The growing regulatory burden on property may cause some estate owners to question the value of their retention. Analysis shows income from rural homes provides over a quarter of the total income received by rural estates and that residential income has grown along with commercial as a proportion of the whole, with agricultural income having declined by 12% in only three years.

Rents for all types of residential property have grown over the last 12 months, with larger properties generally achieving the highest growth rates. UK annual rent increases set a new record for the 12 consecutive months up to April this year, according to Office for National Statistics data going back to 2016. While the pace of annual rental growth appears to be slowing, the affordability of rents remains a key issue, with tenants facing multiple cost-of-living pressures.

Since 2021, the average private rented rural tenancy (excluding regulated tenancies) in Scotland increased by 2.3% to £590 per calendar month, while the equivalent assured shorthold tenancy (AST) rent for England increased by 2.2% to £929 per calendar month. Regulated tenancies rents saw slower growth across both nations, averaging a 1% increase to £465 per calendar month in Scotland and 2% to £589 in England (figure 5).

Looking in more detail into how different-sized houses have performed, the largest houses have seen the biggest rental growth over the last two years (figure 6).

Geographical rents

Specifically looking at performance within the English counties, the highest rural residential rents (across all tenancy types) have consistently been in Oxfordshire, which has an average rent of £1,663 per calendar month and rental growth of 8% since 2021, which is above the average for England.

For Scotland, the highest rents are being achieved in Fife, with an average rent of £691 per calendar month, and rents have grown by 4% since 2021.

Expenditure

Repair costs have unsurprisingly risen significantly and faster than other costs, with a 62% increase over the last 12 months, while total expenditure has increased by 35%.

The near doubling in repair expenditure (figure 4) reflects increases in materials and labour. It is worth noting that repair expenditure in 2021 will have been reduced by the Covid effect, hence the ensuing elevation in net revenue returns. An increase in statutory compliance and investment into energy efficiency measures are other explanatory factors. All elements of expenditure have grown over the last 24 months, increasing as a percentage of gross income from 35% in 2021 to 41% in 2023. Even so, repairs are of greatest concern, having increased the most.

Net position

Savills financial reporting shows growth in rents across all residential sectors in the UK, but also substantial growth in expenditure. Therefore, the key question is what impact has this had on net income. In 2023 net income decreased to 59% down from the headier heights of 65% in the years of 2021/22 (figure 7).

The changing demographic of the rental market

A combination of the impact of the Renters (Reform) Bill, increased energy efficiency requirements and increased mortgage and occupational costs are likely to curtail investment in the private rented sector, and lead to large-scale exits by those operating a Buy-to-Let investment model. Over the last five years, over 250,000 more Buy-to-Let properties have been sold than purchased.

Recent analysis by Savills Residential Research suggests that in the first quarter of 2023 (prior to the recent rise in mortgage rates), the average net profit for a 40% taxpayer buying with a 70% loan-to-value mortgage had fallen to below 4% of the gross rent received. That is the lowest margin since 2007 and well below the 23% seen between 2014 and 2017 and has been compounded by restricted tax relief on mortgage interest. Overall, this is likely to mean a continued undersupply of homes for rent and continued upward pressure on rental values. However, Savills analysis suggests that only 2.64 million of the 5.69 million homes in the private rented sector carry a mortgage and, thus, the impact may be more buffered than previously forecast.

Lucian Cook, Head of Savills Residential Research, considers how the sector will change in the longer term: 'For landlords, the market will increasingly favour cash buyers or those with plenty of equity in their properties or who hold lower levels of debt. For tenants, the loss of the Section 21 notice risks problems for lower-income households seeking rental accommodation. Ultimately, landlords will simply go with more affluent tenants who they feel offer greater security over the long term in terms of rent payments. Married with a reduction in rental stock and the challenge of affordability, difficulties fall on those in lower socio-economic groups'.

MARKET PERFORMANCE

Savills forecast that bank base rates will gradually reduce from the middle of 2024 as inflation is tamed, which will see the mortgage markets settle down and a marked improvement in mortgage affordability. This should ease the demand pressure for rental properties and may see some stabilisation in rental growth. For UK mainstream house prices, in early 2023 Savills forecast a nominal price fall of 10% for the year that should gradually bring more buyers into the market and allow a return to modest house price growth from 2024 onwards, with a more pronounced rebound in 2026.

IMPACT ON THE RURAL ESTATE PORTFOLIO

Most estate cottages are situated in a sought-after location, and this, combined with the greater certainty of a long-term letting, will mean that demand for the estate cottage or house should remain strong.

The impact of both increased costs and energy efficiency demands on expenditure will only continue for a relatively short time. Subject to the strength of the local market, estates can anticipate net returns from their let residential property to return to more attractive levels and in many cases, they will become a key component of estate financial performance again. Resisting the short-term urge to sell may well, therefore, be wise.

_{Read the articles within Spotlight: The future of rural homes below.}