UK residential rents: Room to grow

Contrary to received wisdom, rental affordability has been improving in England and Wales in recent years, according to a new dataset from the Office for National Statistics (ONS). As of Q1 2023 – the most recently available data from the ONS – private renters on median household incomes were estimated to spend 34.2% of their income on rent. While this is still (just about) above the commonly cited rule of thumb of a third of income being spent on rent, it is down from the 38.6% recorded in 2015[1]. Assuming average rental growth and wage growth through 2024, the proportion of income spent on rent would have, therefore, increased marginally to 35%[2].

Additionally, through our existing build-to-rent (BTR) portfolio we know that the household profile of occupiers tends to be wealthier than the wider rental market, with rents representing a smaller proportion of their income. We see 28% of household income spent on rent across the portfolio[3] compared to 31% in the wider BTR sector[4].

There are nuances at a more granular level. For example, 84% of local authorities in England and Wales now screen as ‘affordable’ based on the one-third metric, up from 73% in 2015. Rents have grown strongly during this period, particularly post-pandemic, but the key driver has been the strength of wage growth. On the ONS sample, rents grew by 2.7% p.a. compared with wage growth of 4.3%.

For investors, the fundamental undersupply of housing in the UK provides a compelling opportunity for residential allocation (as we have previously outlined). A key risk, however, has been concerns around the capacity for households to absorb further rent growth, leaving less room for the inflation-correlated income typical of the sector.

This data suggests those risks may be less pronounced than assumed. Although rents in the UK are forecast to grow modestly faster than nominal wage growth over the next five years (rental growth of 3.7% p.a. and 3.4% for wage growth[5]), the attractive income component for investors in the UK living sector is likely, in our view, to continue, supported by an appropriate proportional cost.

That said, major urban centres like London, Manchester, Cardiff, and Bristol still face notable affordability challenges despite improving conditions. Across conurbations with populations of 200,000+ people, 30% of local authorities are deemed unaffordable on the affordability benchmark. In our view, the chronic undersupply of housing in these high-demand locations should continue to support rents growing at least as fast as incomes – if not faster – without additional supply. 

Notably, BTR investment is heavily focused on these areas and can help alleviate some of these supply challenges, supporting more sustainable rent levels, over the long term. For institutional investors, the structural factors underpinning rental resilience are reassuring, and we remain convictional on the enduring attractiveness of the UK’s residential sector over the long term relative to many traditional UK commercial real estate sectors.

Read our full report on the UK living sector here. 

 
[1] ONS, Private Rental Affordability, England & Wales 2023 as at Oct 2024
[2] LGIM Research calculations based on ONS Wage and rental indices as Q3 2024
[3] LGIM BTR Fund as at Q3 2024
[4] BPF/Dataloft/Price Hubble, Who Lives in Build to Rent 2024, as at Q1 2024
[5] PMA UK National Forecast Autumn 2024, as at Nov 2024