Rents rose for the second month in a row in March, according to the latest Buy-to-Let Index from LSL Property Services plc.
In March, the average landlord in England and Wales increased rents by 0.4% to £687 per month, with rents now 4.2% higher than in March 2010. This is their highest level since November 2010. Rising rents and slightly lower house prices means yields for landlords are rising, although the effect was small in March. The average yield was 5.0%.
The greatest monthly increases were in East England, where they rose 2.2% and the South East where rents increased 1.7%. However, on an annual basis, London is powering ahead – over the course of the last 12 months, rents have soared by 7.3%. The South East is close behind – rents there have increased by 6.7%.
The biggest monthly decreases were in the South West, where rents fell 1.6% and the West Midlands, where they dropped by 1.3%. Smaller monthly decreases also occurred in Wales and Yorkshire and the Humber. Over the course of the past year, across England and Wales, only the South West and Wales have registered annual falls in rents – 2.4% and 1.5% respectively.
David Brown, commercial director of LSL Property Services, owners of Your Move and Reeds Rains comments:
“Landlords are seeing demand for their properties go from strength to strength. Although more high LTV products are coming onto the market, there is still not much money at that level from lenders, and first-time buyers simply can’t afford the average £25,000 deposit lenders require without substantial aid from parents.
“As a result, most would-be first-timers are remaining in rented accommodation for nearly a decade. The growing demand continues to outstrip supply, and this is pushing rents upwards beyond the rate of inflation and well above wage rises. At the current rate of increase, the average rent will top £715 this time next year.
“London and the South East are the two regions which are coping best with the economy in its present state, and are least likely to be affected by public sector job losses. It’s unlikely that rent rises will fall away any time soon in these areas. In fact, at their current pace, London rents are likely to hit £1,050 in a years’ time.”
With rental properties worth an average of 1.8% less than a year ago, the total annual return on a property now stands at 2.6%. The total annual return is now the equivalent of £4,261 – £7,326 in rent, with a capital loss of £3,065. However, if property values continue as they have in the last three months, over the next year, a property investor could expect to make a total annual return of £5,114 per rental property[i] – £8,239 in rent, with a capital loss of £3,125.
David Brown continues:
“Landlords are not currently seeing bumper capital gains but strong rental income is providing the bedrock for annual returns. The strong long-term underlying fundamentals of tenant demand and healthy yields are luring more professional landlords to the sector.
“With the recent budget removing some of the financial barriers towards institutional investment – and making bulk purchases easier – we may well see an increasing number of property funds enter the private rental sector over the medium-term. Much needed investment professional landlords should help alleviate some of the pressure on the private rental sector, preventing rents from soaring into the stratosphere.”
Tenants finances took a turn for the better in March, with 9.4% of all UK rent unpaid or late by the end of the month, a strong decrease from the 12.6% in the previous month. Unpaid rent totalled £224m across the UK in March, the lowest figure since October 2010.
“The dip in arrears suggests that renters are beginning to grow more financially prudent and get their household finances in order in the face of rising rents. Retail spending fell to its lowest level in 16 years in March. It’s clear that consumers, hard-pressed by rising costs of living, are beginning to rein-in high street spending.
“With tenants splurging less in the shops on credit cards, far fewer have fallen behind with monthly rent payments than in February. The improvement is a godsend to landlords. With annual returns so dependent on rental income, mounting rental arrears are no longer just headaches for landlords, but full-blown financial migraines.”
Paul Jardine, director of Templeton LPA, comments on LSL’s March Buy-to-Let Index:
“The drop in rental arrears will be warmly welcomed by landlords. Growing rents and pressure from soaring living costs means we are now seeing tenants demonstrating a tighter control over their household finances. As tenants adopt a more cautious approach to high street spend, their growing financial prudence is only part of the story.
“The recent drop in unemployment, albeit it relatively slight, has also contributed to fewer households struggling with their monthly rent cheque, reining in the number of tenants in arrears being experienced.. Nevertheless, with the brunt of public sector job losses still to be felt, over the next year, we anticipate that unemployment will creep upwards again, and tenant arrears will follow – especially in areas like the North East which are more heavily reliant on public sector employment.”