Tuesday January 4, 2022

Rents soared in 2021 and are forecast to climb further, but tax rises and new competition threaten the sector


Landlords had an explosive year in 2021 – at least in some parts of the country. In areas outside the capital, rents rose by 6pc, their fastest rate in 14 years, according to property website Zoopla.
Rents were driven up by an acute shortage of rental homes and huge demand among tenants for bigger properties, prompted by the pandemic. This supply drought should continue to boost rents this year, although growth is expected to moderate.
The sector faces another headwind, however, as looming tax and regulatory changes threaten to dampen landlords’ yields. So will the market continue to soar?


Climbing demand

The number of new prospective tenants in November was 44pc higher than in the same month in 2019. The surge in demand is expected to spill over into the new year, unimpeded by the omicron variant, according to estate agency Knight Frank.
At the same time, supply plummeted throughout 2021. Stock in the rental market was 46pc lower in November than two years previously and Knight Frank predicted that this would maintain “strong upward pressure on rents”.
With little sign of an end to the shortage, estate agents Hamptons forecast rents across the UK to have risen by 2.5pc in the final quarter of this year. Zoopla predicted 4.5pc.



Metropolitan resurgence

Since the pandemic began, both the lettings and purchase markets have been defined by tenants and buyers desperate to live in bigger, greener spaces.
Rural and suburban rents soared as a result and prospective tenants became locked in bidding wars over properties with a garden and space for home working.
However, early indicators suggest that a return to city living will characterise the rental market in 2022. Demand for central postcodes in some of Britain’s biggest cities has more than doubled as employees and students have returned to offices and university campuses.
The resurgence has even been enough to jump-start the beleaguered London market for the most expensive rentals.
Average rents climbed by 2.9pc in the year to December in “prime” central London and by 3.7pc in prime outer London, partially reversing double-digit declines just nine months earlier, according to Knight Frank.
Tom Bill from the company said: “Nine months ago, few would have predicted that rents would end the year in positive territory in the prime London lettings market.”
But it is the regional urban markets that are expected to return the best yields for landlords this year. Smaller cities such as Coventry, Cardiff and Leicester have yielded an average of 6pc for investors, according to analysis by Aldermore bank.
By comparison, larger cities and towns recorded average yields of 5.5pc and 5.4pc respectively last year.


Punishing changes loom

A series of strict tax and regulatory changes means more buy-to-lets are being sold than bought. In 2021 landlords bought 184,100 properties, equal to a market share of 12.3pc, according to analysis by Hamptons.
But investors also made up 13.4pc of vendors last year, selling 201,300 properties. This resulted in a net loss of around 17,200 homes from the buy-to-let market.
The sector has been losing more investors than it could entice since 2016, when a three percentage point stamp duty surcharge was introduced for additional properties.
Landlords narrowly avoided a similar tax rise in 2021 but further changes are thought to be on the Government’s radar. The Chancellor, Rishi Sunak, was close to increasing the surcharge to four percentage points in the most recent Budget.
The proposed tax rise was hidden in the small print of a document published by the Office for Budget Responsibility, but it was not ultimately announced.
It is thought to have merely been put on ice, rather than scrapped altogether. Experts have predicted that the surcharge could still be increased in a bid to boost first-time buyers by disincentivising landlords.
Investors will also need to address costly eco upgrades this year under rules that will require all newly let rentals to have a band C Energy Performance Certificate.
Although the deadline allows for any changes to be made by 2026, or 2028 for existing lets, Jon Cooper of Aldermore said landlords should review their EPC ratings now.
“We’re seeing a wide range of changes that may be required, which in some cases may need significant funds,” he said. “This can be anything from replacing light bulbs with high efficiency ones to more substantial and time-consuming projects such as replacing the central heating, rewiring and the installation of new boilers.”
He added: “Any changes will need to be taken into account by landlords seeking new investment properties or looking at managing current portfolios.”


The rise of build-to-rent

Another serious threat to small-scale landlords is purpose-built and professionally managed rental homes. They come with extras that smaller landlords cannot compete with, such as gyms and meeting rooms, and are spreading quickly throughout the country.
Build-to-rent is backed by large institutional investors such as pension funds. While these homes tend to be pricier, many tenants prefer the higher level of service and accommodation.
Build-to-rent was initially focused on the capital, but more than half of these lets were advertised outside London for the first time in 2021, according to Hamptons.
The company’s David Fell said: “This shift has resulted in a fall in the average rent as developers increasingly open schemes in cheaper locations outside London.”