In this article, Experience Invest looks at why now is the time to invest in rental property.
The desire to own a home has been a deeply ingrained part of British culture for many years.
In countries such as Germany, a large proportion of the population rent for their entire lives, but in the UK, renting is generally seen as a short-term arrangement while people prepare to buy their first home.
However, there are signs this could be changing, owing to a number of factors that have become increasingly influential over the past decade or so. More and more people are facing huge barriers in their attempts to get on the housing ladder, making lifelong renting a likely prospect for many.
For those planning to invest in rental property, the current situation in the British housing market has a number of important repercussions. Perhaps the most significant of all is strong, consistent demand from tenants.
Here are some reasons why buying a house to rent out may provide a good yield on a rental property.
Home ownership challenges
Various factors have combined to make it particularly difficult for first-time buyers to purchase a property in the UK.
One of the biggest consequences of the financial crisis was a crackdown on the mortgage and buy to let mortgage market, with much stricter affordability requirements and credit checks introduced to avoid a repeat of the sub-prime mortgage crisis that originated in the US in 2007.
Furthermore, decades of consistent and at times rapid price growth have made homes unaffordable for many would-be buyers, particularly in London and parts of the south-east. This situation has been exacerbated by the slow average wage growth recorded in the UK since the financial crisis.
As a result, the rate of home ownership has plummeted from 73 per cent a decade ago to 63 per cent in 2018, the Independent reported earlier this year.
A report published by the Resolution Foundation think tank for the Intergenerational Commission in April 2018 pointed out that many young people are now heavily reliant on the private rented sector, and are likely to remain so for their entire lives.
The study noted that the number of households with children renting privately has tripled in recent years, while up to 16 per cent of millennials (those born between the early 1980s and mid-90s) are set to rent “from cradle to grave”.
According to the Resolution Foundation, there is a growing need for private rental sector reform to balance the needs and interests of tenants with the rights of landlords.
There have been signs of progress on this front, with government bodies and regulatory agencies taking action to enforce higher standards in rental properties.
Raising standards in the rental market
In the past four years, a number of new rules and pieces of legislation have been introduced in the UK to improve living standards and safety for private tenants.
The market has responded, with recent research from insurance firm AXA showing a clear trend of escalating standards in rental properties. The company’s findings revealed that:
• 81 per cent of rental homes now have a tenancy agreement (up from 73 per cent in 2014)
• 33 per cent have an Energy Performance Certificate (up from 19 per cent in 2014)
• 58 per cent have a current gas safety certificate (up from 30 per cent in 2014)
• 41 per cent have an inventory of contents (up from 36 per cent in 2014)
• 59 per cent have smoke alarms on each floor (up from 42 per cent in 2014)
• 34 per cent have carbon monoxide alarms (up from 27 per cent in 2014)
Gareth Howell, managing director of AXA Insurance, commented: “Landlords are getting more professional and we are seeing standards rise in British rentals, driven by legislation and the desire of landlords themselves.”
As more landlord invest in rental property, standards across the country’s rental sector are improving.
The trend of rising professionalism and higher standards in the UK’s private rental market is being partly driven by the growth of the build-to-rent sector. This is giving rise to new developments in high-demand locations that are purpose-built for renters.
Some build-to-rent properties are characterised by luxury facilities designed to appeal to young professionals looking for housing within commuting distance of major city centres.
However, there is also growing demand for high-quality rental property from key workers and young families on a modest income. Nick Whitten of specialist property firm JLL told the Telegraph that individuals from these demographics most commonly live on the periphery of regional city centres.
“We need more affordable build-to-rent homes designed with these tenants in mind,” he added.
The right conditions to invest in rental property
These trends provide an insight into why now could be the ideal time for buyers to invest in the UK private rental market.
With buying a home still a distant prospect for many, demand for rental property is high. Meanwhile, the supply of available homes to rent is falling at an “alarming rate”, according to recent figures from Home.co.uk.
The combination of strong demand and tight supply means owners of buy to let property can expect healthy and consistent returns from their investment.
Estate agents Your Move provided evidence of this in a report showing that private sector rents across England and Wales increased by 2.6 per cent in the 12 months to August 2018.
Regional trends showed rents rising across most of England but dropping in London, highlighting what investors could have to gain from buying in cities such as Liverpool, where entry prices are relatively low and demand for high-quality rental property is strong.
Martyn Alderton, national lettings director at Your Move, said: “Regionally, the lettings market remains strong, with demand in the core market of two- and three-bed properties remaining high. However, there’s no denying that challenges still remain in London, where pressure on rents has continued once again.”
Buyers looking to invest in rental property in the UK have more choice than ever before, not only in terms of location but also in the range of asset classes available. While residential housing will always be a good bet, segments such as student accommodation and hotel suites can also prove highly lucrative.
With so many attractive prospects on offer, it’s clear that UK property – and the private rental market in particular – is full of potential for ambitious investors and investing in rental property for beginners.
If you are looking to invest in rental property, contact Experience Invest today for information and advice on.