Yields remain stable, but rent rises highly likely

More landlords will decide to raise rents in 2023 because profitability has taken a hit, according to a report.

Foundation Home Loans says that larger landlords are 20% more likely than smaller landlords to put up rents in the first six months of 2023 after profits fell between the third and final quarter of 2022.

The survey found that ‘increased running costs’ were the most common reason given for higher rent prices being imposed by landlords.

Other reasons include rising mortgage costs and matching rents within the local market.

The average yield fell 0.1% to 5.7% in the fourth quarter – properties in Wales offered the best yields at 6.4%.

‘Positive fundamentals for professional and larger portfolio landlords’

George Gee, the managing director at Foundation Home Loans, said: “There are some very positive fundamentals, particularly for professional and larger portfolio landlords, in terms of stable rental yields, strong tenant demand and ongoing profitability of portfolios.

“However, as we might expect, landlords who have a small number of properties are being hit hardest by the rising cost of letting a property including potentially increased mortgage costs.”

He added: “It is for these reasons, and the continued low supply of properties in the private rented sector that many landlords are likely to raise rents in 2023, as they also seek to realign their properties for the local market and make sure these properties can continue to make a profit.”

Rents will increase by an average of 7.7%

As a result, the survey highlights that rents will increase by an average of 7.7% and landlords with fewer properties will see the highest rent rises of 8.7%.

Also, 81% of landlords said they were making a profit from their letting activity, down 5% on the figure from the previous quarter.

However, for those landlords who have four to five properties, 90% said they continued to make a profit.

When it came to yields, HMO properties went back to the top spot to offer the strongest yield by property type, at 6.4% for the quarter, followed by multi-unit blocks at 6.2%.

Landlords said renter demand was stable

When asked about tenant demand, 65% of landlords said renter demand was stable in the last quarter.

The demand varies with landlords in central London reported the highest strength, but demand appears to have fallen in a number of regions including the North West, West Midlands, the South East and outer London.

Despite the fall in demand, 33% of landlords say they are planning to remortgage over the next 12 months.