London rents react to affordability issues as investment structure evolves
There was a plethora of property investment news over the past week:
- Rents in London recently reached their least affordable for ten years.
- Unsurprisingly, rents have fallen in the capital, as landlords react to retain their best tenants.
- Meanwhile, and as we predicted more than a year ago, the number of investment property purchases by limited companies has surpassed the number by individual landlords.
London rents are falling, and pulling the UK average down
Figures from HomeLet show a second month of rental price declines, with UK rents falling by an average of 0.3% between June 2016 and June 2017. The UK average rent is now £908 per month, compared to £910 per month last year.
The severest falls were seen in London, where rental prices have decreased by an average of 2.6% year-on-year. However, this follows a period in which London rents rose faster than anywhere else in the UK. In June 2016, London rents had increased by 7.1% from June 2015. Therefore, over two years, London landlords have benefited from a rental increase averaging around 2% per year – above the average rate of inflation during that time.
London rents are at their least affordable for ten years
The relative cost of renting has reached a ten-year high, according to data from Hometrack. Increased demand, prompted by strong growth in employment and inward migration (from the UK as well as abroad), and difficulty for first-time buyers to get mortgages have combined to push up rental values by 45% since 2007.
Rental growth averaging 4.5% per annum has far outpaced earnings growth since 2013. It isn’t the case in the rest of the UK, where rental growth has broadly tracked earnings growth.
More property investors are investing using limited companies
Data from mortgages for business shows that lending to limited companies set up for investing in buy-to-let property has soared in the last 12 months. It now surpasses lending to individual buy-to-let property investors. Nearly three-quarters of buy-to-let completions were made by limited companies in the second quarter, which is also benefiting from lower three and five-year fixed rates because of competition for their business.
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After 12 months during which the rate of rental price increase has declined, both May and June’s annual rise figure held steady at -0.3%. It would indicate that rental prices are stabilising. The overall figure for the UK is highly polarised on London rents, and disregarding these, rental prices across the UK rose by 0.5%.
It is always the case that geographical areas move differently. Rental prices in the East Midlands are 2.8% higher than they were a year ago. In the North East, they are 3.1% lower.
Landlords have reacted to tenant affordability issues. Some of these investors will have taken a small cut in rental income on the chin. It appears that much more will have acted to reduce the tax burden by investing in property as limited companies. Investing via a limited company structure also makes it easier for many to obtain mortgage financing (and lower mortgage rates). It could give them more leeway to reduce rents and retain profitability.
However, the affordability issue in London may be overstated. What the Hometrack analysis doesn’t account for is the higher proportion of shared rental accommodation, in which multiple incomes support the rent paid. At a national level, tenants pay around a third of their income on rent. In homes that are shared (particularly popular in inner London), this percentage may be somewhat smaller.
For those investors seeking rental growth opportunity, the best prospects for rental growth in the short to medium term may be provided by investment in the Midlands and northern regions, where rental affordability is the best it has been for a decade, and in commuter towns as London, residents move out of the capital.
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