Headline news from Q4 2023
- UK citizens spend highest portion of salary on rent versus the rest of Europe*
- Buy-to-let in the North West forecast to be a top performing sector in 2024 by Savills
The rental market never sits still, and this has been particularly prominent in 2023. Changes impacting both landlords and tenants have altered the rental landscape for both sides. It is no surprise that the catalyst for this has been inflation. Reaching a high of 10.4% in February, the sharp increase in the cost of living changed the mindset of tenants overnight. Higher levels of due diligence is being undertaken by both commercial and residential tenants prior to committing, with a particular focus on energy costs and building efficiency, as they seek to fully understand their liabilities in advance. This has naturally changed the types of properties tenants look for, with ‘all bills inclusive’ being the preferred option, but otherwise looking for newer more energy efficient properties.
On the other side, and also impacted by inflation, are the landlords and investors. Higher inflation rates has led to higher borrowing costs, increasing landlord’s mortgages and reducing their return. Average mortgage rates exceeded 6.5% in the summer, putting extra pressure on landlords and forcing many to re-evaluate their investment strategy. This has put additional strain on the rental sector with a worsening shortage of residential properties available for tenants. The result? Fast rising rental rates, which have only led to further compound the cost of living problems facing tenants. The North West has seen particularly high competition for tenants who have been fighting to secure accommodation, with 3 regions within Manchester alone featuring in Rightmove’s ‘top 10’ rental hotspots list for 2023, with an average of 47 enquiries per available property. UK citizens now spends the highest percentage of their salary on rent in Europe, averaging 39.1%.
Breakdown of average monthly income spent on rent by country
Data: National Housing Federation
Built to Rent has also seen a shift during 2023, with a heavier focus of investment now being allocated to single family housing (SFH), but the total levels of investment has not escaped the economic turbulence. Overall investment in the BTR sector to Q3 was down for the year, which was reflected in both the deal numbers and average deal size – down 14% on last year. SFH however boosted investment levels, making up 29% of total investment to Q3, way above the previous average of just 6%. The BTR market remains strong and Knight Frank predict that £102bn will be invested into the sector by 2028.
BTR investment volumes. BTR investment proportion
Data: Knight Frank
Looking ahead, the three top performing sectors from 2024, as forecast by Savills, are buy-to-let in the North West, London industrial and retail warehouses, making the North West the key location of focus for residential buy-to-let investors. Increased interest and mortgage rates over the past year – for once – resulted in reports not looking on the property locations that had increased the most in value, but eyes were instead focused on which locations were the most resilient to the market conditions. A clear divide was seen between the North & West and South & East, with the North West in the top 3 more resilient regions during the year to Q4 2023. The North has ‘weathered the storm’ with specific areas even seeing increases for the year, such as Manchester at 5.1%. With inflation reducing over the second half of 2023 and mortgage rates starting to come down, it is likely we could now be at the turning point. The North West is well positioned for this and it is no wonder Savills has put buy-to-let in the region into their ‘top 3’ sectors forecast for growth, predicting annualised returns between 8.5% and 9.2% between 2024-2028.
Change in property values Q4 2022 – Q4 2023 (%)
Data: Land Registry
Will house prices fall in 2024? The Times
Regeneration Reshapes Liverpool Property Market, RW Invest