In last months’ buy-to-let (BTL) masterclass, we looked at gearing and how this helps potential landlords to make the most out of their capital in building a portfolio. However, if properties cannot be rented or housing stock does not increase in value then there is little point in using BTL as an investment strategy. I would like to focus on two of the key drivers in BTL investment, namely supply and demand.
Rental demand
Private rental accounts for 10 per cent of the UK market in comparison to Germany and Switzerland where it exceeds 60 per cent. But it’s not a new phenomenon – if we look back to the turn of the 20th century, as the graph below left shows, over 90 per cent of housing stock was private rental.
The onset of mortgages and local authorities providing affordable rental accommodation forced the sector to decline. However, the 21st century saw owner occupied property plateau and private rental start to see a timely reversal in fortune.
Over the last 10 years there has been a distinct shift in public attitude. Gone is the stigma attached to renting, with 20 and 30-somethings preferring to rent rather than buy. Others are finding the property market out of their reach altogether.
There are other reasons for the increase, most notably the pressure placed upon the sector from the open door immigration policy of the government. A huge factor is the recent influx of Eastern Europeans, with 506,000 immigrating to the UK since 2004. According to the Association of Residential Letting Agents 95 per cent of Eastern Europeans rent within two years of settling in the UK.
Additional pressures include an increase in population, a more mobile workforce, divorce, student numbers and older first-time buyers.
The graph below right shows the Office of the Deputy Prime Minister’s forecast on the decline in household sizes and the sharp increase in the number of single households over the next 20 years.
Therefore, demand for rental property continues unabated.
Supply
While the plethora of flats in desirable locations continues to increase, there is a critical need for affordable family housing in many parts of the UK. The lack of investment in council housing means the private sector is left to pick up the demand and provide housing for many who would otherwise struggle to get a roof over their heads.
This is highlighted in a recent article in the local press that stated the borough of Dudley in the West Midlands has 7500 on the council housing waiting list with just a woefully inadequate 323 vacant properties.
It’s essential that clients entering the BTL market do their homework on demand, not just on region, but also the best type of property. Letting agents are worth their weight in gold here.
Capital appreciation
There’s no point buying a BTL property without a realistic expectation that it will enjoy capital appreciation. Property increases in value over time when the market dynamics are right. Capital appreciation is merely a combination of rising demand and constrained supply equalling price rises.
Where landlords have borrowed prudently then the property can be taken off the market rather than being sold at a price below expectation, as if the borrowings are tame, the owner is not paying large costs to maintain the property and is not under pressure to sell due to monthly losses.
There are demand drivers and supply drivers. Demand drivers include economic growth of the country, economic growth of the region, a drop in the number of people per household, government investment, private investment, falling rates, improvements in transport and the regional hotspots become fully priced thus pushing demand out to a new hotspot. Supply constraints include planning policy and speed, and both geographical and topographical limits.
According to the housing supply review, there is a deficit of 450,000 houses in the UK which is growing by 120,000 per annum. The Town and Country Planning Association stated that 3.5 million new households are needed by 2021. While house prices may not continue to offer double digit growth, the suggestion that prices will fall markedly does not fit the supply and demand model.
