For the past few years, there has been a succession of reports in the media about landlords selling up and quitting the industry. And it’s true that as legislation has been tightened and renters’ rights have been prioritised, it now takes more time, effort and knowledge to succeed as a landlord than it did in the past.
But for those who run their portfolio as a professional business and take the time to understand the ever-evolving needs of the market, or work with a qualified agent that takes care of these things for you, buy-to-let can still deliver great returns. Rather than being a sector going through a slump, as many headlines seem to suggest, we think it could actually be a great time to be a landlord.
Here are four good reasons why:
1. Demand is continuing to outstrip supply for many properties
For many years now, the private rented sector (PRS) has not been able to provide enough homes to satisfy the demand - and that’s from all tenant types, from young adults wanting to rent a room, to families looking for an unfurnished long-term let. The population is growing, and the private rented sector (PRS) isn’t.
In England and Wales (ONS data), the size of the PRS peaked in 2016/17 at 20.3% of all housing, with around 4.8m dwellings. The latest figures (for 2023) reveal the PRS now accounts for 18.8% of housing and the number of dwellings has barely changed over seven years.
During that time, 2016-2023, the population increased by almost 2.5 million or 4.25%, and a large proportion of those additional people require rented accommodation. In England alone, there are currently 1.3 million households on the waiting list for social housing – the highest figure since 2014 - and 139,000 people in Wales.
And while the social housing sector is failing to provide sufficient homes, the PRS is stepping in. Around a third of households renting from a private landlord are in receipt of Universal Credit that includes housing cost support.
The imbalance between supply and demand is good news for landlords as:
• Void periods between lets are likely to be minimal.
• Rents are likely to continue to increase well.
• Landlords also benefit from having a choice of which tenants to accept.
2. Rents are rising faster than the historic average
Every month for the past three years, average UK private rents have consistently risen at an annual rate of more than 5%, with an overall average of 7.4% annual growth (ONS) - far in excess of the historic average of around 2%. Although growth has slowed this year, in the 12 months to August, average UK rents still increased by 5.7%, up by 5.8% in England and 7.8% in Wales.
Zoopla’s latest rental market report, which tracks new lets, shows that rents have increased by 36% since 2020, while average house prices have only gone up by around 20%. That means yields and income returns should have improved for many landlords. Average yields across the UK are now around 6%, and higher in more affordable areas including the North East and Scotland.
3. Mortgage rates are falling
After high inflation caused a spike in interest rates in 2023 and many landlords coming off fixed deals found their repayments increasing significantly, the market has thankfully settled, and rates are now much closer to the long-term average of 4%-5%.
The Bank of England has already cut the base rate down to 4% throughout this year, and there is one more base rate review before the end of 2025. Capital Economics has forecast that it will reach 3% by the end of 2026.
So, if you’re buying in the next few months and can make the figures work with today’s rates, when you next come to refinance, you should be able to move to a better deal and see the benefit of your monthly repayments going down.
4. For most, capital growth is at least keeping up with the rate of inflation
As a landlord, inflation is one of the most important metrics to track - both for rental income and capital growth – to ensure the value of your investment profits doesn’t drop.
And the good news is that, although average house prices have been fairly stagnant over the past three years – only rising by 1.5%, according to Land Registry data – the increases we saw in the previous few years more than compensates for that slowdown.
In the five years from August 2018 to August 2022:
• The average UK house price rose by £51,506 / 24% / 4.8% per annum
• Terraced houses rose on average by £47,292 / 27% / 5.4% per annum
• Inflation rose by an average of 3.5% per annum
And over the last decade:
• The average UK house price rose by £83,682 / 45% / 4.5% per annum
• Terraced houses rose on average by £75,137 / 49.5% / 4.95% per annum
• Inflation rose by an average of 3.9% per annum
With the value of the average property rising consistently on a par or above the rate of inflation in most areas, that means the value of landlords’ investments is increasing in real terms, providing equity gains.
Although that’s just an average and not every property will be rising in value well, it does mean that if you have bought in an area of high growth, your equity growth should be beating the figures above.
To get the best capital returns, it’s important to carefully research an area before buying, to make sure the economic and demographic fundaments for growth are there.
Looking for a letting agent that can help you achieve the best returns? Get in touch with your local branch for a no-obligation chat.
