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PROPTECH-X ‘Proptech & Property News’: Bricks&Logic analysis reveals the true impact of interest rates on the rental sector | Estate agents need to prevent cyber attacks

How are UK rental yields being affected by the rise in interest rates

Michael Joyner Chief Data Scientist at Bricks&Logic explains in his own words how the current high interest rate environment is impacting rental prices.

‘The world of property investment has always been a dynamic and ever-changing landscape, influenced by various economic factors and market conditions. One of the most crucial aspects of property investment is understanding rental yields and how they correlate with interest rates, property values, and market stability.

So let’s explore how low and high-interest rates impact rental yields, the historical trends since the 2008 financial crash, and the role of capital appreciation in the calculations for landlords. We will also discuss the challenges faced by landlords today and how Bricks&Logic can provide valuable assistance in navigating this complex environment.’

Low Rates and Low Yields, High Rates and High Yields ‘Understanding the relationship between interest rates and rental yields is fundamental for any property investor. Low-interest rates typically result in lower rental yields, as landlords find it harder to make a substantial profit on their investments. Conversely, higher interest rates require higher rental yields to make it worthwhile for landlords. This correlation between interest rates and rental yields can significantly impact the decisions of both novice and seasoned property investors.’

Post-2008 Financial Crash: The Yield Drop ‘The 2008 financial crash brought about a significant shift in the property market. In the aftermath of the crisis, central banks worldwide adopted a low-interest rate policy to stimulate economic growth. This policy led to an increase in those investing in property as people hunted for a return on their money. As a result, rental yields dropped as property sale values rose faster than rents.’ 

Yields Plateaued: 2017 to 2022 ‘Between 2017 and 2022, rental yields in the UK plateaued at approximately 4.4% as the around 2017, the UK government introduced policies to deter landlords from buy-to-let investments:

  • Stamp Duty Land Tax (SDLT) Surcharge: Added a 3% tax surcharge on additional residential property purchases.
  • Reduced Mortgage Interest Tax Relief: Phased out the ability to fully deduct mortgage interest from rental income.
  • Prudential Regulation Authority (PRA) Rules: Introduced stricter lending standards for buy-to-let mortgages.
  • Energy Efficiency Standards: Required landlords to meet energy efficiency criteria for their properties.

These measures aimed to cool the housing market and promote homeownership by making buy-to-let investments less appealing to landlords. This period coincided with historically low-interest rates set by the Bank of England, hovering around 0.5%. Landlords were left with a 4% profit compared to what they could have earned by simply keeping their money in a savings account returning interest. Capital appreciation, which had traditionally contributed to landlord profits, was no longer a reliable factor. As a result, landlords needed to rely on rental yields alone to generate returns.’

Yields Start to Rise: post 2022 – The Challenge for Landlords ‘Since 2022, we’ve witnessed a steady rise in rental yields. For landlords to recapture the same level of profitability they saw between 2017 and 2022, approximately 4% above the Bank of England base rate, they are confronted with a formidable challenge. Rental prices would need to experience a staggering 90% increase, soaring from an average of £1,338 to an improbable £2,560. While this scenario is far from realistic, it starkly underscores the difficulties landlords encounter in sustaining profitability in the current market environment where capital value appreciation is not anticipated.’

The Impact on the Property Market ‘Landlords face limitations in their ability to influence the financial performance of their rental properties, primarily because they are price takers when it comes to interest rates and rental prices. They have to contend with interest rates set by external financial institutions, which directly impact their mortgage costs. Furthermore, they can only charge rents that align with prevailing market rates.

When landlords struggle to generate enough rental income to cover their expenses, including mortgage payments, they may choose to sell their properties. This reduction in the supply of rental properties can lead to increased rental prices due to heightened competition among tenants. However, the impact on rental prices also depends on property sale prices. If sale prices decline, landlords may achieve better rental yields, even without changing rents, making their investments more attractive.’

In summary, landlords’ decisions to buy or sell properties are influenced by external factors such as interest rates and market conditions, which, in turn, can affect rental prices. The chart below illustrates rising rental prices alongside stagnant sale prices. While the future direction of the market remains uncertain, if interest rates remain stable such that it is not economical for a lot of landlords to remain in the market, it is reasonable to assume that yields will continue to increase, either through rising rental prices or falling sale prices.

