Rents Will Soar for Three Years in the UK Property Market
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Could Buy-to-Let Investors Benefit From the Current Rental Market?
Analysis indicates tenants will face three more years of increasing rents despite a cooling property market. The Resolution Foundation forecasts that rents will climb nearly twice as fast as earnings until 2027.
The Foundation explains that although the rapid rise in new tenancy costs is slowing down, existing renters who haven’t experienced rent hikes will soon be impacted. This is due to sluggish wage growth, landlords raising prices, and a shortage of new housing.
According to the think tank, new and existing rental agreements may grow by 13% over the next three years. This rate is nearly double the 7.5% growth in average earnings predicted by the Office for Budget Responsibility.
Since January 2022, the rent for new tenants has already surged by 18%. However, this significant increase has yet to affect the private rental sector fully.
This should be a good read for buy-to-let landlords who are looking for a reason to invest in buy-to-let property in the near future.
Let’s look at the news in more detail and see if it could inform your buy-to-let business plan.
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Rental Costs Outpace Wages; Number of Renters Increasing
Senior economist at the Resolution Foundation, Cara Pacitti, said: “Millions of families agreeing new tenancies across Britain have faced surging rents in recent years, as we have emerged from the pandemic.
“Those rises for new tenancies are starting to slow, but how much renters actually pay will continue to outgrow how much they earn for some years to come as those not yet exposed to higher prices are hit.”
The HomeLet Rental Index reports that the average rent in the UK stands at £1,273, marking a 33% increase compared to pre-pandemic levels in February 2020.
The Resolution Foundation noted a nearly doubled number of families renting since the late 1990s, soaring from 11% to 20%. Additionally, more individuals are opting for renting beyond their 20s.
With figures like this, it is no surprise that we have seen a significant rise in tenant demand over the last year, mainly due to supply and demand imbalances and people being put off buying due to high inflation and interest rates.
Discover More: Make sure you understand the cost of letting a property and the intricacies of buying more than one property with some of our helpful guides.
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Rental Market Offers Opportunities to Savvy Landlords
While some landlords are exiting the property sector due to current conditions, the rental market offers potentially lucrative investment opportunities if you know where to look.
For instance, landlords need to understand where people want to rent properties. If you cater to young professionals and students, you’ll want to purchase properties in the city centre or near university campuses.
On the same topic, landlords should consider rental markets in cities with good economies and graduate retention rates, as these are areas where people are more likely to look for accommodation. For example, Liverpool has a strong graduate retention rate from its major universities and is also the fastest-growing economy in the UK (as per The Data City).
By owning a property in these areas, you’ll be more likely to see high tenant demand and limit your chances of going through a substantial void period, which is much better for your long-term investment goals.
It also helps if you purchase properties in areas with strong rental yields. If we take Liverpool as an example, the average rental yield is 7.44%, while the average property price is around £129,000 (both according to Zoopla). If rental growth is set to thrive for the next few years, you may see those yields grow in the near future.
It is also worth mentioning that Liverpool, as part of the North West, is expected to see 20.2% capital growth over the next few years. As such, if you’re looking to buy property in the area, you’ll see the value of your property rise, as well as the potential rental yields.
With property prices stagnating (per the latest Halifax HPI), if you buy property in 2024, you may be able to maximise those capital gains and rental yields.
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Consider Off-Plan Investment to Maximise Rental Returns & Capital Growth
Consider investing in off-plan property if you want to save money and see the most substantial capital growth.
These types of properties are usually available at a discounted rate because you purchase them from the developer – usually through a property investment company – before completion.
In addition, they will often have good EPC ratings, exist in advantageous areas for tenants and potentially have additional benefits like on-site gyms and concierge service, which appeal to tenants further.
If you want to maximise rental returns, you may want to consider off-plan investment. Why not read about the some of the best ways to invest in 100k within the property sector with our free guide.
For more information on UK buy-to-let, check out some of our area guides, such as:
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