A new report from Shawbrook Bank has attempted to sum up the current state of the private rented sector and where it might be headed. The research involved detailed analysis of information from government departments and the Office for National Statistics (ONS), a survey of 1,000 private landlords and 1,000 tenants, and interviews with specialist property finance brokers.
As you might expect, much of the report focuses on how landlords and tenants have adapted to the coronavirus pandemic, but what’s interesting is that many of these changes could well end up being much longer-term.
More cooperation between landlords and tenants
44% of landlords included in the research reported that they had offered their tenants rent holidays or rent reductions, and tenants had taken them up on it about half the time. In most cases, landlords made these offers because they knew their tenants had been furloughed, made redundant or had other sudden money worries.
These measures came at a cost to landlords – often running well into the thousands – but as well as simply demonstrating decent behaviour at a time of national crisis, it also shows that an increasingly professional sector is able to see the bigger picture. Void time is much more expensive than a rent reduction or holiday, and successive packages of legislation continue to address the power imbalances in the rental system – giving tenants better protection and pushing administrative burdens and costs onto the landlord. In this context, landlords are coming to realise the value of building good working relationships with reliable, longer-term tenants.
The ‘race for space’ hits lettings too
Close to a third of landlords said that they'd had empty properties at some point during the pandemic. In some cases this was clearly a temporary trend, and it comes as no surprise that landlords running houses in multiple occupation (HMOs) were particularly hard hit, as students and younger service industry workers moved back in with their families to save money while their education or employment was on hold.
But those with smaller city-centre flats also felt the pinch, as home working more or less wiped out the commute. With everyone suddenly stuck at home, it was a no-brainer to switch the shoebox city centre flat for a bigger place in the suburbs with a garden and a home office – and of course tenants were able to make the move much more quickly and easily than homebuyers.
It’s too early to tell whether people will return to urban living as the cities go back to normal and some level of office working begins again – and landlords aren’t offloading their prime city centre properties just yet – but it was a wake-up call for those who had put all their eggs in one basket.
For many landlords – especially those with multiple properties – this has been their cue to diversify, with nearly 20% of portfolio landlords telling the researchers that they planned to buy a different kind of property. In common with most other homebuyers, landlords are now prioritising properties with gardens and off-street parking for their next purchases.
The knock-on effects of the sales boom
Some landlords saw the Stamp Duty holiday as a chance to expand their business, and nearly half (43%) of portfolio landlords with four or more rental properties took the opportunity to buy extra ones. Apart from this, though, the Stamp Duty holiday and subsequent scramble for property purchases may well have had longer-term implications for the private rented sector.
With annual price hikes of nearly 10% nationwide, the sales boom has driven up property values and reduced supply in a market that was already unaffordable for many first-time buyers. The latest English Housing Survey reported a rise in 35–44-year-olds living in rented accommodation over the past ten years, and the research from Shawbrook confirmed this – with half of the renters they interviewed saying that they expected to be renting for the rest of their lives.
While affordability was the main driver for this, Shawbrook Bank has suggested that the improvement in rental stock may also have played its part, since in some circumstances renting can allow people to live in better properties and nicer areas than their budget would otherwise allow. If this is genuinely the case, then it raises the question of whether landlords should be investing their spare cash in upgrades as well as additional properties.
Time for renovations?
Though rental growth in the last year has been fairly modest at 1.6%, more than half of the renters surveyed said that they'd be willing to pay more if the landlord renovated the property.
And it seems landlords are already getting wise to this, with six out of ten landlords in the Shawbrook survey saying they had refurbished their properties in the past year. These renovations encompassed the standard stuff like redecorating or renewing bathrooms and kitchens, but also included some new pandemic-related trends like converting loft spaces into extra rooms or installing a home office in the garden.
The pandemic has seen a much greater focus on life within the home – thanks to widespread lifestyle changes like increased home working and pet ownership – and buyers have shown themselves keen to commit a larger portion of their income to living in a nicer place. It makes sense that many tenants might also feel this way, and landlords will be looking to cater to this by improving the standard of their rental stock.
A run on the regions
While London properties remain the most expensive in the UK, they also produce relatively low rental yields compared to areas like the North West, Scotland and Yorkshire. This has led some landlords to consider investing in different areas of the country.
Interestingly, the increase in void time during the pandemic and the vast increase in domestic tourism have also got some landlords thinking – and some said they were now looking to invest in properties that could potentially double as holiday lets during any future void period.
Clearly this could have all kinds of effects on the wider sector, not all of them positive. Increased outside investment in short-term holiday rentals in more rural areas (where locals often have much lower salaries than visitors) could make property more unaffordable for the people who live there. Some popular holiday destinations already report a ‘two-tier’ rental market – where better properties are reserved for holiday lets and older, unrenovated properties are for local residents – and this could be exacerbated by greater investment from wealthier areas of the country. The flip-side is that outside investment has the potential to improve the overall condition of rural housing stock more quickly – particularly in terms of energy efficiency.
There’s also the challenge of trying to manage properties from afar. As any long-distance landlord will tell you, managing agents often need close supervision – particularly when things go wrong – and there’s a risk that issues may get out of hand more easily in properties with remote landlords. It’s not insurmountable, but if more landlords genuinely are running rental properties over a wider geographical area then it’s certainly a consideration for both landlords and tenants alike.
Ultimately the rental market is always fluid – governed by trends rather than any sort of permanent status quo – but it does look like some of the changes that came about during the pandemic could be around for a while.