The relationship between debt and equity has had an obvious effect on the sales market over the past 12 months. But their forces have also been at work in shaping the rental market. Increased mortgage costs and suppressed transaction levels have added to rental demand at a time when the regulatory and financial pressures faced by private landlords have further constrained the amount of stock available to rent.

Rental growth

The inevitable consequence of this has been strong rental growth. In part, this has been supported by wage growth, which had steadily increased to 8.2% in the year to the end of August. But on an annual basis, rental growth has consistently been in or close to double-digit territory since October last year, according to HomeLet. It has been higher in London.

At the same time, the gap between readings for tenant demand and landlord supply has remained wide according to the RICS Residential Market Survey. And expectations for further rental growth remain high.

Prime perceptions

In the prime market, the picture is a little more nuanced.

Though rental growth has slowed, in the prime markets of London, rents have risen by an average of 17.9% over the past three and a half years. In the commuter belt and beyond, they have risen by 22.7%.

Over the past year, annual rental growth of prime homes has slowed to 5.4% in London and 4.7% elsewhere. However, it has generally been strongest for smaller properties where demand has been driven by needs-based tenants; those whose prospects of getting on the housing ladder have become even more dependent on the Bank of Mum and Dad. In these markets, there has been little let-up in the scramble to secure a rental property.

By contrast in the more discretionary markets where renting is often more a life choice, the gap between demand and supply has been less intense.

This has been notably so in the market for larger properties, whether they be in London, other urban centres such as Bristol, Birmingham, Manchester and Edinburgh, or the commuter belt. Here, rental demand has been supplemented by those taking some time out of home ownership, but the effect has been more muted.

Landlord experiences of rental growth

From a landlord perspective, the ability to benefit from this rental growth has been similarly uneven, as the divide between equity-rich and mortgage-laden private investors has been exacerbated by the current tax system.

Equity-rich landlords with modest debt costs or no debt at all have seen profits and rents rise in unison, their improved finances offsetting any concerns around tenancy reform and additional landlord obligations.

But more indebted landlords (often with smaller portfolios which have not warranted the use of a corporate ownership structure) have seen their increased rental income swallowed up by both increased costs of debt and, in many cases, the restricted tax relief on higher costs.

Stick, twist or fold

As a consequence, we have seen both a decrease in new investment activity and an increase in landlords selling property, resulting in an acute shortage of available stock to rent across most parts of the market.

Indeed, despite a net balance of 70% of respondents to the National Residential Landlords Association’s Confidence Index seeing an increase in tenant demand, 20% have sold one or more properties in the year to June 2023 (up from 14% two years previous).

Meanwhile, just 8% had acquired property over the same period, down from 15% in the 12 months to June 2021. And with an even wider gap between landlords’ intentions for sale and acquisition over the next 12 months, there seems little chance of a let-up in these trends.

The prime markets have not been immune to these pressures, despite having a core of wealthy long-term landlords with a strong affinity to bricks-and-mortar investment. Results from our agents survey suggest concerns are greatest among those with debt who are struggling to make the finances add up, with regulatory reform a lesser concern.

Preparing for the future

That means the equity-rich landlords and others who are willing and able to ride out a period of elevated interest rates should continue to benefit from a secure income stream underpinned by an inherent imbalance between supply and demand. The recent decision by the government to shelve plans to tighten minimum energy efficiency standards means the short-term focus will be far more concentrated on getting ready for the demise of the Assured Shorthold Tenancy.

Draft legislation is slowly working its way through parliament, as the government wrestles with the practical implications of the proposals it has laid out in the Renters (Reform) Bill. However, even if changes are made, it would be a brave person to bet against it receiving Royal Assent at some point and in some form.

And so those who continue to buy into the long-term credentials of residential property investment will be working hard to make sure their rents reflect current market conditions and they have financially secure tenants.

Understanding the Renters (Reform) Bill

To read more of our Residential Research please visit our Residential Hub

_{Read the articles within Prime UK Residential – Autumn/Winter 2023 below}