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Rental Market Update - Past Market Performance

publication date: May 28, 2012
 | 
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books
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Rental Market Update


2012 is showing signs, as predicted last year, of rents starting to stabilise. Rent rises and falls are influenced by supply and demand in the local market so rents can be going up, down or staying the same within very small areas. Overall though, demand in most areas is increasing as people choose or have to live in rented accommodation as they can't or don't want to get on the housing ladder. It is also apparent that rent rises aren't sustainable unless wages are rising, so unlike the property buying market, a key factor of rent affordability and changes is income levels.

From a supply perspective, on the one hand there are fewer properties available as tenants stay renting for longer and this restricts the supply of rental property coming onto the market. On the other hand, increasing returns from buy to let through lower house prices and higher rents has led to an increase in supply over the last six months, typically from existing landlords increasing their portfolios and from those retiring and choosing to invest their funds in property rather than the finance markets.

The future of buy to let investment remains bright for those who choose their properties carefully, and appreciate success is down to financial management and getting the legals and tax implications of investing in a property portfolio correct. For those that just ‘buy a property' and ‘do deals', success will tend to be more by luck than judgement over the coming years and they are likely to suffer from finance, legal and tax issues when they try to remortgage or cash in their portfolio. Some amateur landlords may even end up losing everything they invested if they haven't understood the key elements to a successful buy to let portfolio.

Past Rental Market Performance


The two main industry measures for past market performance are Paragon Mortgages and Association of Residential Letting Agents (ARLA)

For the rental market from a landlord's perspective, key measures include capital growth of the property they own (their asset) coupled with rental income, which in an ideal world would be higher than any costs incurred. Both of these indices measure these returns.

Q1 2004Q1 2011  Q2 2011Q3 2011Q4 2011
Yield (mortgaged investment)
ARLA5.1%5.2%5%5.1%4.9%
Paragon7.2%6.2%6.2%6.1%5.9%
xx
Annualised Capital Growth
ARLA (over 5 year period)8.55% 5.21%5.66%5.66%5.66%
Paragon11.60%N/AN/AN/AN/A
xx
Combined Annual Returns         
ARLA* 11% to 23%8.5-21.5%9-22%9% to 22%9-21.5%
Paragon19.45%N/AN/AN/AN/A
                                                                                                  
*Lower rates are for cash invested, higher rates for mortgaged properties

From a landlord's perspective, recent research from Paragon has suggested that from the start of 2012, professional landlords have increased the size of their portfolio by 1.8 properties to an average of 10.8 properties. According to Paragon, terraced homes remain the most popular purchase, followed by flats and semi-detached homes.

With the property price market performing at different levels across the UK, (some areas rising, some falling and some stable), landlords who are purchasing now can clearly either spot a bargain in their area to purchase or see the market has bottomed out and as such, have decided to add a few extra properties while they can find a good deal.

Although there was a small decline in yield according to both Paragon and ARLA, latest Q1 figures from Paragon suggest gross income yields have reversed and are now back to 6.2%, with the highest yield achieved in the North West and North East of the UK and the lowest in East and West Midlands and Scotland, which only achieved around 5.5%.

Also read - Current Rental Market and Future Rental Market updates


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