Commercial Insurance Articles

Is the future bright for the rental market?

30 Nov 2009

There is no doubt that this year has been full of ups and downs in the rental market, but are the effects of the recession finally easing for the sector?

Rental values, according to a number of indexes, have been up and down this year but September may be proving the silver lining to the clouds. The Residential Rental Price Index from property website RentRight showed that the average UK rental price for September is £676, compared to £535 in August and July's figures of £564.

This is backed up by FindaProperty.com, which carries out a monthly rental index. The organisation's figures show that August saw the third monthly rise in rents, increasing to £829 a month and representing the highest value for six months. The index stated that supply is dropping in the market while demand remains relatively strong, leading to the rise in prices and more favourable conditions for landlords.

FindaProperty.com stated that rental stock dropped by two per cent in August, compared to the previous month, leading to a 3.7 per cent reduction in the past year. However, the effects of the recession are still being felt, as the year-on-year change stands at -4.8 per cent, showing that recovery is slow.

The trend in increasing rental prices has come alongside a rise in house sale values, according to Nationwide's review, as its August report showed a 1.6 per cent increase. The building society's report stated that an increase from £158,871 to £160,224 occurred between July and August. This may be leading some previous reluctant landlords to put their houses back on the market, rather than rent them out.

However, landlords in London may not be recovering from the economic downturn as well, as figures show that the capital may be lagging behind other areas. PrimeLocation.com's monthly report stated that there has been a flood of prime property entering the market, but added that this may change as house prices rise and these properties are sold.

RentRight's report also stated that there has been a drop in London rents in the past few months, reducing from £1,071 in July to £689 in August, although the figures are based on advertised prices rather than actual rental costs.

However, FindaProperty.com's rental index noted that the region is not seeing the uplift noted elsewhere. It stated that yields have declined in the past 12 months and August saw a drop of 1.8 per cent in rental prices, or £29 a month, on the previous month.

London's six per cent drop in annual rental prices was beaten only by the West Midlands. Michael O'Flynn, director of FindaProperty.com, said: "The London rental market seems to be largely immune to the recovery seen in the rest of the country."

He added that a lack of new graduates heading to the city and an influx of flats on the market have lead to a different situation than in the rest of the UK. Mr O'Flynn stated that when widespread economic uplift occurs – leading to a rise in the number of jobs on the market – the rental sector should pick up.

This was backed up by comments from estate agents Douglas & Gordon, who have said that rehiring in the City may be occurring, as the prime rental market in London has marginally improved over recent months. Ed Mead, director at the company, said: "That market has suddenly started being active again, so that is a very sure sign that the City is rehiring again and that city banks are rehiring. That is quite an important pointer to the economy in general, not just for the rental market."

Areas that were best performing in London included Kensington and Chelsea, the City of Westminster, Camden, Hammersmith and Fulham and Richmond upon Thames. However, Barking and Dagenham, Bexley, Waltham Forest, Croydon and Havering were at the bottom end of the sector, with Greenwich and Haringey having the biggest drops in rents.

One factor which has affected the market over 2008 and 2009 is the supply and demand issue, as the sales market declined more reluctant landlords came to the rental market – opting to get tenants into the property until sales values rose. Earlier this year, the market saw an influx of larger properties, which were said to have skewed rental figures.

James Davis, founder and chief executive officer at property finding service upad, said that one, two and three-bedroom flats were still doing well, but bigger homes from reluctant landlords reduced average rental prices. He adds: "The reluctant landlords and people renting out their places because of the state of the market and being unable to sell has skewed data."

However, it seems these 'unplandlords' are now moving out of the market as house prices rise and they sell their homes. A report from the Association of Residential Letting Agents, out this month, said that the situation is not as bad as it was last year. It added that 80 per cent of its members' offices are seeing property rented out rather than sold, which is still high but remains less than the 90 per cent seen earlier this year.

Ian Potter, operations manager at the organisation, said that the trend is "slowly diminishing", as sellers now have more options than earlier this year. "There are, however, still a high number of these reluctant landlords in the market who need to understand the obligation to their tenants," he added.

While London is not following the rest of the UK in rental, it is seeing a rise in reluctant landlords leaving the market, with 72.5 per cent of the capital's agents seeing a decrease in the number.

With rental prices rising and sales values also on the up, it seems tenant are set for higher rents, however it may still take some time yet before we are back to the heady heights of 2007.