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Paragon PRS Trends Q2 report reveals Covid-19 impact on landlords

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"After reopening in May, the UK housing market has shown positive signs of recovery, perhaps further boosted by Rishi Sunak’s Stamp Duty holiday.

Industry indices highlighted the release of pent-up demand as would-be home movers revisited plans put on hold by the pandemic. Landlords also sprung back into action, increasing the supply of rented housing to record 7% growth on this time last year.

A sense of optimism has returned during the second quarter. Compared to Q1, fewer landlords expect their lettings business to be negatively impacted by Covid-19 and to a lesser extent, only 1 in 5 anticipating a ‘significant’ negative impact. Rental yields have increased from the historic low reported in Q1 and the number of profitable landlords has risen by 4 percentage points since Q1 to 87%.

These may be factors in the annual rise in landlords who now rate their expectations for the next three months of their business as ‘Good’ or ‘Very Good’. Although we’re yet to confirm that this increased confidence will translate into UK sales activity, research points to a purchase upturn over the remainder of the year.

Early evidence suggests that Private Rented Sector (PRS) recovery may be boosted by people reassessing what is important about their home, including where it is located. Although too early to tell how this will affect demand in the longer term, we are already seeing some regional variation in the market.

Although often an anomaly, it is interesting to note that London is one of the few localities to buck the general trend for rental demand outstripping supply and the place where landlords are least likely to report a rise in rents.

London has experienced a high proportion of short-term lets coming onto the market as tourism has dried up and may be why landlords in London are most likely to anticipate a negative impact on their lettings business as a result of the pandemic."
 

 

The impact of Covid-19

Landlords expect the impact of the Covid-19 pandemic to be less severe than originally anticipated.

The percentage of landlords who expect their lettings business to be negatively impacted by the pandemic has decreased from 81% in Q1 to 69% in Q2. Fewer landlords surveyed feel that the impact will be significant with the number falling to 21% in Q2 from 46% in the previous quarter.

These expectations vary across England, however. Higher numbers of landlords who operate in central London, the West Midlands and outer London anticipate a negative impact on their lettings business as a result of the pandemic. Those with properties in Yorkshire and Humber are least likely to think they will be affected.

 

Rental demand

Since the property market reopened in England in May, with Scotland and Wales following in June, several industry indices have pointed to strong levels of tenant demand.

Property portal Rightmove reported an all-time high number of phone and email enquiries to agents on Monday 6 July.

Data from Zoopla’s June 2020 UK Rental Market Report shows overall demand for rented homes is 25% above 2019 levels with current demand 33% higher than it was before lockdown.

This extra demand is more evident in some cities and when compared to three year averages, particularly Bradford, Sheffield and Cardiff where demand sits just under 150% and supply ranges between -10% and -30%.

London bucks this trend however with 3 in 4 of the landlords surveyed now reporting a recent decline in tenant demand.

Alongside this rise in demand, supply has increased with 7% more homes available for rent compared to the same time last year.

 

Meeting tenants’ property priorities

The need for us to stay in our homes over the past few months has reminded us of the importance of our living spaces. As a result, some landlords who have been in contact with tenants during the pandemic have reported a shift in their property priorities.

Landlords with 20 or more properties were most likely to see a change in the features people place at the top of their property wish lists with 24% now looking for home working space. These landlords also saw 32% of tenants place homes with gardens in their top three property priorities and 17% desiring properties with parks and open spaces nearby, hinting at outdoor space becoming more important than it was before the Covid-19 outbreak.

 

Regional variation in rents

The North West and South West are locations where rental increases are most likely, with 28% of landlords who operate in each of these areas saying that they expect them.

Just 6% of landlords operating in Central London foresee an increase in rents, making it the area where rent rises are least likely. This is followed by Outer London and the North East where 10% of landlords expect to see a rise in rents.

 

Rental yields

Average rental yields in Q2 are 5.8%. This is an increase of 0.5 percentage points from the historic low of 5.3% in Q1.

As we have seen in the past, the highest average yields (6.5%) are generated by landlords with the largest portfolios (11+ properties).

Looking at rental yields regionally highlights that the highest average of 6.5% is achieved by landlords in the North West while the lowest at 5% is gained by those operating in Central London.

Rental Yields by location

Rental yields by number of properties

 

Profitability

A typical portfolio generated a gross rental income of £60,000 per annum and has a value of around £1.3million. The average size is 7.0 properties, each valued at £187,000 and generating £714 per calendar month or around £8,571 annually.

Despite a challenging economic climate, 87% of landlords report making a profit in Q2, up by four percentage points on Q1. A loss was posted by just 3% of landlords, although this rises to 6% amongst those with a single rental property.

Lettings activity is relied on for a full time living by 3 in 10 landlords, rising to over 3 in 4 for landlords with 20+ properties.

Profitability

 

Portfolio intentions

In Q2 17% of landlords said they intend to expand their portfolios in the next 12 months. This is an increase of 5% and the highest level in four years.

Terraced houses are the most popular choice amongst these landlords with 51% indicating that they will opt for this property type.

Semi-detached houses were cited as the property type that 36% of landlords planned on buying, making them the second most popular choice.

The proportion of landlords who will seek to reduce the number of properties they own has fallen to 17%, marking a three year low.

Looking at portfolio intentions by region, the North East and North West are set to see the most buying and selling with almost half of surveyed landlords in these areas stating an intent to be active in the market.

Central and outer London as well as the South West are areas where fewest landlords intend to be active in the market with nearly two-thirds expecting to see no change to their portfolios.

Portfolio intentions

 

 

For further information contact:

Michael Clarke
Head of Media Relations
Tel: 0121 712 3156
Email: [email protected]

 

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