In November, the average UK rent rose to £692 per month – squeaking ahead of October’s record high of £691. However, the growth of 0.1% represents the smallest increase since rents began to rise in February.
However, recent rent increases seem to have ended in several parts of the country. The east of England and the east midlands reported falls of 3.1% and 2.4% in November, whilst rents dropped by 1.9% in the south east and by 0.6% in the north west.
The marginal monthly national gain was largely driven by rents rising by 1.8% in London, where they hit £992 per month – an increase of 9.2% in the last year. The average yield rose slightly to 5% in November, thanks to increasing rents, contrasting with a slight decline in the value of an average rental property.
David Brown, commercial director of LSL Property Services plc comments:
“In the run-up to Christmas, we tend to see the rental market slowdown somewhat. Tenants prioritise Christmas spending over setting aside money for moving home. But with the limitations placed on the supply of rental property by the lack of mortgage finance, rents have continued to increase - even though the rental market’s peak season is behind us.
“Nevertheless, rent increases have begun to slow in several regions, and we expect this trend to continue across the country in December and January. However, the UK’s buy-to-let market still faces a shortage in the supply of rental properties and we don’t anticipate that the slowdown in rent rises will last long into 2011. ”
Following a slowdown in the annual growth of rental property prices, the total annual return on a property has fallen from its peak of 13.4% in May to 7.3% in November. This is now the equivalent to £11,857 - £7,359 in rent, and £4,498 in capital gains. An investor entering the market now could expect to make a total annual return of £3,433 per rental property .
Brown continues:
“Returns are slowing as annual house price growth steadies. But investors are faced with a fantastic opportunity. With property prices beginning to dip, and yields improving, it is a great time for landlords to expand their portfolios and lock-in high rents.
"Even off-peak, tenant demand has remained robust enough to lift rents and the chronic lack of affordable housing and mortgage finance for first-timers will continue to augment demand from tenants, keeping rents high in the long-term.”
However, tenant arrears provided less positive news for landlords in November. Tenant finances were in worse shape than October, with 9.7% of all UK rent unpaid, rising from 9.3% in the previous month. Unpaid rent totalled £231m across the UK in November, up from £221m in the previous month.
David Brown concludes:
“The one cloud on the horizon for landlords is tenant arrears. Without the timely cheque from tenants each month, landlords cannot pay their mortgages, and risk dipping into rainy-day funds or falling into mortgage arrears. And with public sector spending cuts set to take their toll on employment and tenant finances in the next year, it’s crucial that landlords act quickly to nip potential issues with rent payment in the bud before they escalate.”
Methodology:
LSL Property services analysed 18,000 rental properties and tenancies from around the UK to determine rents, arrears and voids. Figures for the whole country were inferred by scaling up from LSL’s market share.
Paul Jardine, director of Templeton LPA, comments:
“While it is good news for property investors that rents are still marching upwards, growing tenant arrears should provide a pause for thought for current landlords. Across the UK, £10m more rent went unpaid in November than in October. And with many tenant finances likely to suffer from Christmas expenditure, this figure is unlikely to look drastically better in the short-term.
"It is rental income that pays landlords’ mortgages, and they need to act swiftly to ensure tenants don’t fall deeply into arrears - and that they themselves don’t fall behind with mortgage payments. This is even more crucial in the current economic climate. Unemployment is rising, with 35,000 more people out of work in the last three months.
"And with the labour market still to bear the full brunt of government spending cuts, this will be an area to watch closely next year, as more renters’ work situations change and rents remain high.”
David Whittaker, managing director of national advisory firm Mortgages for Business said:
“Another record high for rents shows how attractive the current market is for buy-to-let investors. Although the level growth of rental prices has dropped off slightly in the run up to Christmas, the fact that they are bucking the seasonal trend is hugely encouraging. Towards the end of the calendar year, tenant finances are constrained by Christmas spending, leaving many renters without the time or money to change properties.
"Landlords tend to drop prices in order to avoid facing void periods during the festive season, but underlying tenant demand is so strong that it has been possible to maintain or increase rents. Given that there is unlikely to be a loosening of lending criteria for buyers in the New Year, we can expect to see more records fall in January, when the rental market tends to pick up.”
