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Recent research by Savills points to more landlords being priced out of BTL

Rent increases - moving in

Even more buy-to-let (BTL) landlords could be joining the ranks of those who have already left the sector. This, as rents hit record highs in what Savills – as reported by The Investor’s Chronicle -  describe as an ‘affordability ceiling’

Unprecedented rental growth

Currently the residential rental market in the UK is experiencing an unprecedented surge in rent levels. According to the leading estate agency Savills, rental prices are set to have increased by 9.5% in 2023, followed by an additional 6% in 2024.

This rate of growth is being attributed to several unique factors in the general economy and the housing market, including rampant wage inflation, a shortage in the supply of rental housing, and landlords passing on to tenants the costs associated with high mortgage interest rates.

Growth will slow down

This article suggests that while these factors have been driving this remarkable pace of rental price growth in recent years, they will also contribute to a highly unusual and potentially unsustainable market dynamic: a significant slowdown in rental price growth from 2025 onwards.

Savills thinks that the market will approach an "affordability ceiling" where these rent rises will be no longer sustainable and many buy-to-let landlords, especially those burdened with high gearing and debt, will potentially be forced to sell up.

The bubble being experienced now in residential rents is likely to come back down to earth as these rent levels prove to be unaffordable for tenants. Savills is predicting that by 2025 growth will slow to 3.5 per cent and continue to slide in the following three years to 2028.

New data provided by the HomeLet rental index shows that tenants are spending an average of one-third of their income on rent, and in some cities and particularly in London the situation is reaching crisis levels with tenants unable to find suitable accommodation at a price they can afford, in some cases with rents near 50 per cent of earnings.

Rents reaching an affordability ceiling

Lucian Cook, the head of residential research at Savills, says in his report that these unprecedented rent levels are pushing the market dangerously close to its affordability ceiling. But he thinks there will be some time delay before reaching the ceiling, which will have a substantial impact on actual rent levels.

Mr Cook says that, with the supply-demand imbalance as it is, there will still be enough renters to pay these inflated prices. He foresees a time coming where with higher rents, mortgages will become a more affordable option again, as interest rates fall.

On current thinking this should occur from 2025 onwards when the reducing inflation rate means a lowering of the bank rate and the first mortgage interest rate cuts are expected to come through. It is also possible, given more recent economic developments, these changes could begin even earlier.

More will enter the buyers’ market

As parents realise the devastating effect that rent levels are having on their offspring, consuming an increasingly a bigger and bigger proportion of their salaries, and with house prices on the wane, they may be persuaded to fork out more money by way of deposits to help them buy.

The unsustainably of these levels of rent rises, outpacing wage rises by a significant degree, due to the supply-demand unbalance in the rental market, is very concerning thinks Mr Cook. It will most likely lead to a shift in the dynamics of the private rented sector.

As the effects feed through the system the projected decline in rental growth starting from 2025 onwards is likely to create a division in the buy-to-let market. This Cook suggests will lead to those highly leveraged landlords being forced to sell because they won’t be able to raise rents sufficiently to cover their mortgage payments. There are already signs that some residential landlords are feeling the squeeze, demonstrated by the doubling of mortgage arrears from over the last 12 months, reported by some lenders.

Cash-rich landlords will be at an advantage

Meanwhile, for landlords with low mortgage debt, and those with no mortgage, their situations will be less critical, being far less dependent on continuing rental growth. For these landlords and those large landlords with deeper pockets operating substantial portfolios, not to mention the institutional landlords operating in the build-to-rent sector, there will be opportunities opening up as interest rates decline. Cook sees build-to-rent landlords such as Grainger taking advantage of this situation over the coming years.

Cook thinks that a tougher operating environment due to higher interest rates, an unfriendly tax regime and more regulations on the way, will mean that highly leveraged small-scale buy-to-let landlords will be the ones to suffer. The cash-rich, well funded operators will have more flexibility and will be less concerned about the new regulations included in the Renters Reform Bill.

These portfolio landlords are in a position to diversify tenant risk across multiple properties and the fact that, according to Zoopla, around 40 percent of landlords have no borrowings, with another 30 per cent whose mortgages have loan-to-value ratios less than 50 per cent, gives them a welcome financial cushion.

Rents vary widely across the regions

The Savills' rental forecast, as reported by The IC, gives a varying picture across the UK regions, quite different returns for buy-to-let landlords over the next few years: From 2024 to 2028, thinks Savills, there will be a cumulative increase of just over 20 per cent in rents in the South West and the South East of England, while Yorkshire & The Humber and the North East will be around 15 per cent. This difference is reflective of the much higher wages and lower rental supply in the southern regions.

In London, where both rental demand and wage growth are high, Savills is forecasting an 18 per cent plus growth in rents from 2024 to 2028, with the growth level mitigated somewhat by an increasing supply of rental housing in the capital.

There is no double that with an alarming proportion of UK tenant’s income going on rents, particularly in London and the South-east, an affordability crisis is heading for a peak. This is due to the imbalance between rent and income as well as a severe shortage of rental property in certain locations.

Savills predictions indicate that the affordability ceiling will take a little time to be reached, but when it is, the impact on rental prices will rise to a level where mortgages become a more affordable for buy-to-let landlords, particularly those with low debt.

There will be ongoing challenges for heavily leveraged landlords. This will probably lead to increased selling. The advantage will then be with those with low debt or no debt and the portfolio landlords, as well as with the build-to-rent operators who can take advantage of future lower interest rates.


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