Recent data has found that annual rental figures had increased by 5% in May – the highest amount in almost 7 years.

Since the start of the year, rental prices have risen to record levels across the UK, with month-on-month increases of up to 3% in certain regions between April and May. On average, rents in the UK saw increases of around 1.2% in May to £1,213 PCM – up from the April figure of £1,199.

In this timeframe, rents in London also reached around £2,039, one of the highest monthly rates ever recorded. Other areas, like the North West, are seeing promising rental growth. This follows an already high rent increase of 4.9% on the year in March, further showcasing this upward trend in UK rental figures.

But, as rental figures continue to rise, what does this mean for the buy-to-let property investment market?

Why Are Rents Rising?

There are various reasons why rental prices in the UK are rising so constantly across the board.

Higher Mortgage Rates

According to RWinvest, the combination of higher mortgage rates and a shortage in supply of good-quality and affordable housing – particularly for first-time buyers – appears to be persuading many prospective buyers to continue renting (at least until the market stabilises or returns to the more reasonable levels seen previously).

To offset rising inflation levels, the Bank of England has also increased their mortgage interest rate to a record-breaking 4.5% as of May 2023. This is the highest rise in interest rates in the UK since 2008 and has made the cost of borrowing much higher than many can afford – drastically limiting the number of people able to take out a mortgage and purchase a property this year.

Alongside this, as inflation rates have yet to fall back down to more normal levels, there is a huge possibility that this rate could increase even further over the coming months.

Limited Housing Supply to Match Demand

The ratio between supply and demand has been skewed in the UK for a long time.

Put simply, there are nowhere near enough homes to match the level of demand.

According to Zoopla, the number of people currently enquiring about new homes to rent has risen by around 23% since 2022, with rental enquiries per estate agency branch being 46% above the national 5-year average.

In comparison, the current stock of homes to rent is roughly 38% below the average of the last 5 years, highlighting the considerable gap between supply/demand that the UK currently faces.

One of the most prominent outcomes of this disparity has been an increase in the amount of lets agreed upon before viewings have even taken place, as well as a growing number of instances in which potential tenants are forced to outbid each other in order to secure a place to live.

This continued imbalance between supply and demand, as well as the increase in rental value growth, is fuelled partly by a reluctance of first-time buyers to enter the market, which stems from a number of factors: including the ongoing cost of living crisis and fluctuating mortgage rates.

Rising Economic Immigration Boosting Demand

Post-pandemic, and with the loosening of travel restrictions, the number of people arriving in the UK has bounced back.

According to Zoopla, one of the underlying drivers of rental demand is the strength of the jobs market. According to the latest ONS data, with over 1m vacancies, the UK market has seen considerable improvement over the year.

At the moment, many jobs are filled by UK nationals, but the most advanced economies are increasingly looking towards overseas talent to fill positions, particularly high-skilled workers.

In an effort to attract skilled talent, the government conducted major shake-ups to visa applications.

This led to record-high immigration levels, totalling over 500,000 people in the year leading up to June 2022.

Zoopla also posits that rental demand has been boosted by humanitarian efforts supporting Ukrainians fleeing the war, as well as specific visa schemes for British Overseas citizens looking to leave Hong Kong and move to the UK.

According to Investors Chronicle, however, whilst this may explain the sudden nature of rental increases – as a result of many immigrants “tending to be younger and therefore more likely to rent” – there is no proven and direct link between immigration and rental figures.

Growing Number of International Students

The decline of student accommodation in the last few years has been particularly detrimental for international students living in the UK, with many finding rental costs becoming increasingly unaffordable.

In 2022, however, the government issued around 500,000 visa grants for those studying in the UK from abroad – a notable 80% increase in comparison to pre-pandemic figures.

As well as this, there were around 105,300 Indian nationals enrolled in UK universities. Again, this is an impressive improvement, with approximately 34,300 recorded in 2019.

Following the loosening of COVID-19 restrictions in the country, predictions also suggest an increase in the number of Chinese students studying in the UK. It is only inevitable then that the student property investment market will flourish alongside these rates.

As of May 2023, the UK continues to attract a large number of overseas students. According to HESA, there are currently more than 600,000 full-time international students, an increase of over 400,000 compared to five years ago.

As the number of international students undoubtedly increases further, the number of potential tenants for properties will also increase and improve the likelihood of long-term gains for the foreseeable future.

Landlord Economics Have Changed

The amount needed to purchase a new home for sale with a mortgage has been steadily increasing over the past couple of years.

Again, this is mostly in part due to soaring house prices, fluctuating rental yields, and changes to the lending criteria – as well as predominantly rising mortgage rates. As buy-to-let mortgages are generally interest-only, lenders will often require the rental income generated by a property to be at least 125% of the mortgage interest payments for lower-rate taxpayers.

As a result of changes made in 2016, this value increases to 145% for higher-rate taxpayers.

In London, the amount needed for investment has increased from £130,000 to over £255,000 (50% of the property’s value.

Considering that the typical London property investment will see a gross rental yield of around 4%, this is a significant sum of money to depart with.

However, where rental yields are however – in regions like the North West, for example – the amount needed to buy is typically lower. For instance, Liverpool-based development The Prestige features units available from £154,950. In comparison, the average London property would set an investor back £740,740 – a difference of over £580,000.

These shifting economics within the buy-to-let market, as well as rising costs, more regulation and the uncertain outlook for property values, have drastically changed the way landlords look at property investment.

The majority of buy-to-let investors are now looking towards buying lower-value homes with higher rental yields, but some other strategies like off-plan property investment (which has the potential to deliver higher revenues and stronger capital appreciation in the long run).

Where are Rents Rising the Most?

From a buy-to-let investment viewpoint, there are many regions across the UK showing particularly strong signs of rental growth in 2023 so far.

Areas like the North West, for example, have seen figures rise by an average of 0.83% between April and May.

This sits decently above the national average of 0.73% and well above the 0.32% average in the Greater London area.

This makes the North West one of the most promising regions to invest in when it comes to rental growth in the UK.

This comes alongside the North West’s most prominent cities – Liverpool and Manchester – establishing themselves as one of the biggest competitors to the capital when it comes to property investment – with both coming out on top in terms of strong rental yields and low property prices, especially in comparison to their London equivalents.

A recent report from January also found that rents in Liverpool have increased by 8.70% since 2020. During the same period, Manchester also saw similar growth, with rental prices rising by over 13%, one of the highest increases in the UK in recent history.

In terms of future growth, the North West region is also expected to come out on top once again, with an 11.7% rise in property prices projected in the next five years to 2027.

Summary

There is no particular reason as to why rental figures have increased so rapidly over the last few months. However, the underlying shortage of housing in the UK, combined with recent issues such as high inflation, high-interest rates, rising demand and the rise of other revenue streams for landlords, has no doubt played a significant role in securing this new status quo.

While rents are currently skyrocketing, it’s vital that both landlords and tenants alike understand that this specific cocktail of events is unlikely to last forever.