Paragon Bank paints optimistic picture for private rented sector
The bank puts a positive spin on buy-to-let, despite others regularly asking, “should I give up on buy-to-let?” And Savills reveals a secret market segment that heralds growth.
Ahead of an uncertain election, Paragon Bank’s Q1, 2024 PRS Trends report paints a surprisingly optimistic view of the private rented sector (PRS).
Landlords, the report states, are “buoyed by continued strong tenant demand and signs that the business environment is improving as part of a broader economic recovery.”
Paragon’s PRS Trends report gauges several measures of the PRS market using in-depth interviews with almost 800 landlords, including asking about:
The report concluded that over 80 percent of landlords were experiencing strong tenant demand, with 43 percent stating demand is strong, while 40 percent said it is very strong.
What’s more, they reported average rental yields increasing during the last year, increasing from 5.2 percent in Q1 2023 to 6.1 percent in Q1 2024.
Given the uncertain outlook for the economy as a whole over the preceding months, and the uncertainty of a looming election, it is perhaps understandable that landlords are cautious about what lies ahead, but the report concludes that they have “confidence in their own lettings businesses,” which have seen “a significant uplift since the Q4 2022 mini-budget.”
Paragon also found that despite a very slight increase in the rent arrears position, “the proportion of landlords who have experienced tenants in rent arrears has decreased by around 20 percentage points over the past five years.”
Richard Rowntree, Paragon Bank Managing Director of Mortgages, has said:
“PRS Trends reflects the general mood at the moment – growing but cautious optimism. Despite the economic instability we’ve faced, we see many lettings businesses in safe hands, with landlords astutely managing portfolios to remain profitable, something that is important if they are to continue to provide an essential societal function – good quality homes for a varied population of renters.”
The snapshot below from Paragon’s report gives a quick overview of the state of the buy-to-let market in 2024. Interestingly, over 50 percent of landlords own their properties outright, while almost 25 percent now own their portfolios through a company structure.
A recent Investors’ Chronicle study concluded that buy-to-let has become increasingly unprofitable for landlords with mortgages. Several factors are persuading landlords to desert the sector including falling house prices, higher costs, an adverse tax regime, increasing regulation and changes to capital gains tax. Using a company structure isn't the panacea that works for every landlord.
It’s been a difficult time for buy-to-let investors ever since George Osbourne decided to remove tax relief on mortgage interest payments. Since then, a stamp duty surcharge, rising mortgage interest rates, less generous tax treatment on expenses (the removal of the wear & tear allowance) ever tightening and complicated regulations, and for many landlords, the numbers don’t stack up.
However, demand for renting remains strong as the Paragon report testifies, so any post-mortem on the buy-to-let market is perhaps premature. As the IC article says, “the patient still has a pulse”. Profits might not be what they were, especially for landlords with high gearing, but for certain investors, and especially those with cash resources, buy-to-let is still quite profitable.
The fact that some landlords are choosing to exit the sector leaves those who remain in a more secure position, with rental demand higher than ever, and likely to remain so for the foreseeable future.
Meanwhile, with build-to-rent (BtR), the corporate investment market continues to grow, albeit still a small proportion of the PRS.
The FT reports that older people, the “forever renters”, those people who are excluded from property ownership because of rapidly rising house prices, are forming a bigger proportion of build-to-rent tenant occupiers. The sector, which started with high rise blocks, is also increasingly catering to the single-family homes market.
For these corporate developments, the middle aged “forever renter” cohort provides a new target market segment for their multi-occupier and family home developments.
Many of these middle-aged renters have spent years with multi-occupied or single occupancy private landlords, many of them moving several times over their renting careers, having been served notice for one reason or another.
Only now do they find there are opportunities provided by BtR, able to move into brand-new build-to-rent developments with the prospect of long-term uninterrupted stays.
Many of these long-term forever tenants are in need of city centre accommodation because of its proximity to their employment, and they are willing to pay the premium rents that go with them.
So, BtR is growing, but still a small proportion of the PRS, representing under two percent of the whole. It’s a market still dominated by small-scale landlords, many owning just one or two buy-to-lets. A recent Savills analysis – see below - shows the present size of the build-to-rent market is around 102,000 homes now complete with another 55,000 currently under construction.
Paragon Bank has estimated that people over 35 accounted for more than 57 percent of England’s private renters last year, an increase since 2013 from 49 percent. Amazingly, Savills predicts that new demand among the over-35s for private renting will increase eight times by 2030.
Corporate landlords are targeting that shift in demographic. They are claiming to offer tenants more stability than their small-scale landlord competitors. They are now attracting increasing amounts of institutional investment to capitalise on “a frenzied UK rental market characterised by soaring demand and record [renting] costs.”
According to Savills, the sector attracted £4.5bn in inward investment last year, at a time when investors are wary of other property sectors, such as commercial retail and offices, for example. Private equity giant, Blackstone, a fund specialising in real estate, just agreed to buy around 1,750 new rental homes from housebuilder Vistry.
Unlike the US and much of continental Europe, the rental market in Britain is still dominated by small-scale private landlords, as opposed to the big corporates and their professional property management groups.
Head of residential research at Savills, Lucian Cook says that corporate providers have “really picked up on this trend of greater demand among older renters and are catering for that”. Investments for multifamily and single-family homes were reaching their second-highest numbers on record in the final quarter of 2023.
Grainger, one of the UK’s largest listed buy-to-rent landlords, is one such investor that’s targeting the older forever tenant demographic, gearing up their marketing efforts with promotional events such as cheese and wine tastings, aimed specifically at over-35s tenants.
These older tenants have characteristics that appeal to all landlords: these tenants have more stable earnings power than young renters, and they tend to stay put for longer. All landlords prefer this behaviour as voids and re-letting costs are reduced to a minimum.
Grainger’s chief executive Helen Gordon says:
“It’s more expensive if people move out because we [have to] freshen up [the properties]. “It’s actually quite good for us to have people with us for a long time”.
Small-scale landlords should also be enthusiastic about this demographic. There’s no reason why small-scale landlords should not benefit from these same advantages.
Richard Rowntree, mortgage managing director at Paragon, a bank that specialises in buy-to-let mortgages, says that older renters “are a good tenant . . . What we hear is that there’s less issues in terms of antisocial behaviour and noise”.
Tags:
Comments