Demand Without Supply: How Aberdeen Became Scotland’s Renting Hotspot

16 Dec

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The latest statistics for Aberdeen once again show a city that is more expensive and competitive for renters than anywhere in Scotland.

The average rent for a 2-bed property in Aberdeen is now over £1,000, up 15% on the year. For a 4-bed, it is over £2,000, up 12%. Comparatively, rent levels in Edinburgh are now only around three-quarters of what they are in Aberdeen.

Similarly, another key factor, time to let (TTL), continues to fall. TTL for a 2-bed flat in Aberdeen is now only 12 days on average. In Edinburgh, the TTL average is 23 days, in Dundee 25 and in Glasgow it is 34 – nearly three times the TTL in Aberdeen.

Aberdeen is now clearly Scotland’s rental hotspot. But how has it grown so rapidly?

The private rented sector (PRS) in Aberdeen has expanded, particularly since the economic recession. The proportion of households in the City housed by the PRS has almost doubled in this time, from 9% in 2008 to 17% in 2014.

The growth of the PRS has been fuelled by strong demand from contract workers, a rising student population and lack of access to mortgage finance for many who want to buy. As the economy has shrunk in many of our other economic centres, in Aberdeen it has rapidly bounced back as a result of high oil prices, a thriving energy industry and its world leadership status in drilling technology.

However, despite a population expansion and strong demand for housing in the City, new build levels are currently low. There were just around 500 new completions in Aberdeen in the last year and only 523 since 2006. Household projections estimate that just to keep up with the increasing number of households an additional 1,598 new houses need to be built in the City each year until 2035. Supply and demand is a problem across Scotland’s major cities, but one that stands out in Aberdeen.

High levels of demand coupled with weak levels of supply have led to sharp upward pressure on rents and house prices (the latter are 10% up on the year). The rise of Aberdeen may not be complete yet but is clearly a market to watch in future Lettingstats reports.

Note from Dr John Boyle – Director, Research & Strategy, Rettie & Co:

This latest report from Lettingweb clearly shows the continuing strength of the Aberdeen rental market, and this has not been lost on investors. Gross yields are consistently higher in Aberdeen than they are in Edinburgh and Glasgow, and they have fluctuated between 6.75% and 8% in Aberdeen over the last 5 years.  For those who bought property a few years ago, the yield will obviously be much higher now in Aberdeen than elsewhere.  The rental market’s stability is a result of higher rents being matched by higher house prices.

Some caution needs to be exercised here as cities are made up of myriad areas and neighbourhoods and quality data are needed to properly assess yields, but the following graph is useful to illustrate the City’s attractiveness to investors.

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Future rent levels are difficult to predict given that they rely on a number of interdependent factors such as demand, supply, general inflation, interest rates and further regulation/legislation, some of which can be projected and some of which cannot.

Still, given the strong demand factors, low levels of new supply and the introduction of government stimulus packages, house sales and rental markets in Aberdeen City are expected to remain strong over the next few years. In fact, Rettie & Co estimate that rental levels will likely increase by around 10% to 20%.

Download the full report here.