We have forecast that rents in the mainstream rental market of the UK will rise by 20.5% over the period of the next five years.
This growth is expected to be driven by reduced access to owner-occupations because of mortgage constraints against the context
of limited levels of new supply, particularly given a lack of new build product.
The overriding constraint on growth is rental affordability in light of the anticipated constraints on household finances.
In the prime markets, the inability to buy will be much less of a driver of demand, although we do expect this to support rental demand among young professionals, and therefore underpin rental growth
in the one and two-bedroom prime flat market. This is likely to have
an impact in rental markets of the East of City where the profile
of renters is becoming slightly less reliant on the financial services sector.
Within the prime markets the affordability constraint is likely to be less of an issue, with some of the highest income growth expected in the more affluent households of London and the South East.
We see rental demand in the prime sector to be dominated by three main types of tenant:
1. Those excluded from buying prime property because of mortgage constraints, who we have referred to above.
2. More mature households for whom renting is the tenure of choice and who have no aspiration to buy. These will include some of the international tenants, particularly those from North America who are seconded to London.
3. Those who intend to rent for a limited period before buying. We anticipate that the pressure to exit the rental sector and return to home ownership will be reduced over the period of the next five years. Given relatively low yields on prime rental property, renting remains relatively cost efficient, despite low interest rates.
Furthermore, relatively low rates of anticipated house price growth mean that the risks of losing out on capital appreciation or finding it significantly more expensive to buy in the short-to-medium-term are less of a risk.
Demand across all of these sectors is likely to be driven by the outlook for employment, particularly in the financial and business services sector. In this respect, the health of the financial markets is critical.
This goes someway to explaining the close relationship between annual movements in the FTSE and residential rents in Prime Central London In the short-term, the uncertainty both in the financial markets and the financial and business services sector more widely is likely to temper tenant demand in this market.
Supply of rental property is the other major consideration. A lack of new build activity will have an impact in some London markets, though this effect will be tempered by the increased buying activity from overseas investors over the recent past.
Across the prime markets it will be the interaction with the strength of the sales market that primarily dictates whether there will be a rise in the amount of stock available to rent.
Within the prime market of the South East we have already seen this begin to have an effect that is likely to be carried over until next year, a weaker sales markets have brought stock on to what is a relatively shallow prime rental market.
Within the deeper prime rental markets of London, where the outlook for the market is strongest over the next five years, this is likely to have less of an effect, even though we expect rental growth in central London to slow over the period of the next year.
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