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Some musings on the rental market post lock down

We said in a blog before the market reopened that demand was building during lock down as the market was placed into hibernation and people were unable to move. Since the market reopened in Scotland on Monday 29th June we have experienced a huge surge in demand for viewings with properties going under application fast. At the same time Rightmove have reported that rental demand is at record high levels across the UK. The result is it looks as if our view of rising pressure has been vindicated with the market bouncing back fast and proving to be resilient for the moment.

It was the STR market that was perhaps hit hardest by lockdown the result was many landlords moved to the long-term market and this has resulted in an oversupply of stock particularly in some locations. The areas that have been most seriously affected are those that had high concentrations of short-term rental (STR) stock. An example of this is Simpson Loan, where I counted 78 one bed flats currently advertised as live on Citylets. Recent figures from Rightmove back this up they reported that new rental listings in Edinburgh are up by 34%.

This supply demand imbalance will undoubtedly put downward pressure on rents as landlords seek to try and get properties let and start generating some income no things have reopened. It will also impact on time to let (TTL) figures and it will be very interesting to see just how significant this will be when the data filters through in the next Citylets Quarterly Report.

Looking at the most recent national figures rental values have so far remained buoyant with the Office for National Statistics (ONS) reporting that rental prices grew in the UK by 1.5% in the 12 months to June 2020. Growth in Scotland was weaker at a rate of 0.6% over the same time period. But as we have said above our feeling is there will be a downwards readjustment due to there being an oversupply of stock, but it will take time for the data to filter through. That said the downward pressure should be relieved as stock levels drop and the oversupply is reduced over the coming weeks hence, we believe the market will stabilise over the next quarter.

In the Homelet Rental Index for June average rent was reported to be £951 PM which equates to an increase of 1.1% on the same time last year but a drop of 0.8% when compared to May this year. When London is excluded rents across the UK stand at £797 PM which is an increase of 2.0% when compared to last year. Average rents in Scotland stood at £671 in June up 3.1% from the same time in 2019 but down from £682 recorded in May this year.

In their June Residential Survey, the Royal Institute of Chartered Surveyors (RICS) reported that tenant demand returned to growth for the first time in three reports (non-seasonally adjusted monthly series), with a net balance of +24% of contributors seeing an increase. At the same time landlord instructions remained broadly stable after some steep declines seen in recent months.

At this point it is worth noting that the elephant in the room is the end of the furlough scheme and the state of the wider economy. I am not going to go into detail on the economic figures at this point but we all know that the impact of Covid-19 has been considerable. There will be fallout and we are already seeing unemployment figures rising and there is no doubt they will rise further. The question is what impact is that going to have on the rental market?

Before we look at this question it is worth noting that the fundamentals of the housing situation across all tenures in the UK remain unchanged; the market is significantly under supplied. Pre-Lockdown the Private Rented Sector (PRS) in the UK was the fastest growing sector in the country and made 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.

At the same time that tenant demand is increasing there has been a constriction in supply of rental stock on the market as 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 initial impact of shutting down the market was profound in Zoopla’s Q1 2020 Rental Market Report it was reported that demand in fell by 57% between March 7th and March 30th. Demand then rebounded by 30% off a low base rate in the in the two weeks to April 14th. This is because the rental market tends to be more dynamic and resilient and is quicker to react to shocks to the system.

So, things are uncertain and any projection on what might happen is fraught with difficulty. We do expect regional variations to become more pronounced as some areas will be better insulated against the wider economic fallout than others. There is already evidence of a softening in rents in the higher than average areas for example London while rents have held up well in other regions of the country. The effects of unemployment will further add to this increasing regional differentiation

Looking at Scotland we feel that the underlying market fundamentals remain strong and like the UK national trend; there is an under supply of housing across all tenures. Increasing regulation of the PRS and changes in taxation have resulted in landlords to exit the market while others are being put off investing. In addition, the growth of the STR market has resulted in stock reduction in cities like Edinburgh further driving competition though as we have mentioned Covid has led to a reversal of this trend certainly in the short term. At the same time tenant demand levels were strong pre-lockdown. In a recent report Galbraiths stated that the number of property lettings increased by 31.8% in the first quarter of the year.

We expect activity to match or even overtake previous years’ levels in the typically busier seasonal periods in Q3 and Q4. 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.

The rented sector tends to be counter cyclical to the sales market as it is more resilient with activity falling less severely and rebounding more quickly after financial and economic shock than seen in the sales sector. In times of economic volatility people tend to prefer to rent rather than buy homes and the result is rental demand can actually increase. At the same time actual supply of stock does not tend to increase which has the effect of keeping rental inflation in positive figures. It can in fact act a bit like a safety valve when the purchase market goes into reverse. The result is we feel the market is well placed to weather any adverse headwinds resulting from an economic slowdown.

 

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