Dataloft’s PRS Squared Index: Predicting Rental Success, which factors matter?
The growing size and scale of the private rented sector is not new news. Headlines shout about the changing profile of the housing market and, since the millennium, the proportion of households renting privately has grown from 10% to 19%.
But how do investors decide what to buy? Which towns and cities should investors look to for high levels of rental demand and future rental growth? Which demographic and economic indicators are best at predicting performance? The Dataloft PRS Squared Index monitors key indicators for 50 towns and cities across the UK to help our clients predict performance and we have picked out some of the highlights in this article.
A strong local economy is strongly associated with an active rental market – best judged through local earnings and job growth. The airport towns of Luton and Crawley (for Gatwick) have seen the strongest earnings growth over the last few years.
As a predictor of future jobs and earnings, we keep an eye on towns and cities that are nurturing new businesses. Cambridge, Aberdeen and Aldershot are top of the league for new patents per head of the population. Aberdeen and Aldershot have dominant local employers (oil and military) that are contracting, which would account for the high rate of new start-ups.
Demographic data tells us a lot about the scale and strength of the rental market. Is the population growing? How about the number of young professionals, the Holy Grail for rental demand? University towns do well on this measure, particularly those with strong research facilities that hold onto students well beyond graduation. Cambridge and Oxford rank highest for locations with a young demographic (aged 20 to 44years). Coventry, the location for Warwick University, has been a chart topper in terms of overall population growth as well as strong growth in rental households.
Affordability is another crunch factor for rental demand. In places where house prices are particularly high relative to earnings, more people will stay longer in the rental market. London is our nation’s primary example of overstretched affordability, but Oxford and Cambridge rival London. In all three locations it currently takes over 50% of household gross earnings to meet mortgage payments for the average house price. However, investors need to be aware that there is an upper limit for rental affordability too.
This is no more than a glimpse of the indicators on our rental watch. There are many other factors that influence demand. We have devised a 4-part framework for assessing and weighting the complex web of factors that affect rental demand. This structured approach allows investors to compare and benchmark locations and ultimately to build portfolios based on places with the best prospects for tenant demand and rental growth.