A number of recent surveys have suggested that more confidence is returning to the market as mortgage rates continue to fall.

In January, for example, The Mortgage Lender published research showing that 52 per cent of residential buy-to-let landlords had expanded their property portfolios over the last 12 months, adding that a similar majority intend to buy one or more additional properties in 2024. Importantly, a third of those respondents said that high tenant demand was a key reason for choosing to invest.

Demand is a fundamental market force that helps to set market prices, both for tenancies and the capital values of homes more generally. In the coming year, it will greatly influence the returns that landlords can expect to achieve. Consequently, in this article, we’ll consider the latest demand trends, and what they might mean for investors.

Price and Affordability

It’s no secret that the last few years have been hard for ordinary Britons. For much of the last 15 years, house prices have grown much faster than average earnings, so prospective buyers have found it increasingly difficult to afford the homes they want.

In 2022 and 2023, affordability was further constrained by fast-rising inflation and, in particular, by the soaring cost of vital commodities such as food, fuel and energy. In addition, virtually all households have been hard-hit by record levels of taxation, and millions of borrowers have had to face higher interest rates and demands for larger deposits.

Happily, some of those pressures are now abating. Inflation has fallen dramatically since the same time last year and, amid widespread expectations that the Bank of England will soon reduce the base rate, mortgage lenders have been cutting their own rates for months.

Nevertheless, that doesn’t spell an end to domestic budget concerns. Inflation is still double the Bank of England’s target, and mortgage interest rates are still considerably higher than they were. That means that first-time buyers and anyone coming to the end of an existing fixed-term deal will be facing much higher costs than they would have seen just a couple of year ago.

Tenants, too, face similar pressures. The costs of food and other goods are still rising, and although fuel and energy costs have started to moderate, they are still well above historic norms. And in addition, of course, average rental values have been rising quickly. Rightmove is just one of several sources that suggest that rents have risen faster than average earnings. Its Rental Trends Tracker for Q4 2023 shows that rents rose by +9.2% year-on-year. For comparison, a report from ONS in January 2024 states that average annual growth in earnings was just +6.6%.

Faced with such pressures, homebuyers and tenants alike are changing their behaviours, looking for ways to make their budgets stretch further.

Demand for Smaller Properties

Successive market reports have shown that demand for smaller properties is rising quickly. And it’s coming from more than one direction. First-time buyers, of course, usually have little choice but to seek smaller, lower-priced homes. That’s typically a consequence of limited savings coupled with high interest rates, strict mortgage stress-testing and a requirement for substantial deposits.

However, research has also hinted at a growing trend for downsizing. Many older homeowners are reportedly selling their existing homes, buying cheaper properties and thereby releasing equity to help fund their retirements. In other cases, financially squeezed mortgage-holders are choosing to move to smaller properties in order to reduce their monthly payments.

All of these trends are piling on demand for starter homes, small apartments and bungalows. Over time, this rising demand, coming from three different market segments, is almost certain to drive their average capital values higher. For investors, these smaller homes therefore present an appealing prospect: low upfront costs, plus the potential to outperform many other property asset classes in terms of capital growth, rental returns and yields.

Demand for More Energy Efficient Properties

Energy price hikes came as an unwelcome shock to millions in 2022, partly as a result of Russia’s invasion of Ukraine. Rising far faster than average earnings, they focused widespread attention on the subject of energy efficiency in way that global environmental concerns probably had not.

Since then, estate agents and professional bodies have reported strongly growing interest in more energy efficient homes. Often, that translates into rising demand for new-build and off-plan residential properties, which are typically built to much higher standards. ONS notes that the average property in England and Wales has an Energy Performance Certificate rating of D, but that 85% of new-build properties have an EPC rating of A or B. Only 4% of existing homes meet that same A/B standard.

In 2023, the House Builders Federation calculated that “the average new build homebuyer saves £135 a month on energy bills, amounting to more than £1,600 a year, compared with purchasers of equivalent older properties. This saving rises to over £180 per month for purchasers of houses, rather than flats or bungalows, totalling £2,200 a year.”

