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Rental sector hits £1.4trn, but a ‘cocktail’ of factors slowing growth – Kent Reliance

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  • 08/12/2017
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Rental sector hits £1.4trn, but a ‘cocktail’ of factors slowing growth – Kent Reliance
The value of the private rented sector (PRS) has hit a new high, rising by 6.4% – or £82.6bn – to reach nearly £1.4trn. Yet this growth sits amid a backdrop of fragile confidence and growing professionalisation that may hinder supply.

According to Kent Reliance’s seventh Buy to Let Britain report, rising house prices have been a key driver in the value jump, with the average rental property climbing 4.2% in value over the last year.

However, inflation is outstripping size growth – with the number of households in rented accommodation growing at less than a third of the pace seen three years ago. There are currently 5.6m households in rented accommodation across Great Britain, increasing by an annualised 2.2%, against the expansion of over 8% in 2014.

 

Insecurities

The slower growth reflects landlords’ “fragile confidence” in the sector, says Kent Reliance. In the sentiment analysis portion of the report, it was revealed that 41% of landlords were confident about the prospects of their portfolios.

Although this showed a recovery from a record low seen in Q2 2017, confidence nonetheless remains lower than in recent years.

“Landlords are swallowing the unpleasant cocktail of higher taxation and tighter regulation, and this is undermining the expansion of the private rented sector,” said Andy Golding, chief executive of OneSavings Bank, parent company of Kent Reliance and InterBay.

Among the bitter cocktail are tax reforms reducing the amount of mortgage interest that can be offset against tax, rising costs, and new mortgage rules that have tightened criteria.

Golding continued: “Landlords’ confidence is better but still clearly fragile, and as the new tax reforms gradually come into force, any further financial burdens may prove to be a tipping point.”

Meanwhile, growth in tenant demand is also slowing. While 22% of landlords reported tenant demand increasing in the past three months, 17% reported falls.

The net balance of 5% more landlords seeing rising tenant demand represents the lowest net growth in at least five years, said Kent Reliance.

The tepid tenant demand growth is reflected in easing rental inflation: although the average rents per property now stand at record £895 a month, the rate of growth in 2017 was 1.5%, against the 2.4% in 2016.

However, rents are nevertheless likely to continue climbing, as buy-to-let (BTL) landlords look to pass the rising taxation costs onto tenants in each of the next three years. The survey showed 29% of landlords surveyed expect to increase rents over the next six months – ten times the number who expect to reduce them.

 

Professionals

The report also noted the changing dynamics of the BTL market, with expanding supply driven by larger scale landlords.

In a survey of 856 landlords, run in association with BDRC Continental, among those who bought or sold properties in the last three months, landlords with more than ten properties made a net addition of one property, while those with less than five properties had no growth in their portfolios.

“A fundamental shift in the landlord population is now underway, as BTL moves from being a popular past-time for hundreds of thousands of British amateur landlords, to the preserve of committed long-term investors with experience and expertise,” said Golding.

“The pace of professionalisation will only increase following the Prudential Regulation Authority’s latest moves, and incorporation continues apace,” he added.

Increasingly, landlords are purchasing properties as limited companies, as opposed to buying as individuals.

“Given investors with just a single property comprise 62% of the landlord community, a lack of growth in this segment of the market is dragging on the expansion of supply,” read the report.

 

Ltd Co rise

The results showed that in the first three quarters of 2017, more than seven in ten BTL applications for house purchases were through limited companies – up from 45% in 2016.

“Creating a more professional sector is no bad thing,” Golding continued, “but there is a limit to the amount of change the sector can absorb before we see a damaging reduction in supply – an outcome that would see rents increase for tenants and reduce their ability to save for a deposit for house purchase.

“The removal of stamp duty for 95% of first-time buyers should provide some help for those with savings, but it will also bolster house prices – the same side-effect Help to Buy is having,” said Golding.

He added: “The housing market is significantly more complex than can be solved with some demand side stimulus. The private rented sector fulfils a vital role in our society and our economy, a role that needs to be reflected in an evolved housing policy.”

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