The lockdown policies implemented by governments across the world have been essential in containing the spread of coronavirus and minimising the impact on their country’s health services and populations. But it has had a massive impact causing major economic disruption and social distress.
Relaxation of Lockdown
In the UK debate has now started on how and when lockdown can be lifted, and as such there are huge decisions for the UK government and devolved assemblies to make. These will be focused on balancing the need to save lives against the potential longer term economic damage and the impact that this will have on society going forwards.
So, it is perhaps worthwhile having a look at what we think might happen once the restrictions of lockdown are relaxed.
The first thing to say is that we are not going to return to a normal pre-Covid-19 situation overnight. It will take time and the road ahead is uncertain but that said there is light at the end of the tunnel and life does and will go on.
Pent up demand
Lockdown has meant that the property market has been in an enforced state of limbo with most people unable to move. We believe that one result of this is that a significant demand has been building and the relaxation of lockdown will mean a release of this.
According to ARLA Propertymark’s CEO David Cox:
“There’s clearly a massive amount of pent-up demand in the market. Our message is just put everything on pause – don’t cancel it. The first Friday out of lockdown is probably going to be one of the biggest moving days in the lettings industry’s history,” he said during a webinar hosted by Goodlord yesterday.
At this point it is worth mentioning that the fundamentals of the housing situation across all tenures in the UK remain unchanged; the market is significantly undersupplied.
The Private Rented Sector (PRS) is expanding in size
The PRS in the UK is now the fastest growing sector in the country and makes up approximately 20% of all households which equates to a growth of some 2.5 million rental homes since the year 2000. An extra 560,000 households are expected to be renting a home by 2023, taking the proportion of housing in the private rented sector to 22%, up from 20.6% at the moment.
In some recent data released by ARLA Propertymark it was revealed that demand for rental accommodation reached a record high in January with an average of 88 prospective tenants registered per member branch. The figures show that agents have witnessed a 57% increase in the number of prospective tenants registered since December. Year-on-year, demand for rental accommodation has increased by a fifth (21%), rising from 73 in January 2019 to 88. The RICS reported tenant demand (monthly non-seasonally adjusted series) rose at the headline level for a third consecutive month.
Constriction of Supply
At the time that tenant demand is increasing there has been a constriction in supply of rental stock on the market as the changes to taxation and increasing regulation has resulted in landlords exiting the market. ARLA report that the number of properties managed per branch fell from 206 in December to 191 in January. Supply has not been this low since July last year when it stood at 184. Year-on-year supply is down from 197 in January 2019, but up from 184 in January 2018. The RICS also reported that landlord instructions fell once again, extending a persistent run of decline stretching back to 2016.
Initial Impact on PRS of Corona
Although the underlying market trend in the UK across all housing tenures is one undersupply and rising demand one effect of the pandemic on the rental market specifically will be an initial increase in available stock since the traditional long term private rented sector (PRS) is now viewed as a more stable, safer and hence more attractive tenure for rental assets by many investors.
This is particularly apparent in Edinburgh where the number of PRS listings on Citylets in the middle of March was double that when compared to the same week in 2019. It is the city centre postcodes of EH1 and EH2 which have seen the largest increases. What is telling about the geographical concentrations is it is these areas that are key short term rental (STR) locations. At the same time Air BnB listings dropped by 26% in March from Q4 2019 so much of the increased supply in the PRS is the direct result of landlords exiting STR and moving their assets into the PRS.
So, we think the initial result of this rise in supply will be increased void times and a reduction in rents as the rental market responds to the challenges.
Once lockdown restrictions ease, it is projected that activity levels will rise and could match previous years’ levels in the typically busier seasonal periods in Q3 and Q4, meaning that the total number of moves within the rental sector will be end up approximately 25% lower than in 2019. Hence in the mid to longer term we believe that demand levels will remain robust and the short term glut of stock will be cleared as the market re-balances.
Strength of PRS
It is our view that the rental market is more dynamic, flexible and better insulated against shocks to the wider housing market and underlines the defensive, counter-cyclical qualities of rental housing as an asset class. We believe the long term outlook for the PRS remains strong and any short term volatility is part of what constitutes a market needs to be viewed in the context of the longer term.
At Glenham we have always been focused on responding to market conditions and are always seeking ways to react and mitigate our client’s risk as much as we can. We have always ensured we have embraced technology this has meant the transition to working from home has been smooth with limited impact on our service levels. We are now working to ensure we are fully prepared and best placed to start releasing some of the pent up demand by letting properties and moving tenants in as quickly as possible once the lockdown restrictions are relaxed.
Get in Touch
If you would like some more in depth information on the current market and the possible impact of Covid-19 please click here to download a copy of our most recent market review. If you would like to have a chat about investing or renting out a property please get in touch here.