What the future holds for UK residential rental values
With the global pandemic in mind, Savills researchers have looked at how residential rents and tenant demand have changed in previous periods of uncertainty and forecast what may happen to UK rents.
Researchers Richard ValentineSesley and Jacqui Daly looked at three sources of rental data that reveal that over the last 25 years, residential rents have been much less volatile than house prices.
This is what the researchers discovered:
Following the Global Financial Crisis in 2008, rents exceeded their pre-downturn peak within two years and nominal rental growth has averaged between
2–3 per cent per annum over the past 15 years, in line with income growth.
Comparing the MSCI residential rents index to other sectors suggests that residential was the most resilient property asset class during the last downturn between 2008 and 20013. Residential rents fell by -2.2 per cent to their trough at the end of 2009, compared with -13.5 per cent for offices, -5.4 per cent for retail and -4.6 per cent for industrial. This stability was underpinned by more consistent levels of demand than found in the residential property sales market.
There was a significant fall in the number of new buyer enquiries following the run on Northern Rock in the lead up to the last recession. This coincided with the period of house price falls.
In contrast to buyer demand, residential tenant demand never fell. During late 2009 and early 2010 there was a period where demand grew more slowly compared with the preceding few quarters, but the RICS survey reported a consistent, rising tenant demand.
Overall the data analysed by Savills shows that residential tenant demand is considerably more consistent and robust compared with the more volatile level of demand in the sales market.
The researchers concludion is that in the long term, the outlook for rental growth will be linked to what households can afford.
They says: “While we may see short-term fluctuations in rental values as local levels of supply and demand shift, growth over the next five years will be linked to the state of the economy and the strength of income growth.
Therefore, we anticipate that any falls in rents will be smaller than those in capital values and are likely to return to growth at an earlier stage.
“When we published our forecasts in November 2019, our rental growth estimates were predicated on income growth of three per cent per annum over the next five years. We expected this to feed through to overall rental growth of 15.4 per cent for mainstream UK rents between 2020 and 2024.
“A weaker economy will have a detrimental impact on income growth, highlighted by the recent spike in unemployment, which increased by 69 per cent between
March and April to 2.1 million. Despite this, Oxford Economics’ current baseline forecast expects incomes to fall by only 1.6 per cent this year, followed by a rebound of 5.4 per cent and then annual average growth of 3 per cent until 2024.
“This results in total income growth over the next five years being only two per cent lower than the forecasts we published in November 2019.
“The capacity for rental growth as we come out of the lockdown will be hampered by slower income growth and suggests that we are likely to see rents rise by 13.6 per cent by the end of
2024.