markets that are heavily dependent on housing benefit tenants, such as some of the seaside towns along the south coast and parts of the northern urban belt, will come under renewed pressure as a result of Government policy to limit welfare.

FIGURE 7

Mainstream rental growth forecasts

 
Figure 7

Source: Savills Research
NB: These forecasts do not apply to housing benefit dependent tenancies. They also only apply to average rents in the second hand market. New build rental values may not move at the same rate

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