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Could demand for flats boom as renters seek smaller homes?

The persistent shortage of rental homes is pushing the market upwards in terms of prices and tenant demand, and flats are proving a more enticing option than ever amid the energy crisis.

Two-bedroom flats are increasingly the top property choice for tenants in the UK, according to the latest Zoopla Rental Market Report for Q3 2022, which found demand for this property type holds a 36% market share.

The data also revealed that rental costs across all property types have risen by 12.3% over the past 12 months, the highest annual rise reported so far and a sign that the lack of rental homes available compared with the number of prospective tenants continues to affect the market.

While the cost of living crisis in general could be encouraging some renters to seek smaller properties, causing a peak in interest towards flats and apartments as tenants look for cheaper rents compared to houses, soaring energy bills are also a factor, according to Zoopla.

The report notes that the gas needed to heat a purpose-built flat is 40% less than that which is needed for a three-bedroom house, and this is something that the country’s tenants could increasingly be factoring in – and something for buy-to-let landlords and property investors to bear in mind.

Flats in cities garnering interest

One area that Zoopla’s report pinpoints as seeing particularly strong performance is in city centre flats. It highlights the fact that urban areas have had average rental growth of 10.5% over the past year on average, compared with 8.5% in rural markets, indicating stronger city demand.

The jobs market is a major driver behind this “return” to the city, particularly as industries continue to recover post-Covid, with the report adding: “Higher levels of new-build supply concentrated around city centres is also becoming more appealing to renters looking for smaller homes with lower running costs.”

Over the course of 2021 and 2022, Zoopla has discovered a rising trend towards more tenants seeking one and two-bedroom flats, while those seeking two and three-bedroom houses has diminished. The trend has been particularly apparent recently.

While some of this may be down to the supply and demand imbalance, it appears costs are a major factor. New-build rental flats come out top when it comes to lower running costs.

The report adds: “A one-bed home requires less than half the gas that is needed for a 3-bed home, while D and E rated homes require 25% and 48% more gas, compared to a C rated home.”

Better value in the north

It is no secret that living costs are generally cheaper in the north and the Midlands than they are in London and the south east. However, wages also tend to be lower away from the capital.

But Zoopla points out that as far as rental affordability goes – the level of rent being paid in relation to the average household income – private renters in the north and the Midlands report that they find rent easier to cover than those living in the south.

Zoopla adds: “Together with our own data on rental affordability, we believe rents have further headroom for above-average growth in the less expensive areas of the UK.”

From a property investment perspective, therefore, it is vital to not only weigh up the cost of property alongside the rental income, but also to consider this heightened tenant demand and the future prospects of both rental rises and capital appreciation in a market that tenants find generally more affordable.

Looking to the future, Zoopla’s report does not forecast any major changes on the horizon. While rental growth may begin to slow over the next quarter and into 2023, it does not envisage any drastic drops, because the supply-demand imbalance will continue to prevail.

BuyAssociation has a range of property investment opportunities available, including new-build flats in the north and the Midlands. Get in touch for more information.

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