Gulf between rental demand and supply is widest on record, say Rightmove

Sharp surge in rental search activity results in expanding gulf between supply and demand, report Rightmove.

Related topics:  Specialist Lending
Millie Dyson
5th March 2012
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Rightmove’s latest Consumer Rental Forecast shows that the gulf between rental demand , as measured by search activity, and supply, measured by available properties for rent, is at the widest point Rightmove has ever measured. Search activity keeps setting new records having more than doubled over the last two years whilst available stock for rent is down by nearly 10%.

The rate at which properties are added and removed from the Rightmove site has not materially changed over this period. As a consequence, the upwards rental pressure Rightmove has been reporting since the beginning of 2010 has reached new heights with 63% of tenants forecasting that their rents will be higher still in 12 months’ time.

This is up from 53% last quarter, a very large increase in such a short space of time. These stark statistics clearly illustrate the extent of the growing accommodation crisis in Britain, as well as the investment opportunities for landlords to help alleviate it.

Miles Shipside, director of Rightmove comments:

"Attention investor landlords: now, more than ever, your country needs you! As well as potentially earning a good return on your investment compared to other asset classes, private landlords can help provide a long-term rented roof over a grateful tenant’s head.

"While hard-nosed rental investors may not welcome the appearance of too many new landlords if it results in downward pressure on rents, if you invest wisely it seems to be a genuine win-win of good rental yields for landlords and a secure stream of tenants paying a fair return.”

Without a significant increase in rental supply, there is the danger of a rental bubble in some parts of the country. Tenants could end up paying too high a percentage of their disposable income on rent, and landlords could end up with arrears and voids rather than a secure long-term income-producing tenant.

Shipside adds:

“Six out of ten tenants forecast that their rents will be higher in 12 months’ time. This might be music to some landlords’ ears, but in reality it is the sound of many tenants crying for help! In areas where rents are close to their affordability ceiling landlords should be prepared listen and avoid a situation which results in voids and arrears.”

Housing demand hotspots?

Existing and prospective investors should do their research on the ‘housing demand hotspots’, locations that could offer some of the better potential investment opportunities. These are likely to include areas where tenants state the balance of power is most in favour of landlords and area where search activity is highest and yields most attractive.

"Just as demand for rental property is on the increase, demand for good advice backed up by reliable market evidence will also be on the rise from investors looking to make informed investment decisions.

In particular, lettings agents are taking differing views on the yield they require. They report some investors are happy with a 5% rental return on the cost of buying the property, whilst others are willing to take more risks in looking for more aggressive returns towards 10% if there is little prospect of growth in capital values.

Shipside comments:

“If you’ve got money sitting in the bank and are looking to diversify into other asset classes then one option is to help out those that cannot buy but are desperately searching for a place to call home. However, budding landlords should take care as some investor clubs took advantage of inexperienced investors and irresponsible buy-to-let lending prior to the credit crunch. After that pain we now need a saner approach where those contemplating investing use all the research tools available and take advice from reputable lettings agents on local long-term housing demand trends.

"We will need the rented sector to be a mainstay of future housing supply, but where and what you buy must be based on thorough analysis of future demand rather than just jumping in to satisfy the current need.

Tenants-for-life?

Most investors in an asset will be reassured if there is long-term consumer demand for their product. If one believes that existing tenants and those who will form new households in the future will never again be able to buy their first home in the same numbers that we saw in the 2000 to 2007 era, then the rental sector provides such a long-term investment option.

In Rightmove’s latest survey, 55% identify themselves as ‘trapped renters’ who would like to buy but cannot afford to. While their desire is to buy, what is the reality? 22% inform us that they have been in their current property for five years or longer, and 37% expect to be renting for three years or longer. This provides clear evidence of sustainable demand in the rental sector.

The concept of ‘tenants-for-life’ may not be something that many existing or future renters are ready or willing to accept, but there is evidence that it is gaining momentum. Whilst our statistics show that the average age of those intending to buy for the first time in the next 12 months is 32, six out of ten of all current tenants are now aged 34 or over.

Shipside observes:

“Unless something changes radically to reduce property prices, reduce personal debt and heighten borrowing power, many are already on the road towards being life-long tenants. It is up to those that are enlightened in the rental sector to provide investors with a hassle-free investment model, and provide tenants with a quality selection of property to let to suit their life cycle and lifestyle needs”.
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