Landlords enjoy more stability and better profits as rental yields grow

Could rental market outperform house price growth in UK?

As demand in the rental market continues to push up prices, landlords could see yields climb more quickly than the capital growth of their properties.

Tenants in the UK are now paying more than ever to rent a property, with many listings seeing competition between multiple tenants amid a shortage of homes. Between August and September this year, rents climbed by 1.4% to an average of £1,159 per calendar month.

According to the latest rental market index from HomeLet, rents rose in every area of the UK in September, with London seeing the biggest monthly increase of 2.5% to £1,945. Excluding London, prices rose by 7.7% between September 2021 and 2022, to £961 per month.

At the moment, agents are reporting a significant shortfall in many areas between the number of homes available in the rental market and the number of tenants seeking homes, which is one factor pushing rents up.

The increase of higher quality rental homes, though, is also having an effect. The build-to-rent market in particular has been booming in recent years, with expectations of accelerating growth in the coming years. With more to offer tenants, and a focus on long-term renting, they often command higher rental prices.

Predictions for the sector

One forecast by Hamptons in September pointed to the rental market potentially overtaking the housing market in terms of price rises. It predicted that rental growth could hit 6% this year, according to its own measures, greater than the growth seen in house prices.

However, the agency also expects this soaring rental growth to stabilise in 2023, 2024 and 2025, partly due to the squeeze in tenants’ finances due to the cost of living crisis, which could reduce competition. According to its forecast, landlords with lower yields in London and the south could feel this more than in other areas.

Aneisha Beveridge, head of research at Hamptons, points out that, in the long-term, the market will return to its “traditional cycle” from 2025, although house price growth may be at a slower pace than we have seen recently.

Rental market by region

HomeLet’s rental index offers a regional breakdown of rent rises across the country, demonstrating how the various markets are performing in the current climate.

It reveals that after Greater London, the north east saw the largest monthly increase in its rental market prices, up by 2.4% to £609 per month. The area is also home to the cheapest monthly rents, leaving more room for growth as demand heightens.

Other rental hotspot areas include the West Midlands, where rents went up by 1.4% between August and September to £858 per calendar month. The north west also saw strong growth of 1.1% during the same time period, bringing the average monthly rent to £911 in the area.

On an annual basis, the north west has seen rents climb by 9.8%, ahead of the UK average of 9.2%. The region has also been home to some of the highest house price rises, and with forecasts to be the leading region in terms of both its rental and housing markets, it is attracting growing levels of investment.

Demand remains high

The latest report from Propertymark has revealed the current level of demand in the rental market, as reported by its agency member branches.

It showed that while the average number of tenants registered per member branch had reached a new high in August of 141, the number of available properties listed had not increased in the last three months. This is further evidence of an upwards pressure on rents.

The level of tenants now registered as seeking homes is 188% higher than it was in December last year. Meanwhile, more than three quarters (77%) of member agents had recorded monthly rental price increases in August.

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