How Bricks&Logic Can Help you In this evolving property investment landscape, having access to accurate and up-to-date data is crucial for informed decision-making. Bricks&Logic offers a valuable solution by providing the public and landlords with tools to keep track of rental and sale prices in their local areas. With real-time information at their fingertips, investors can make more informed choices about their property investments.

Conclusion Michael Joyner Data Scientist at Bricks&Logic sums up by commenting that, ‘The relationship between interest rates, rental yields, and property investment is intricate and constantly evolving. Property investors must adapt to changing market conditions, and the challenges posed by low yields and increasing regulations have put pressure on landlords.

While the future remains uncertain, having access to reliable data and insights, such as those offered by Bricks&Logic, can be a valuable resource for navigating the complex world of property investment.’

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Estate agents urged to ensure they have measures in place to prevent cyber attacks

The Guild of Property Professionals is urging estate agents across the UK to be on high alert as cyber attacks targeting the property sector continue to surge. Recent incidents of cyber attacks impacting conveyance and law firms that have brought thousands of property transactions to a standstill, highlights the need for heightened cybersecurity measures within the industry.

Cyber attacks and claims are on the rise, and estate agents need to be prepared, warns Paul Offley, Compliance Officer of The Guild of Property Professionals. Offley notes that the property sector continues to be a prime target for cybercriminals, with an alarming number of cases where businesses have fallen victim to hackers attempting to defraud consumers. The sophistication of these attacks, including email mirroring techniques, poses a serious threat to the integrity of property transactions.

Amongst other things, the rise in remote working has acted as a catalyst for increased vulnerability, particularly for smaller businesses in the sector. Offley emphasises that the shift to hybrid working has made many businesses more susceptible to cyber attacks, as smaller entities often lack robust cyber defences, making them easier targets. Given the sensitive nature of information held by estate and lettings agents, the escalating cybercrime trend is a significant concern for the industry.

Offley recommends that if they haven’t already, property professionals should take proactive measures to protect themselves against potential cyber incidents. The Guild offers its Members access to free Professional Indemnity and heavily discounted Cyber-crime insurance to ensure comprehensive protection.

However, Offley strongly advises all agents to review their cyber coverage with their insurance brokers, as reform within the sector has led to all PI insurers deciding not to cover cyber, so it is now largely excluded from all PI policies. “Many agents may believe that their PI insurance would protect them against cyber attack, however, over the past 18 months there has been a lot of reform in the sector with PI insurers deciding to no longer cover cyber attacks, so agents now require separate cover and protection,” adds Offley.

Statistics reveal that a significant percentage of cyber insurance claims result from human error, emphasising the importance of education and training within estate agency teams. Simple mistakes, such as selecting the incorrect recipient when sending an email or sharing passwords improperly, can lead to significant security breaches. Offley stresses the necessity of implementing stringent password policies and ensuring that departing employees have their access promptly revoked.

“Unfortunately, the reality is that no one is immune to potential cyber attacks, but having preventative measures in place with offer protection.  In the event of an incident, having adequate protection is crucial,” Offley concludes.

The Guild of Property Professionals (The Guild) is an award-winning network of some of the best independent estate agents from across the UK. The Guild is a sign of professional excellence that agents can use to differentiate themselves from their competitors and assure clients that they will act with knowledge and integrity to achieve results, the three core values of The Guild. To allow agents to perform a superior service, The Guild offers marketing, business and technology services to its Members.

Andrew Stanton’s PROPTECH-X ‘Proptech & Property News’ in association with Estate Agent Networking & News Now publications. #proptech #property #realestate #digitaltransformation #startups

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Andrew Stanton Founder & Editor of 'PROPTECH-X' where his insights, connections, analysis and commentary on proptech and real estate are based on writing 1.3M words annually. Plus meeting 1,000 Proptech founders, critiquing 400 decks and having had 130 clients as CEO of 'PROPTECH-PR', a consultancy for Proptech founders seeking growth and exit strategies. He also acts as an advisory for major global real estate companies on sales, acquisitions, market positioning & operations. With 100K followers & readers, he is the 'Proptech Realestate Influencer.'