Third consecutive monthly rise for rents

Third consecutive monthly rise for rents

June 2012

Rents increased for a third consecutive month in June, according to the latest Buy-to-Let Index from LSL Property Services.

The firm, which owns the UK’s largest lettings agent network, has reported that last month the average rent in England and Wales rose by 0.9% to £718 per month, marginally below of the record high of £720 pcm in October last year.

This has caused an increase in the pace of annual rental inflation, climbing to 2.4% from 2.3% in May.

LSL Property Services said that on a monthly basis, rents rose in all regions of England and Wales but one. Wales saw the largest rise, with rents increasing by 2%, followed by the North West and West Midlands where rents rose by 1.7%. But rents dipped in the South West, falling by 0.3%. Following a rise of 0.9% to £1,047, London’s rents hit a new high for the second month in succession.

The capital remains the region with the fastest annual rental growth. Rents in London rose 4%, with tenants paying an average of £41 extra per month compared to June 2011. The South East had the second highest rental inflation, with rents climbing 3.6% compared to a year ago. On an annual basis, rents remained in negative territory in just the East Midlands after the North East and Wales returned to growth.

“The sheer weight of tenant demand continues to push up rents across the country,” said David Brown, commercial director of LSL Property Services.

“Lending criteria remains tight and the number of mortgages given to first-time buyers – especially those without substantial deposits – is still a long way from the level seen before the credit crunch. With higher rents and the growing cost of living eroding how much tenants can save towards the large deposits required to buy, it’s no surprise to see the private rented sector swelling by 262,000 households a year.”

“But shorter-term factors were also at play in June. The rental market tends to see a flurry of activity at this time of year as tenants look to move before the onset of summer holidays, but this trend has been exacerbated – especially in London – by tenants moving with urgency to secure properties ahead of the disruption of the Olympics.”

Landlords saw the average total annual return on a rental property rise to 5.4% in June, up from 5.2% in May. This represents an average return of £8,884, with rental income of £7,719 and a capital gain of £1,166.

LSL Property Services claimed that if property prices maintain the same trend as the last three months, an average investor in England and Wales could expect to make a total annual return of 7% per property over the next 12 months – equivalent to £11,538 per property. Despite the improvement in rental property prices, the average yield on a rental property remained steady at 5.2%.

“Property prices have stabilised over the past quarter and that’s played into the hands of investors, boosting returns,” explained Brown. “But the picture is far from even across the country. Stronger capital gains mean London landlords are seeing an average return £27,005 – more than three times the average for England and Wales in cash terms.

“However, while capital gains are a welcome short-term bonus for landlords, it is strong yields that are drawing in long-term investors. With interest rates so low, mortgage payments are still historically very cheap, and in many cases landlords have a surplus at the end of the month to put towards a rainy day fund or reinvestment.”

Overall rental arrears deteriorated in June, with 9.2% of all rent late or unpaid at the end of the month, an increase from 8.9% in May. In total, unpaid rent in June amounted to £289m, an increase of 5% from £275m late or unpaid in the previous month.

Brown added: “While arrears are still down on their 12 month average, rising rents and difficult economic conditions are squeezing tenants’ finances, and a growing number face payment problems. With the country in recession, and more public sector cuts on the way, tenant arrears are unlikely to drop in the longer-term, while summer holiday spending may also impact coming months’ figures.

“The monthly rise highlights how crucial it is that landlords strike a balance between securing the best possible rent and ensuring prospective tenants will be able to meet payments in the long-term, rather than leaving the investor at risk of arrears on their property’s mortgage.”