In February, the average rent in England and Wales rose by 0.2% to £684 per month, with rents now 3.9% higher than in February 2010. The average yield increased to 5% in February, as the rent increased at a faster pace than rental property values during the month.
Although London recorded a modest increase in rents of 0.3% compared to January, rents have now risen by 7.7% in the last 12 months, almost twice the national average and reflecting the especially tight market in the capital.
The greatest monthly increases were in Wales, where they rose 1.9%, the North West and the East Midlands, where they rose 1.1% and 0.8%. The biggest decreases were in the North East, where rents fell 1.4%, Yorkshire and the Humber and the South West, where they fell 1.2% and 1% respectively
David Brown, commercial director of LSL Property Services, owners of Your Move and Reeds Rains comments:
“The fierce competition among renters in many areas of the country has cut short the traditional lull we tend to see between December and February. The consistently constrained level of lending to home buyers has bolstered demand – and rents – in the private rental sector during what is typically a slower period. 158,000 fewer first time buyers were unable to enter the market in the last 12 months, compared with three years ago. With the mortgage market even more sluggish since the start of 2011, this backlog of frustrated buyers has increased even further and rents have risen correspondingly. “
The total annual return on a property is now 3.9% as the slight fall in property prices over the course of the past year has been counteracted by a strong annual growth in rents. The total annual return is now the equivalent of £5,730 - £7,317 in rent, with a capital loss of £1,587. However, if property values continue as they have in the last three months, over the next 12 months, a property investor could expect to make a total annual return of £5,933 per rental property[i] - £8,202 in rent, with a capital loss of £2,269.
David Brown continues:
“Over the past year, extremely strong rental income has underpinned landlords’ annual returns. With house prices unlikely to rocket up as the year progresses, rents will continue to provide the lion’s share of returns for property investors.”
Tenant finances continued to deteriorate in February, with 12.6% of all UK rent unpaid or late by the end of February, an increase from 11% in the previous month. Unpaid rent totalled £296m across the UK in February, up from £258m in January.
Brown concludes:
“The growth in tenant arrears is an early indicator of the impact of the wider economy on households. At a time when rents are close to all-time highs and rising once more, many tenants are feeling the financial squeeze of spiralling costs of living compared to sluggish pay growth. But we must remember that the figure is not representative of all renters. It is a minority in severe financial straits that are contributing to the growth in arrears – while the vast majority of landlords do not encounter difficulties in receiving rental income.
"Nevertheless, the figures should serve as reminder to property investors that active and prompt intervention is necessary at the first sign of a tenant showing signs of difficulty in paying the monthly rent cheque, or they themselves will see mounting mortgage arrears.”
Paul Jardine, director of Templeton LPA, comments on LSL's February Buy-to-Let index:
“Persistently high tenant arrears are proving to be a growing headache for many landlords. Tenants are beginning to feel the financial squeeze triggered by near-record rents, growing inflation and the VAT hike. With public sector spending cuts continuing to take its toll on many tenants’ employment situation, rental arrears are likely to remain stubbornly high over the medium term.
"The good news is that two years of historically low interest rates have kept most landlords’ monthly mortgage payments at a low level, keeping buy-to-let mortgage arrears in check. But when rates rise, and many landlords face higher monthly mortgage costs, it’s crucial that they do not take their eye off the ball, to ensure tenant arrears don’t escalate further and avoid falling behind with their mortgages.”
Richard Sexton, business development director of e.surv, commenting on the LSL Buy-to-let Index said:
“The mortgage finance is simply not available to young professionals – the potential buyers who need it most. That means potential first time buyers remain confined to the rental market.
"As lenders keep their hands in their pockets, tenant demand has soared, luring in property investors who are seduced by the combination of high rental incomes and an underlying weakness in housing prices. Investors will sit cosily in the knowledge that rental yields will remain a safe and steady source of profit. As rents rise, it becomes harder for tenants to save for a deposit for their first home. It’s a vicious circle.
"With foreign investors making a land grab for bricks and mortar that British buyers can’t afford, owning a property in London is fast becoming the reserve of a privileged few. This has pushed the capital’s rental market into overdrive as the backlog of first time buyers scramble over one another to secure the best rental properties”
