Tenants sitting pretty as rents fall

Tenants sitting pretty as rents fall

Rents will fall by up to 10% this year, according to some of Britain's biggest letting agents, as a wave of properties that owners and developers can't sell have started to flood the rental market.

The fall in rents will bring welcome relief to tenants but will squeeze buy-to-let landlords who now face a triple whammy of falling property values, sliding rental income and rising mortgage costs. To add to their misery, the Law Commission this week issued proposals on "encouraging responsible letting" that are likely to drive up administrative costs for landlords.

The forecast fall in rents will bewilder landlords, given that many who would otherwise be buying are sitting out the property market woes by renting instead. Shouldn't that be pushing up rents?

The reality, according to property agents Knight Frank, is that although there is a big rise in the number of people wanting to rent, it has been more than offset by a surge in "forced landlords" who, unable to sell, are now placing properties with letting agents.

Liam Bailey, head of residential research, says rents in the London area peaked in 2007 and will fall 10% this year. "The problem is that the volume of tenants has risen by 25%, but the volume of property available for rent has risen by 35%. There is a lot of stock coming in from people who can't sell and who are putting it on the rental market instead. There is a lot of choice out there for tenants."

Jane Ingram, head of.....continued below

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lettings at Savills, says: "Across the UK we are seeing a lot of people choosing to rent rather than buy, and our offices are very busy. But there has also been a surge in stock, and I would say in some areas [rental] prices have fallen by 10%. In Docklands, in particular, we are seeing an oversupply. Developers have decided not to sell and are putting properties through the lettings market."

Knight Frank and Savills have a strong bias towards higher-priced lets in London and the south-east, but in the rest of the UK there is growing evidence of a wider slide in rents. According to the Gumtree 2008 rental index issued this week, average rents over the past year have fallen by 0.9% in Leeds, 2.7% in Manchester and 3.5% in Birmingham. However, not all surveys suggest rents are under pressure. Buy-to-let lender Paragon says that, in the past year, rents have risen by 9.3%.

Many amateur buy-to-let landlords who poured into the market in 2006 and 2007 may be facing huge losses. Hargreaves Lansdown suggested this week nearly 200,000 buy-to-let mortgages taken out in 2007 may be in negative equity as a result of falling house prices, and that 10,000 are in arrears.

"Recent buy-to-let investors may find themselves facing a 90% capital loss if they borrowed 90% of their property value," says Laith Khalaf of Hargreaves Lansdown. "Property investors may be forced to sell up prematurely because interest payments become unaffordable. The real test of affordability is to come in 2009/10 when those who borrowed large sums at relatively cheap rates in 2007 come off two and three-year fixed deals."