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The state of the UK rental market


Published: 20 March 2017 | Author: John Goodall, CEO and co-founder, Landbay

Landbay is a peer-to-peer lender that provides retail and institutional investors with access to the UK buy-to-let mortgage market. We do so through a platform that simplifies the traditional lending process, offering a direct transaction between investors and borrowers.

Our business is based on a detailed analysis of data about the rental market, which we publish in our national rent review, published annually, and our monthly rental index. Rent Check is our online tool allowing tenants and landlords to follow movements in their own rents against others in their area, with our postcode “widget” harnessing sophisticated UK-wide data from the monthly rental index.

So, what does our data show about recent developments in the UK rental market?

UK national picture

Rents across the UK continued to grow in 2016, rising by 1.12% between January and November, but the pace of growth slowed to half the 2.34% seen over the same period in 2015.

The average rent across the UK is now £1,188, up from £1,177 at the turn of the year. That adds up to an extra £11 per calendar month, or £132 per year. The average rent in the UK excluding London is now £749, up from £735 at the turn of the year – an extra £14 per month or £168 a year.

Chart 1: Monthly rental growth, January- November 2016

Monthly rental growth, January-November 2016

Source: Landbay Rental Index, powered by MIAC

But the pattern is not the same across the UK, with rents falling in London and only weak growth in the north east.   

Across the UK, the incremental uplift in rent between one- and two-bed properties is 14%, and it is the same when rising from a two-bed to a three-bed property. However, the differences are much greater in London. In the capital, rents jump by more than twice the national average, or by 32%, from £1,456 for a one-bed to £1,927 for a two-bed property, and by almost three times the national average (40%) to £2,693 for a three-bed home.

These huge jumps suggest that London has a greater supply of one-bed and two-bed properties than it has of larger homes. Indeed, figures from property website Rightmove suggest that, in January this year, availability of two-bed flats was at its highest since 2007.

If tenants have more two-bed properties to choose from, they will pay less in rent, which goes some way to explaining why properties of this size have seen the greatest decline in rents so far in 2016. They fell by 0.6% in the year to November, and were 0.81% lower than their peak of £1,943 in March this year. It has been a similar story for one-bed flats in the capital, with rents falling by 0.28% in 2016.

Conversely, three-bed properties in London are the only ones where rents have ended the year in positive territory, growing by 0.1% in the 12 months to November. For tenants, the question of living in a two- or three-bedroom property becomes more significant, especially given people are now renting for three years longer than in 1995. So, tenants are more likely to have growing families before being able to buy their first home.

Meanwhile for landlords, the opportunity cost of offering a three-bed property in a London market crowded with smaller properties is clear: a 40% uplift in rent received for a home that is likely to have no more than 30% more living space.

Chart 2: Average rent for one, two and three-bedroom properties

Average rent for one-, two- and three-bedroom properties

Source: Landbay Rental Index, powered by MIAC

Infrastructure and rental values

The High Speed Two (HS2) train line may still be decades away but, ever since the route was confirmed in January 2012, rents along the route have been climbing rapidly.

All of the key stations outside London have seen rental growth above the national average of 8.8% since the start of 2012: Birmingham Curzon Street (23.7%) and Birmingham (22.4%) have seen remarkable uplifts, while in Leeds (15.3%), Sheffield (15%) and Manchester (14.5%) rental growth has also outstripped the rest of the country.

There are, of course, many reasons why rental demand may be increasing in these cities. But all cities except Leeds and Sheffield were experiencing falling rents in 2011, and all bounced back quickly to significant growth following confirmation of the route.

Figure 1: HS2 rental map


HS2 rental map

Source: Landbay Rental Index, powered by MIAC

Crossrail 2

Much has been written about the impact on property prices and rents near the new Crossrail stations, but less so on its sibling, Crossrail 2.

The north-south line was only confirmed in March of last year and the first trains are not expected to run until 2033. However, since the scheme and route were announced in February 2013, there has been time for potential rental and property price movement, in the same way as we saw when Crossrail was finally confirmed.

The current route has six terminals, and four out of these six have seen rent increases above the national average of 8.02% since the route was announced. Shepperton (14%), New Southgate (11.8%), Hampton Court (9.7%), and the northernmost tip in Broxbourne (a staggering 25.3%), have all seen significant rental increases. Chessington South (7.5%) and Epsom (6.7%), perhaps because of the larger property types in the area, have seen less of an uplift.

Figure 2: Crossrail 2 rental map


Crossrail 2 rental map - minus title 2 landbay

Source: Landbay Rental Index, powered by MIAC

Current trends

There can be no doubt that 2016 will go down as one of the more volatile years in recent memory. Perhaps unsurprisingly, rental growth slowed over the course of the year. When you weigh up the raft of regulatory, political and economic challenges that the market experienced over the last year, 2016 looks like a year of transition for the sector.

Supply and demand remain the defining factors, shaping rents in the UK. The gap between the two has been widening since the 1970s. We need to build 300,000 additional households every year, but this is currently around twice the level of increase in supply. Until we see a transformative injection of house-building across tenures, growing demand will continue to swallow up the insufficient additions being made to the housing stock.

The availability of rental accommodation was given a temporary boost by a rush to complete transactions ahead of the rising stamp duty levy in April 2016 but, since then, purchases have been much more subdued, with landlords facing higher transaction costs.

Even six months later in September 2016, landlord borrowing was down 22% year-on-year. The upshot for the private rental sector is lower supply. The Royal Institution of Chartered Surveyors estimates that the chancellor’s tax grab on second homes has contributed to a shortfall of 1.8 million rental properties in the UK, a shortage that can only force up rents.

The recent housing white paper demonstrated a significant shift for a Conservative government away from a long-held policy stance in support of home-ownership. Finally, we are seeing some long overdue recognition of the role the private rented sector can play in the UK housing mix. Even so, schemes large enough to have a serious impact on the “broken” housing market will take time to build. So, this is not a problem that is going to disappear quickly.

Policy and regulatory initiatives will be the key drivers of rising rents in 2017. Last year’s increase in stamp duty levy has already reduced the purchase of buy-to-let properties, and January’s tighter controls from the Prudential Regulation Authority will reduce the availability of mortgages for landlords.

Changes to the treatment of mortgage interest coming through from April will also mean that landlords are likely to delay decisions. In dampening buy-to-let purchase activity, the government’s actions look set to constrain the supply of rental housing while demand continues to grow strongly.

Tenants will unfortunately have no choice but to compete for limited stock, leading Landbay to predict that average rents will continue to rise above the level of inflation in 2017. With inflation forecast to hit 2.7%, this means rents rising by at least 3% over the year.

About Landbay

Landbay deploys extensive risk mitigation measures to provide a platform for investors seeking sound returns, without exposing their money to more volatile markets. As a lender in the buy-to-let market, ensuring the quality of our loan book is paramount to our existence.

As a responsible lender, we perform detailed analysis of the property’s rental income to assess the affordability of the loan, with applicants required to demonstrate that they can service their mortgage repayments without relying solely on rental income.

Our processes and levels of scrutiny has produced a loan book worth more than £40 million, which has not experienced any arrears or suffered any defaults.