RICS Residential Lettings Survey
RISC Economies, Second Quarter 2007
Record rental growth raises Landlord optimism
- Tenant demand growth pushing rents up at fastest pace in survey’s history
- First time buyers caution expected to push rents for flats sharply higher into Autumn
- Landlords increasingly optimistic despite rising interest rates
Tenant demand for residential property rebounded in the quarter to July having moderated in the spring. A deterioration in accessibility alongside a moderating housing market has directed more people into the rental sector since quarter 1. Uncertainty as to the extent and impact of interest rates rises led some vendors to adopt a wait and see approach before re-entering the housing market. Surveyors expect a surge in rental growth for flats into the Autumn as a more cautious climate among first time buyers sets in.
The strength of tenant letting demand has encouraged landlords back into the sector having moderated their activity over the previous year. Growth in new landlord instructions, an indicator of buy to let activity picked up sharply in the second quarter moving back above the long run average of the survey for the first time in 15 months. Gross yields are stabilising as the pace of rental ascent has started to match growth in capital values. Greater optimism on behalf of landlords is unsurprising given the continued increase in rental growth which picked up at the fastest pace in the survey’s history.
Despite rising interest rates over the last year landlords have been able to make rental increases stick as tighter conditions take root. Surveyors expect record rents in the coming quarter as demand holds firm.
The moderation in new landlord instructions over the past year appears to have benefited those still active in the market that may have a higher cushion of equity to ride out interest rate increases. Some landlords at the margins may be feeling the pinch from rising interest rates. The percentage of landlords selling their properties at expiry of tenant leases edged up for the second consecutive quarter and the fastest pace since January 2005. However, at 6% the number of landlords opting to sell properties at renewal is a long way below the 10% figure recorded 3 years ago.
TENANT DEMAND
Overall
Tenant demand for residential property rebounded in the quarter to July having moderated in the previous quarter. Deteriorating accessibility and a modest slowdown in the housing market since the spring has led to more potential homebuyers opting to rent.
29% more surveyors reported a rise in new tenant lettings than a fall, up from 15% in the previous quarter. The acceleration in tenant demand was most prominent in the North, London and the South East with lettings demand activity moderating again in the Midlands and Eastern region.
Flats and Houses
Demand picked up for both flats and houses with the pick up similar in magnitude across both markets. Tenant demand for flats reached a 6 year high whilst for houses tenant demand rose at the second fastest pace in the survey’s history.
For flats 30% more surveyors reported a rise in demand than a fall, compared to 14% in the previous quarter and a long run average of 19% since 1999. For houses 28% more surveyors reported a rise in demand than a fall, up from 15% in quarter 1 and well above the long average of 16%.
By type of tenant
New lettings to private individuals as a percentage of all lettings fell back to 79.9% following the record amounts of activity in the previous quarter. Lettings to students rebounded in line with the usual seasonal pick up during the quarter. Corporate lettings activity declined for the second consecutive quarter whilst there was a marginal pick up in lettings activity from the social sector.
NEW INSTRUCTIONS
Overall
Growth in the new landlord instructions, an indicator of buy to let activity picked up sharply in the second quarter having shown some evidence of moderating over the previous 12 month period.
The rise in new instructions appears to have been across the board with both houses and flats seeing the biggest pick up in activity in 18 months and over 3 years respectively
New instructions in the quarter to July rose to above the long run average of the survey for both flats and houses for the first time in over a year.
Flats and houses
The rise in new instructions was pronounced for both flats and houses with the pick up in instructions for houses the most marked in 18 months following a slowing in lettings instructions. The rise in new instructions of flats was the strongest in over 3 years.
For the quarter to July, 21% more surveyors reported a rise in new instructions for flats than a fall, up from 10% in the previous quarter. In the housing sector, 17% more surveyors reported a rise than a fall in new instructions, up from 4% in the previous quarter and the long run average of 14%.
Landlord activity
The share of new instructions made up by private individuals rose to a 3½ year high to 87.3% up from 82.2% in the previous quarter.
Property companies and institutions were less active as a percentage of overall instruction activity reducing their share to 5.8% and 4.8% respectively.
PROPERTY SALES
Landlord sales
The percentage of landlords selling their properties at expiry of the tenant lease rose by a percentage point for the second consecutive quarter. At 6% sales are picking up although remain below the previous highs of 10% reached in July 2004.
The level of sales is the highest in over two years although this is to be expected as interest rate rises bear down on some more novice landlords at the margins. Those whom have a comfortable equity cushion may be riding out the rate increases and will be largely compensated by firmly rising rents.
RENTS
Past rents / rent expectations
Surveyors reported that rental levels increased at their fastest pace in the survey’s history. This has generally been borne out at the regional level as well, though with the expectation of the Eastern region, where rental growth moderated slightly. The North and the South East both experienced a sharp rebound in rental growth, whereas in London the rebound was far less pronounced. In the South West and the Midlands rental growth continued to accelerate.
For quarter 2, 39% more surveyors reported a rise in rents that a fall compared to 29% in quarter 1. This marks a new record high. For flats, 36% more surveyors reported a rise in rents than a fall compared to 27% in quarter 1. For houses, 46% more surveyors reported a rise in rents than a fall compared to 31% in quarter 1.
Looking ahead to the next quarter, surveyor’s confidence in the outlook for rental growth picked up sharply, rising to the highest level in the survey’s history. Muted growth in new instructions during the last few quarters combined with sustained interest rate hikes (totalling 100bp since last August) are buoying surveyor’s expectations in the rental outlook. For the next quarter, 38% more surveyors expect rents to rise than to fall, up sharply from 27% in the previous quarter and over three times the survey’s long run average. Rental confidence is now higher for flats than for houses, although is firm in both sectors.
GROSS YIELDS
Residential gross yields fell for the fourth consecutive quarter, although yields are starting to stabilise. Gross yields slowed sharply for flats while for houses, they increased slightly. This sharp deceleration in the pace of yield declines reflects moderating house price growth and strengthening rental growth.
For the quarter to July, 4% more surveyors reported a fall in gross yields than a rise, compared to 21% in the previous quarter. Across all regions gross yields either declined at a slower pace or increased, as was the case in the North and the Midlands.
