The average rent in the UK rose by 0.5% to £667 per month in May, according to the latest Buy-to-Let Index from LSL Property Services plc.

Rents have risen for four successive months, and are 2.7% higher than a year ago. The average UK rent is now £18 per month higher than May 2009.

Rents fell by 2.7% in the North East, and 0.2% in the North West, bucking the national trend. In contrast, London rents rose by 1% to £924, whilst the West Midlands recorded a rise of 2.1% to £540 per month.

Yields on buy-to-let properties remained at their highest level since December 2009 at 4.8%, as rents accelerated faster than house prices. The house price for the average rental property snicked up by 0.1% compared to April, and registered an annual increase of 8.6%.

David Brown, Commercial Director of LSL Property Services plc, comments:

“House price increases have steadied, and rental income is now accounting for an increasing portion of a landlord’s total return. Rents have continued their upwards climb and are just £21 short of their all-time high.

“With the government likely to raise capital gains tax, capital gains may no longer be taxed more lightly than rental income. These measures could reduce the attractiveness of investment in the private rented sector, which would be a step backwards from financing the UK’s housing shortfall.

“But such a move would at least encourage landlords to take a more balanced view of rental income and capital gains in the sector. Total annual returns are being boosted by strong capital gains, but it is rental income that makes an investment plan viable and pays a landlord’s mortgage.”

The total return from investing in buy-to-let over the last twelve months hit 13.2% in May, rising from 12.8% in April. The average landlord would have made £20,363 in the past year, a combination of £7,100 in rent and capital gains of £13,263.

With house price growth now having levelled off, a landlord investing today could expect to make an annual return of 5.4% over the next twelve months. This is equivalent to £9,096 on a typical property in the UK. The majority of this would be in income rather than capital gains.

Tenant arrears grew in May, as £244m of all rent in the UK was unpaid – a sharp increase of £24m from April. This represents 10.7% of all rent. 508,600 tenants owed rent in May, an increase from 465,500 in April.

David Brown continues:

“Tenant finances have been in improving shape in 2010 and this drop highlights just how far they have come since the downturn. With the final three days of May falling on a bank holiday weekend, many payments were delayed until the Tuesday, leaving many landlords waiting into June for their rents. Even with this anomaly, arrears are 1% lower than the same time last year.

“The fundamentals of sound property investment, tenant demand, yield and rental income, are in place for the buy-to-let recovery to continue apace.

“But we need to wait for the budget. If the government proceeds with its short-sighted plan to impose a higher Capital Gains Tax on the private rented sector, it will risk bringing the recovery to a juddering halt – especially if neither taper relief nor indexation allowance accompany the hike.

“Without either of these, the new tax would penalise sustainable long-term investment, deterring private landlords and institutional investors alike.”