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Is the rental market still profitable?

Over recent years, governments have tightened lettings legislation and increased the tax burden on landlords. Add on the current cost-of-living crisis, high mortgage rates, and the Renters (Reform) Bill making its way through Parliament, some landlords are understandably beginning to wonder if it’s still worth having a rental property.

How are prices and rents doing?

Rental income figures are currently robust. For the 12 months to May this year, ONS data shows:

  • England     +4.7% (excl. London)
  • Wales     +5%
  • Scotland     +5.4%
  • N.Ireland     +10% (year to March 2023)

Data from Zoopla shows that rents for new lets increased by 10.4% in the year to April (9.1% excl. London).

Can this level of growth continue?

Average UK rents as a percentage of earnings are now at their highest level for more than a decade (28.3%, versus a 10-year average of 27%), nevertheless, more than half of renters are reporting that paying their rent is ‘somewhat’ or ‘very’ easy, with only 15% saying that it’s ‘very difficult’.

In addition, spending 30% of earnings is considered affordable, so ‘on average’ there is still some room for rents to rise more, but this is very location specific. As a result, we’re expecting rental growth to slow, but certainly not stop.

Looking at average property prices, although Zoopla reported in June that sellers were having to accept offers that were, on average, 3.8% below the original asking price, we have to view that in the context of the excellent house price growth that we’ve seen over the past few years. 

Rightmove has reported that asking prices went up by 6.3% in2021 and by another 5.6% in 2022, and their data for the last five years shows the average asking price has increased from just under £310,000 in June 2018 to around £375,000 in June 2023.

Even with prices predicted to fall by up to 5% by the end of 2023, most landlords should have seen good enough growth since before the pandemic for that not to be an issue.

In terms of rental income and capital appreciation, the figures look good. Our own Landlord Tracker revealed in June that landlords remain generally positive about the market: 68% plan to maintain their portfolio and 6% plan to expand it.

Is the Renters (Reform) Bill bad news for landlords?

Our view is that the vast majority of landlords, who already let in a very professional manner and look after their property and tenants well, shouldn’t be negatively affected as and when the Bill passes - assuming the contents doesn’t change much. This has been reinforced by our own landlord research – when asked ‘Will the bill change your approach to property investment?’, 40% said ‘no’, compared to33% who said ‘yes’ (27% are currently undecided).”

Things to check as a landlord

If you’re still unsure whether to hold on to your rental property or sell, here are 5things to check:

  1. Check  your cashflow. Put together a breakdown of all your ongoing expenditure and check that your property is still making money.
  2. Know the property’s current value. Check what capital growth you have had recently, as this may well compensate for any loss in income or monthly profit.
  3. Work out your break-even point based on mortgage rates reaching 7-8%. Calculate how much you would be paying if rates rose to 7-8% - would you still be making an acceptable level of profit or could you finance any losses until mortgage rates fall?    
  4. Could you refinance at a lower LTV? If your property has increased in value significantly since you last remortgaged, you may be able to secure a better interest rate by refinancing at a lower LTV.
  5. Is the property still meeting your investment objectives? For example, if your investment priority was capital growth so you could realise a lump sum for your retirement, as long as the property is still covering its own costs, there may be no pressure to sell.

Before making any decision, we’d recommend you speak to local property experts, such as the Leaders team in your local branch, who can help advise.


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