The impact of uncertainty on the rental property market in Wales – by David Owen

David Owen, Business Development Director for Wales, delves into the uncertainty in the rental property market for landlords and investors.

You can contact David here.

Over the past year, the UK economy and lending market has been surrounded by political and economic uncertainty. With the Bank of England implementing seven consecutive interest rate hikes in the past year alone, challenges have been presented for landlords, particularly those with older properties. Sustaining these hikes has proven difficult due to a lack of financial resources for property improvements, coupled with increased regulatory demands. Moreover, yields are shrinking, leaving many landlords struggling to break even.

The market seems to have an increased level of properties for sale, which has in turn affected the values, showing a decline over the last six to nine months. Nationwide has recently reported a 5% decline in the last 12 months in Wales.

The demand for rental properties remains high, especially amongst landlords with large residential property portfolios. They have subsequently identified the long-term investment potential as rents continue to increase. This trend has led to a growing demand for financial ‘hunting pots’, enabling investors to snap up properties as soon as they hit the market, rather than missing opportunities due to the time-consuming negotiation of new facilities.

In contrast, owners of some larger commercial properties are finding it increasingly difficult to attract customers to buy or lease properties. In response, they are converting these properties into residential units for the rental market, recognising the high demand.

In support of the above, discussions with our network of finance brokers and intermediaries across Wales indicate that property purchases are generally down and refinance is robust, as it offers a better option than going onto the standard variable rate after fixed terms have ended.

A recent study by RICS revealed that 58% of respondents still perceive the market to be in a downturn phase, with subdued activity due to the current fragile economic outlook. The same study highlighted that more than 75% of contributors foresee pressure on corporate cash-flows intensifying in the coming year.

While loan applications for finance continue across the UK, lending criteria has tightened, and deals take longer to complete compared to previous years. We, and our intermediaries, believe that this could be attributed in part to commercial property values falling by approximately 30% and residential properties also dropping by 5%. While this presents opportunities for some, it poses challenges for current landlords, along with higher debt burdens as many fixed-term mortgages come to an end.

However, it’s not all bleak for landlords and SMEs across the region, as there are some signs of optimism ahead. Medium to larger landlords will be looking to utilise background portfolios to expand and capitalise on emerging opportunities.

Confidence in the market seems improved compared to Q4 2022, but larger landlords seem to be eager to see what happens in the near future rather than jumping in at this time. This is unless they are able to pick up securities from the smaller landlords exiting the market, if they can obtain these properties with strong yields for a good price. We predict SMEs will seek to invest and position themselves for a more successful 2024 and beyond off the back of this improved confidence and positive financial performance, paired with a reduction in inflation and the base rate holding steady.

However, as a slight caveat to this optimism, I believe that over the next 12-18 months we may witness a spike in insolvency cases resulting from over-trading in the short term, and difficulties securing working capital due to weak balance sheets and tougher lending conditions. By identifying these risks early on, we can take proactive measures to mitigate the financial impacts.

In conclusion, while we continue to navigate uncertain times, we may have reached the peak of current interest rate hikes. A viewpoint echoed in a recent talk held by the Bank of England, suggesting that rates are likely to remain at their current level until the fourth quarter of next year, with a gradual reduction thereafter. The outlook for growth, both in the economy and for landlords and SMEs, appears optimistic yet steady.

This article was featured on Insider Media. You can read it here.