Profit is coming from relationships, not price increases

The broader economic environment remains somewhat bleak, but rather than allow this to add to the gloom, Nick Clay, suggests the positive relationships RLA members have with tenants will see them through these less certain times.

Macro-economic environment

The Private Rented Sector, like other economic sectors, is facing a period of uncertainty: the economy is on a sluggish growth path – limited growth in the first quarter of this year is expected (according to independent forecasts such as PwC) to fall back over the rest of 2019, before a recovery next year. ONS data shows that even though private rental housing price increases have been modest, wages are still struggling to keep pace with price increases (See Chart 1). 

Chart 1-The growing gap between wages and PRS rent increases

Meanwhile, rent increases across the regions are themselves highly variable. Chart 2 below shows annual growth, April to April, across England and Wales.

London and the North East are not often discussed in the same breath when it comes to analysis of property markets, but here they share the unwanted prize for being the regions with the lowest annual growth. 

The East Midlands experienced rental growth of just over 2%, but even this just about kept pace with inflation (CPI for the twelve months until April was 2.1%)

Chart 2 - Current growth in Private Sector Rents across England and Wales

Landlords' Confidence

The modest price increases highlighted in Chart 2 are reflected in emerging findings from our forthcoming Landlord Confidence Index.

This index is based upon responses to the RLA’s quarterly survey of landlords and provide a snapshot of confidence in the sector. The aim being to provide an indication of key investment, portfolio and rental decisions and the changing factors which are having an influence on those decisions.

The graphic below shows our first look at the Index:

Our forthcoming Landlord confidence index

The infographic shows that landlords in North East are by far the most gloomy, followed by those whose properties are mostly in London. Not surprisingly these are the areas in which rental price growth has been below average in recent months.

In contrast, landlords in the East Midlands – where rental growth is the highest of all the regions – are the least despondent about prospects over the next twelve months. Landlords in the South West (again where rental growth is more positive) are not far behind.

Portfolio Changes

Our research also shows the likely key decisions landlords are expecting to take through the rest of 2019 and into 2020. The chart on the bottom left of the infographic shows that over half of all landlords are planning to see out 2019 with the same property portfolio they started the year with.

However, those that envisage selling outnumber those landlords looking to expand their property base by a ratio of over two-to-one. This reinforces the findings of recent RLA surveys, that pessimists are presently more pessimistic than optimists are optimistic!

Rent increases

Finally, landlords are more likely to be looking at rent increases over the next twelve months. Rather than this being a sign of market confidence, factors such as changes to Mortgage Interest Relief and the costs of new legislation are as likely to explain these changes (see the circular pie charts in the bottom right of the infographic).

Positive news?

The short term may lack positive news, but with the build of social and private sector new dwellings stuck, there is no let-up in the demand for property in the PRS. Chart 3 below shows the quick turnaround our members are reporting in filling vacant properties:

Chart 3 - duration of vacancies (from our forthcoming Q1 survey)

RLA members are also highly efficient at letting property – 71% of those landlords with vacancies reported their properties were empty for less than four weeks. Finally, RLA landlords set great store in the relationship they develop with their tenants.

It will be this combination of patience, skills and the personal touch which will ensure landlords are able to ride out the 2019 uncertainty and head towards, hopefully, better times in 2020.

A shorter version of this article appeared in the Jul/Aug edition of the RLA magazine Residential Property Investor. The views expressed are those of the author and not necessarily those of the RLA.