1.1million additional rental homes needed by 2016

By 2016 demand for private rented accommodation could reach one in five households, a new report from Savills and Rightmove forecasts.

This, they say, will require an additional 1.1million rental homes and £200 billion in investment, but only £50 billion of this is forecast to come from buy to let funding.

The report, Rental Britain, estimates that there are 4.8 million privately rented homes in Britain, up from just 2.5 million in 2002.

In London, private renting already accounts for 27% of all homes (900,000), having overtaken social renting in 2010, which now accounts for just 24% of tenure (783,000 homes).

Private renting is big business.  The report estimates that in 2011 Britons paid around £48 billion in rent to private landlords, both individual and institutional, and this is expected to rise to £70 billion within five years.

“Meeting the growing demand for private renting and the changing profile of tenant demand are perhaps the greatest challenges facing both the housing industry and policy makers,” says Lucian Cook, director of Savills residential research.

“The dynamics of supply and demand make a great case for investment in this sector, and rising rents and lower capital values have begun to attract private investors back into the market.  Investment returns relative to other asset classes will dictate the pace of investor entry to this sector.

Rising rents, constrained choice, affordability squeeze

Demand for private rented stock continues to rise.  The situation of first time buyers unable to access home ownership has been well-documented but they are now joined by a new generation of more mature renters, particularly families.

Rightmove estimates that ‘trapped renters’ now account for over half of the UK rental sector, and over a quarter of these are aged over 40.  Such renters will require a different type and size of rental product, catering for longer term lets.

Rent increases over the past year have averaged 5.2%.  Savills forecast 20% rental growth over the next 5 years (3.0% in 2012), while research from Rightmove indicates that almost two-thirds of tenants are expecting their rents to rise over the next year.

“This illustrates that the shortage of supply is creating severe upwards rental pressure,” says Miles Shipside, director of Rightmove.  “This could lead to an over-stretching of tenants’ finances or a ‘rental bubble’ in some locations.

“A shortage of supply is making the situation worse.  Our analysis shows that search activity has more than doubled over the last two years while stock available for rent is down by nearly 10 per cent, even though there has been no reduction in stock posted.”

The price of renting

Rental values vary enormously across the UK and regional averages can mask highly localised variations.

Proximity to London tends to equate to higher rents, with an average of £10,300 for a 2 bed property in the South East compared to £6,170 in the North East.  In London rents vary from a low of £9,980 per year in Bexley (SE London) to a high of £48,230 in Kensington and Chelsea.

And there is a real North/South divide which is shown by the rents across the 30 largest rental markets outside of London.

The five highest value locations (Elmbridge, Oxford, Brighton and Hove, Woking and Reading) are all located in the South East and have average rents over £10,000 a year.

The lowest value markets (Bradford, Kirklees, Warrington, Sheffield, Coventry) are all in the Midlands and North with average annual rents in the £5,700 to £6,700 range.

Where affordability is most stretched

Affordability appears most stretched in London (53%) and the South East (35%) compared to the most affordable, the East Midlands and North East (both at 25%).

 In locations where affordability is most stretched landlords will face a trade off between pushing for higher rents, thereby risking arrears and voids, or opting for a lower rental growth but a more secure income, and renters will face the possibility of long periods in shared accommodation to make renting an affordable necessity.

A shift to private renting may go against a nation’s emotional attachment to home ownership and long-established political aspirations for a nation of private sector home owners, but the market dynamic is running against this aspiration.  Rental Britain , the report concludes, is here to stay.



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