At a time when household budgets are so tightly stretched, it’s small wonder that many prospective buyers are turning their attention to new-builds and off-plan developments. And, again, this represents an important potential growth market for investors; as demand rises, so the capital values of newer properties should tend to outgrow those of other types.

In the rental market, exactly the same concerns apply. Running costs for tenants are broadly similar to those for home-buyers, and numerous reputable sources have reported that tenants will readily pay more for more modern properties that are warm, dry, safe and cheaper to run. In 2023, Dataloft reported that “78% of renters considered the Energy Performance Certificate important when searching for a property.” This followed a December 2022 report by Legal & General Capital, which found that the average tenant would pay a 13% premium to rent an energy efficient property.

In January 2024, this trend was still continuing strongly. In a press statement, Jonathan Rolande of the National Association of Property Buyers said: “Homes that aren’t energy efficient may find their value dip sharply,” adding that energy efficiency is becoming more relevant for buyers and tenants of all property types.

In the same statement, he noted several other demand related trends:

  • More emphasis on 4g, 5g and super-fast broadband
  • Proximity to local amenities
  • Access to local and regional transport infrastructure

Demand for Properties in More Affordable Areas

Logically, another way to make budgets stretch further is to seek property in more affordable locations.

There are often significant regional disparities in house prices and rental values. For example, according to the January 2024 House Price Index from Zoopla, the average value of a UK residential property was £264,400. However, the mean in Glasgow was £146,300, while in London it was £536,800.

Simply moving to a different town or city is an obvious way to save money, and many people have done exactly that. Faced with a severe cost-of-living crisis, they have chosen to relocate, often migrating from more expensive city centres towards either commuter belt locations or smaller urban centres.

A number of towns and cities in the Midlands and northern England (i.e. the North West, North East, and Yorkshire & Humber) have benefited from this demographic shift. Often, skilled workers in the south will have seen an opportunity to move, having calculated that the lower cost of living in other regions could translate into significantly better living standards overall. Similarly, young graduates are now much more likely to stay in their own university cities rather than follow the pattern of previous decades and join the “brain-drain” into London, where everything costs more.

In 2024, staying (or moving into) Britain’s secondary cities will make sound financial sense for tenants and homebuyers alike. Property prices and rental values will be lower, and ordinary goods and services will be cheaper. In many cases, these smaller cities and towns will also be benefiting from ambitious economic development plans that are creating a growing need for skilled workers.

Devolution schemes, city deals, town centre redevelopments and major regional transport improvement programmes are all helping to revitalise local economies and to generate jobs. So too are the billions of pounds of investment being injected by private sector employers. With more young graduates staying, and more skilled workers migrating inward, that all amounts to a recipe for steadily rising demand for homes.

Properties in these more affordable markets therefore look set to enjoy strong demand. And that, in turn, raises a credible prospect of rising values, particularly since housing stocks are so severely limited in many parts of the country. For investors, however, there is another good reason to buy property in these lesser-celebrated secondary markets: in recent years, these have also been the towns and cities where capital values have been most resilient, and where rental yields have been strongest.

Regional Variations in Returns

According to several recent house price indices, Scotland and the North West of England have produced some of the UK’s highest rates of capital growth. In January, Rightmove suggested annual growth rates of +5.3 and +1.2% respectively. By comparison, it quoted a UK-wide average of -0.7%.

The Home Asking Price Index also listed Scotland and the North West in its top three. The North West led with +3.8%, then the North East (+3.3%) and then Scotland with +2.5%. Those capital growth rates compared against a national average of +0.4%.

Rental growth has been strong across the whole of the UK – well ahead of the rate of inflation, but on the measure of rental yield, the UK’s more affordable markets again predominate. According to Rightmove’s Rental Trends Tracker for Q4 2023, the top five regions for yields included:

  • North East: 8.5%
  • Scotland: 8.2%
  • Wales: 7.4%
  • North West: 7.2%
  • Yorkshire & Humber: 7.2%

Those are only broad regional averages, of course. At a more local level, better results can certainly be achieved in well chosen, affordable locations where prices are more competitive and demand for property is high.

Article supplied by Residential Estates

Leave a Reply