Rising Rents Boost 2023 Buy to Let Investment Prospects
Increasing rents for UK buy to let properties show little sign of stopping. How much have rents increased, what are the latest regional trends landlords need to know and will rents stop rising anytime soon?
How much have UK rents increased?
According to the latest available data from the Office for Nationals Statistics (ONS), rents paid by tenants increased by 4% in the 12 months to November 2022 and 4.2% when excluding London. This surpasses a 3.8% rise in the 12 months to October and is the most significant annual increase since the ONS started tracking in January 2016.
Hamptons Monthly Lettings Index from the same period found that achieved UK rents rose 7.9% for new lets, demonstrating that landlords are utilising new tenancy agreements and buy to let properties to increase rent rates and recoup yield they may have lost amidst rising interest rates.
Zoopla’s report also supports findings that new tenancies are driving rent inflation. While the report found rental growth in the 12 months to October 2022 to be 12.1%, ‘for the 75% of renters that do not move each year, rental increases are much lower at 3.8%’. They note that to avoid rental increases, more tenants stay put longer. Of course, this is fantastic for landlords in terms of preventing void periods and maintaining a consistent income, but it means many aren’t seeing the reported rental growth in their bank balances.
Where are rents rising the most?
Data from the ONS indicates that Scotland is leading the charge in rental increases, at 4.4% in the year to November 2022. England is second, at 3.9%, and Wales falls behind at 3.1%.
Regionally, the East Midlands storms ahead of the UK average at 5.1%. The North West, South West and Yorkshire and The Humber all exceed the 4% UK average. Perhaps surprisingly, the North East and London are joint bottom with just a 3.5% increase.
Interestingly, Hamptons’ broader regional data on new lets shows that London is making significant ground, having lagged post-pandemic. Rental growth for newly let properties increased by 11.1%, with Inner London achieving 20.4% growth. This means average rents in London now exceed £2,000 per month. Again, the Midlands and The North also do well here, both showing 9.9% growth, with average rents now above £800 per month.
Zoopla’s latest report found that ‘the largest UK cities are registering the fastest growth rates’, with London leading the way with 17% rental inflation (October 2022). Manchester isn’t far behind at 15.6%, Birmingham at 12.3%, Glasgow at 14.1%, Bristol at 12.9% and Sheffield at 12.4%. The report suggests that high demand vs low supply, high employment opportunities and large student populations contribute to their success. While Hull, York, Oxford and Leicester had below 8% rental inflation, all UK cities are significantly above the five-year rental inflation average.
How does the number of bedrooms impact rental growth?
Hamptons’ data on new lets shows that one-bedroom properties are making a significant comeback after falling out of favour with renters during the pandemic. UK rental growth for these properties was 11% in the 12 months to November 2022, with two-bedroom properties increasing by 9%. Interestingly, the data shows three-bedroom property rental growth softening slightly to 8%. This may be due to slightly less demand for these larger properties due to the rising cost of energy. Ultimately, smaller properties usually cost less to run!
Why are UK rents rising?
While higher mortgage interest rates may have pinched your property investment yields, they’ve significantly impacted first-time buyers’ ability to purchase due to affordability. Consequently, many are delaying purchase plans while they continue to save, meaning demand for rental homes is increasing.
Zoopla’s latest report found that rental demand was 46% above the five-year average, while the supply of available properties is 38% down. This complete imbalance pushes rents up and will seemingly continue to do so for the foreseeable. This is especially good news for landlords purchasing new investment property in 2023, as property values are likely to soften, meaning increased yields.
When will UK rent rates stop rising?
The reality is unless there’s a sudden, significant injection of rental properties into the PRS, the supply and demand imbalance will continue. Increased buy to let mortgage interest rates and ongoing legislation uncertainty mean that some landlords (new and existing) are hesitant to invest. However, the aforementioned softening property prices will likely encourage a fair few back with deals too good to miss!
The fact is, rental growth is significantly ahead of income growth and is currently at the highest level for 10 years. Tenants spend, on average, 35% of their income on rent; ultimately, this growth level is not sustainable. However, that doesn’t mean to say rents will suddenly crash, but the experts at Zoopla anticipate growth will slow to 5% over 2023.
In short, rents are unlikely to stop rising but will probably stop growing as fast. For those who take the opportunity of a cooling housing market, investors will likely benefit from more substantial yields than we’ve recently seen, on top of continued capital growth, as property prices bounce back over the next five years.
What’s next?
Wherever you are in your property investment journey, our experts are here to help. Talk to us today to find out how much you could borrow on a new buy to let purchase or maximise your cashflow with the right remortgage deal. Call us on 0345 345 6788 or submit an enquiry here.
18th January 2023
