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19th August 2011

Rents rise for 6th consecutive month

Rents rose for the sixth month in a row in July, to a new record high, according to the latest Buy-to-Let Index from LSL Property Services plc.

In July, the average rent in England and Wales rose by 0.6% to £705 per month, surpassing the previous high of £701 in June. With annual inflation at 4.2%, the average rent is now £29 pcm higher than July 2010. 

The average yield reached 5.2% in July, up from 4.8% a year ago.

London saw by far the greatest annual rent increase in England and Wales. In July, rents hit a new high of £1,009 per month – an annual increase of 7.1%. 

The next biggest rises were in the North East where rents increased by 5.5%, and the East and West Midlands, where rents rose by 4.8%. In the last year, average rents have risen in all regions except Wales, where they now are at the same level as July 2010.

On a monthly basis, rents increased fastest in the South East, where they rose 1.7%. In Wales and the East Midlands, they increased by 1.4% compared to June.

Rents declined in three regions – the West Midlands, where they fell by 0.6%, Yorkshire & the Humber and the North West, where rents fell by 0.2% and 0.1% respectively.

David Brown, commercial director of LSL Property Services, comments:

“Rents are on an upward trajectory, and it is unlikely that tenants will gain respite any time soon. Demand from thousands of frustrated buyers each month is underpinning buoyant competition for rental homes, enabling landlords to increase prices.

"This is the peak summer season, with more renters on the move, the market will continue to heat up. Such strong demand and high rental incomes has forced lenders to take notice, and more are returning to the sector.

"As a result of the competition in the buy-to-let market, the range of affordable products is expanding – and lending to investors rose by 21% in the last quarter. Nevertheless, even with squeeze on landlord finance abating, the new supply will not be enough to meet demand from tenants.

“The increasing cost of rental accommodation – alongside the soaring cost of living – is eroding first-time buyers’ ability to save deposits. But first-time renters are also keenly feeling the pinch. As rents climbs, so does the size of the average deposit a new renter must find.

"Thousands of new buyers each year rely on the bank of Mum and Dad to help fund a deposit. However, now it is becoming increasingly commonplace for renters to get parental help to fund their first deposit on a rental home, with the typical one month deposit on a property in London more than £1,000.”  

The total annual return on a rental property fell to 1.2% in July as annual declines in rental property prices took their toll. The total annual return is the equivalent of £2,060 - £7,522 in rent, with a capital loss of £5,462.

If property values continue on their current trend, a property investor could expect to make a total annual return of 2.5% over the next 12 months – equivalent to £4,093 per property.

David Brown continues:

“Falling property prices are holding back total annual returns and will continue to do so over the short-term. But the vast majority of prospective investors look at longer-term fundamentals such as tenant demand and yields – and these are looking increasingly attractive. ”

Tenant arrears decreased for a third consecutive month, with 9% of all UK rent unpaid or late by the end of July – down from the 9.3% of rent unpaid or late in June. Unpaid rent totalled £251m across the UK in July, down 2.4% from the £257m unpaid in the previous month.

Brown concludes:

“Tenant finances have performed remarkably well in recent months and arrears are down as landlords show less forbearance with tenants experiencing payment problems. As a result, landlords’ mortgage arrears have dropped – and are actually lower than arrears in the owner occupied sector for the first time in three years.

"But with question marks over the economy, and public sector job losses still to come, tenant finances will be placed under increasing stress. Rents won’t drop anytime soon, and we anticipate the number of tenants facing payment difficulties will climb.”

Paul Jardine, receiver and director of Templeton LPA, the surveyors practice specialising in LPA receiverships, comments:

"Landlords have been adopting a stricter stance with tenants facing payment problems, and this behavioural change has helped keep a lid on tenant arrears in recent months. Demand is at an all-time high and annual returns are becoming increasingly dependent on rental income.

"As a result, property investors are looking at the potential increase in rent they could generate from a new tenant, and are less concerned about the possibility of void periods.

"Despite this change in outlook, rental arrears will no doubt climb once more as the year progresses. Inflation remains high, and we’re starting to see the impact of the economic slowdown on the labour market.

"If rents continue to rise, a growing number of tenants will face financial difficulties. In these instances, it is crucial that landlords open the lines of communication early to prevent being caught unawares by mounting tenant arrears that may impact their ability to meet their own mortgage payments."