The past five years have had profound effects on Britain’s private rental sector. The combined impact of the property market slump and the credit squeeze has boosted longer-term demand from a whole tranche of Britons who in former times would have rented from a private landlord on a relatively short-term basis, before buying their own first property or as a stopgap between moves.

Rental Britain, our report on the private rental sector based on joint research with Rightmove, highlights the key challenges facing tenants in the private rental sector, and the outlook for the coming years.

The increase in tenant demand in the UK has been dramatic: over the five years to the end of 2011, the total value of housing in the private rental sector was up 42%, while the number of households renting privately had leapt almost 50%, from 3.4 to 4.8 million. And the trend is set to continue: by 2016 we estimate that figure will have risen to 5.9 million. 

Trapped tenants

This shift in the way people access accommodation is underpinned by the retail lenders’ continuing reluctance to provide mortgages for prospective first time buyers at the high loan to value ratios (LTVs) they seek. Gross mortgage lending at LTVs of 90% plus has fallen by 95% since summer 2007, and the average deposit paid by first time buyers has more than doubled over that time. In London more than seven out of ten first time buyers now turn to their parents for help in raising the capital.

Further, where lenders do make available mortgages at suitably high loans to property value, they charge an inflated price. At the end of 2011, the interest rate on 90% LTV discounted rate mortgages averaged 5.1% – two thirds more expensive than the equivalent on 75% LTV, at an average 3.0%.

The consequence is that although the private rental sector has historically been the province of the young, more people are remaining for longer in privately rented accommodation because it’s cheaper for them to rent, or in some cases because they really could not afford to buy. More than half of private rented sector tenants are believed to be ‘trapped’ in this way – a quarter of them aged over 40.

Moreover, not only are more people renting, and for longer, but the social profile of tenants is changing and broadening. Private renting is increasingly becoming a way of life for a wide spectrum of people in their 30s and 40s.

Regional variations

However, there is huge variation in average rents paid across the UK, though in general rents are higher in centres nearer London. A comparison of the 30 largest rental markets outside London shows that the highest average monthly rent for two-bedroom properties (£1,320 pcm in Elmbridge) is three times that of the lowest (£470 pcm in Bradford). The differentials are even more marked in London, with two-bed properties almost five times more expensive in Kensington & Chelsea (£4,020 pcm) than they are in Bexley (£830 pcm).

In part these rental differences reflect regional differences in income. The mean average single person’s rent of a two-bedroom property as a percentage of mean average income, stands at an average 31% across the UK as a whole, but that nationwide average masks large disparities when regional or local averages are considered.

In the North East and East Midlands, this broad indicator of rental affordability averages just 25% of the average incomes for these regions, while in the South East it rises to 35% and in London, where private tenants more regularly share accommodation and renting is more common in more affluent income groups, it rockets up to 53%.

Question of affordability

Regional rental differentials, however, cannot be fully explained by variations in income. Another key factor is the existing supply of private rented accommodation, as well as the extent of social housing provision. Thus a high affordability ratio occurs in areas where rental demand markedly outstrips supply, pushing up rents regardless of average income levels.  

The London market is particularly skewed. For a start, the public sector provides affordable housing for a large tranche of households on lower incomes, thereby taking them out of the equation. In other words, the average tenant in London’s private sector is likely to be on a higher than average income. At the same time, owner occupation in the London market is lower than elsewhere, relative to the rental market, reflecting the high number of young people starting their careers there, and inflated property prices that make it even harder for them to get on the ladder.

Clear hotspots

Yet there are clear hotspots outside London too, where supply of private rental accommodation lags well behind demand for it. Oxford is an extreme example, with the average rent on a two-bedroom property amounting to 57% of average income; another is Brighton & Hove, where average rents are slightly less crippling at 47% of income.

In contrast, the private rental market is well catered for in Milton Keynes, and rental affordability there, at 32%, is in line with the national average. Clearly, each local market has its own dynamics and needs to be understood on its own terms, but investors could start by identifying those with a high affordability ratio as areas
likely to be suffering from a shortage of good quality private rental accommodation.

Taken from
Residential Property Focus 2012 Q2