The economic recovery and ongoing low interest rate environment have done little to reverse the expansion of the rental market. In fact, house price inflation, which has surpassed wage growth, has served to push homeownership further out of reach for many.
The requirement for sizeable deposits and stricter lending criteria, as a result of mortgage regulations, have continued to act as barriers to the property ladder. As a result, demand for rental homes is still rising, underlining the long-term trend which predates the financial crisis of 2007. According to the Government’s English Housing Survey, the rental market has been growing by a staggering 17,500 households per month on average over the 10 years to 2014.
Government housing policy seeks to reverse this trend with the target of delivering 400,000 affordable homes for sale aimed at helping people access the property ladder over the course of this parliament. Measures include the delivery of 200,000 Starter Homes, the building of 135,000 new Shared Ownership homes and access to larger equity loans through Help to Buy in London.
Without policy interventions, we forecast that the rental market would grow by an average rate of 260,000 households a year in the UK. The Government target of building 400,000 affordable homes for sale would enable an average of 80,000 new households a year to access homeownership over the next five years.
Of the 80,000 new households a year which may be helped onto the property ladder, 40,000 are likely to come out of the rental market with the balance shifting out of other submarket tenures. This would reduce the growth of the rental market by 15% from 260,000 households a year to 220,000 new households a year. Hence the sector will still grow by 1.1 million by 2021.
However, we would question whether policies can accelerate house building enough to deliver 400,000 affordable homes for sale in the first place. Given the overlap between the schemes, which are focused at similar parts of the market, it is possible that one scheme would simply replace the other rather than providing additional homes. Without the higher house building numbers, it is unlikely that the Government will achieve these targets.
Policy changes aimed at residential property investors are likely to put further pressure on the already constrained supply of rental homes.
From April 2016 purchases of residential properties over £40,000 for investment will attract an additional surcharge of three percentage points above the current rate of SDLT. Hence a buy-to-let investor acquiring a property worth £500,000 would pay an additional cost of £15,000.
This stamp duty increase follows a restriction of tax relief on mortgage interest payments for buy-to-let investors with debt set against their property. Both measures are likely to limit the ability of some private investors to expand their existing portfolios or buy their first investment property. The withdrawal of tax relief may also prompt some to rationalise their portfolios although we are not expecting a mass exodus from buy-to-let. The experience of the last downturn suggests that most are long-term investors.
The Government is consulting on the policy detail, including whether an exemption for corporates and funds owning more than 15 residential properties, is appropriate (see Policy Response: Additional Homes Stamp Duty Surcharge).
We think it highly likely that corporate investors will remain exempt from these tax changes and that the appetite from housebuilders to secure deals with large-scale investors will grow strongly in 2016.
Housebuilders have relied heavily on off-plan sales to buy-to-let investors, particularly as their banks and debt funders very often require evidence of sales to de-risk the development. As a result, there is a big opportunity for large-scale investors to fill the gap through forward funding structures.
The mismatch between supply and demand for rental homes is likely to underpin rent rises, particularly in undersupplied markets. It also represents an opportunity for institutional investment at scale which has been growing steadily. Some big domestic and international players have entered the rental market and the flow of capital is building up.
The overall value of deals recorded by Savills own investment database has increased from £2.3bn in 2014 to £2.65bn in 2015. The number of deals backed by institutions doubled between 2014 and 2015. Last year (2015) over 30% of all rental market deals were backed by institutions compared with 22% in 2014. Private companies also represent a significant part of the sector, accounting for 40% of deals.
As the market evolves, we are seeing a shift in the corporate-backed rental market from one in which investors purchase ready-made schemes to one in which forward funding development is becoming increasingly prevalent. This document outlines opportunities for investment and development in the rental market as demand is here to stay.