When we look at the market on Q4 2019 from a supply-demand perspective, we can see that this rental growth acceleration can be attributed to continued rising demand in key locations coupled with a lack of rental supply.
While tightening regulations for private and portfolio landlords and a raft of tax changes caused investment into private rented housing to fall and supply dip slightly, 2019 saw an 8% increase in rental demand. In addition, we have seen a 4% contraction in the supply of homes available to rent over the last two years, meaning the supply-demand model is still balanced in favour of property investors seeking to take advantage of emerging opportunities.
This upward pressure on rental values was welcome news for the UK rental market despite the fact that rental growth in 2019 fell short of the growth in average earnings of +3.8%. However, this remains consistent with historic data as rental growth has run below the annual growth in average earnings for the past three years.
High Flyers and Poor Performance
When looking at which locations achieved the highest annual rental growth for Q4 2019, we can see that Nottingham, Bristol, York, Preston and Stoke take the top five spots. York, Bristol and Nottingham all registering rental growth over 5% per annum, more than double the UK average of 2.6%.
At the other end of the scale, Southend, Newcastle, Coventry, Middlesbrough and Aberdeen recorded the lowest annual rental growth for the quarter. The last three locations actually recorded falling rents in comparison to last year with Aberdeen at -2.8%, Middlesbrough at -1.1% and Coventry at -0.1%.
We can examine these developments through a wider lens as Middlesbrough’s poor performance acts as a microcosm for some locations in the North East of England (outside of the Northern Powerhouse) where poor career opportunities and growth along with accessible opportunities for home ownership have capped rental demand.
What’s Happening in London?
In the UK capital, rental growth hit a four-year high at +2.8%, which is a positive development following poor rental prices in the years prior due to a drop in demand. Rental supply has dwindled in London, falling by 19% since 2017 due to a lack of landlord investment as well as renters staying put for longer periods, pushing rental growth. However, things are kept in check due to a lack of flexibility with rental affordability in comparison to other UK cities.
There is certainly an issue of over-centralisation in London as evidenced by a report from IPPR that shows that London and the South East accounted for 47% of new jobs in England to 2019 while the North East of England saw only a 1% increase in net jobs (38,727). This will continue to have a knock-on effect on the rental market in two aspects.
On the one hand, many people are choosing to leave London due to high house prices, increasing rents, and poor affordability – the Northern Powerhouse is a prime location for those seeking quality of life and good career opportunities without the high price tag of living in London. On the flip side, the capital still retains a far higher quality and quantity of career prospects, which in turns supports the rental market as many choose to stay in the capital and further their careers, choosing to live in a rental property rather than buy or rent in a more affordable location.
The Rise of Build to Rent
Build to rent – properties that are developed for the sole purpose of renting out – is gaining more and more traction all the time to play a key role in rental market developments.
Four major schemes started construction in the final quarter of 2019, equivalent to a total of around 1440 homes, while recent research from Savills shows there are now more than 150,000 build-to-rent homes in the pipeline.
Most of these schemes are being developed as part of major regeneration projects in key cities including Leeds. As more and more regeneration projects come to fruition across the key northern towns and cities, we can expect to see a major boost to UK rentals with a higher quality and supply of property coming to the market in response to increasing demand.
Across 2019 as a whole, rental growth was driven by higher wages and poor supply but we need to keep an eye on the reduced wage growth to stay ahead of the investment game. Taking a step back to look at the rental market over the last decade, we can see that average rents have grown from £700 per month to £886 today, an increase of 27%, in line with the growth in average earnings over the same period (26%). The highest growth city over the decade is Edinburgh, where rents have grown by 50% (an annual average of 4.2%), followed by Bristol (45%) and Coventry (45%).
Conditions in the UK rental market remain positive and Q4 2019 did not see any unusual trends. Zoopla has predicted a 3.5% growth in rental prices over 2020 which is another boost for landlords and institutional property investors interested in the rental market. Now that we have left the EU, we can expect to see the rental market boosted further as the element of uncertainty has been taken away. While many had previously chosen to bide their time until a final decision on Brexit was made, we can now expect investors, homeowners and renters to be more confident about making decisions and the market to exhibit consistent and positive behaviours.