Average rents charged by buy-to-let (BTL) landlords have risen every month since November 2006, to reach £10,702 in May. This is 1.0% higher than April’s figure of £10,591, and up 9.7% or £1,037 on November’s figure of £9,665.
John Heron, managing director of Paragon Mortgages, commented: “Rents continue their upward trend. It may be that higher borrowing costs are feeding through into rises in rents, but more likely it’s a function of the strength of tenant demand. The number of people who want to rent continues to grow – due to a range of social, economic and demographic factors, including growth in the student population, more single person households and inward migration.”
As evidence of this growth in tenant demand, 63% of landlords who responded to a recent survey said that demand was either stable or growing, and they are growing their property portfolios in response. Latest CML figures show that well over half of buy-to-let lending business is undertaken for the purpose of property purchase as opposed to remortgaging or refinancing of an existing property or portfolio.
“The UK housing market is characterised by a chronic shortage of supply of new homes,” continued Heron. “That means that house prices are almost certain to continue rising over the medium term. It also means that demand for private rented accommodation will continue to grow. Whether they rent or buy, people need a roof over their heads, and the private rented sector fills a vital role in providing homes for many millions of people for whom house purchase is not an option, especially as the social renting sector continues to shrink.”
Against the positive backdrop for buy-to-let, rental yields have remained very steady at or just over 6% for the past year, providing further evidence that the sector is well underpinned.
Heron continued: “Yields appear to have reached an equilibrium of around 6% at which buy-to-let investment makes sense. Even after recent rises in interest rates, this stable yield generates a good return to landlords, bearing in mind that average gearing across their whole portfolio is around 38% and many are immune to short term interest rate rises as they borrow on a fixed rate basis.”
Intermediaries agree with this analysis, as David Whittaker, managing director of Mortgages for Business in Sevenoaks, explained: "Despite the base rate increases, many landlords have been encouraged by the continuing strong tenant demand and are expanding their portfolios. Their rationale is that annual rental growth of 5% or more across a portfolio will generate additional cashflow on their existing properties where in many cases they have locked into fixed rates and are therefore protected from increased borrowing costs. This allows them to take a more sanguine view on new acquisitions which are now being funded against rates that are rather higher than at the turn of the year."
Heron concluded: “Lending for residential property investment remains very buoyant, with volumes of buy-to-let being generated across the sector holding up better than mainstream business. All in all, buy-to-let remains well underpinned and prospects for sustained growth in the sector are excellent.”
