The average rent across England and Wales is 3.1% higher than February 2014, the largest year-on-year increase experienced in nearly two years, according to the latest Buy-to-Let Index from Your Move and Reeds Rains.
This annual boost follows a monthly uplift of 0.4% in February 2015, a £3 increase which comes after a series of monthly drops in January (-0.6%), December (-0.1%) and November (-0.2%).
In real terms, average residential rents in England and Wales now stand at £766, compared to £763 in January 2015 and £743 in February last year.
Adrian Gill, director of estate agents Reeds Rains and Your Move, said: “The rental sector is carrying the weight of the housing crisis. More homes are needed to house an ever-growing population. The supply simply isn’t there. The result is that landlords are catering to those who can’t afford to buy as well as those who choose renting for the flexibility it offers them – workers moving into new jobs, or people wanting to get a feel for an area before committing to property ownership and setting down roots.
“House prices rising out of reach for people at the lower end of the market makes increasing demand in the private rented sector inevitable. A serious and substantial commitment to new builds is the only way to bring supply in line with demand.”
Rents in the East of England have rocketed up to £787 in February 2015 compared to £714 a year ago. This represents a 10.2% year-on-year increase for rents in the region – the largest growth seen in any region in over five years. It forms the latest link in a chain of accelerating annual rent rises for the East stretching back to July last year. London saw the second highest annual rise with rents resting 4.9% above levels in February 2014.
The North West (-0.3%) and North East (-0.4%) were the only regions to see a year-on-year drop in rents, while prices in the West Midlands and South West remained stable compared to last year.
On a monthly basis, the South West took the lead with a 1.7% increase in rental prices, closely followed by Wales (1.2%) and the West Midlands (0.9%). Although rents in the East of England saw a more modest 0.7% boost, it is the only region to have experienced monthly rises for ten consecutive months, contributing to its dominant position in the year-on-year leader board.
Rents have cooled in four UK regions. There were month-on-month rent decreases in Yorkshire, the North West, the West Midlands and the South East of England, with all of these regions seeing a 0.4% dip from January to February.
Gill said: “Here we have a perfect example of rents following the jobs market. With growth gathering around London, renters are moving to areas that allow them to commute into the capital. Rents are rising in line with the salaries of these new tenants. It’s a clear illustration of why new builds are important to the wider economy. Job creation depends on workers in England and Wales being able to find accommodation. Landlords are providing a much-needed link between jobs and people. They have ensured that the UK’s talented workforce has the flexibility to move to the places their skills can be best put to use.”
The gross rental yield on a typical rental property in England and Wales now stands at 5.0% as of February 2015, stable since January and a 0.2 percentage point drop from February 2014 when yields stood at 5.2%.
Taking into account price growth and void periods between tenants (but before costs such as mortgage repayments or maintenance) total annual returns on an average rental property now stand at 11.5% over the twelve months to February. This uptick bucks a trend of slowly sinking returns which stretched over the past six months.
In absolute terms this means the average landlord in England and Wales has seen a return, before deductions such as mortgage payments and maintenance, of £19,849 over the last twelve months. Within this figure rental income makes up £8,167 while the average capital gain amounts to £11,682.
Gill said: “With buy-to-let properties offering such generous returns on income and capital, it’s no wonder first-time buyers are getting squeezed out by landlord demand. Yields have steadied near the 5.0% mark, and we’re seeing a reciprocal stability in total annual return as property prices stabilise.
“In the current climate, renting is a sound investment, but still more support is required to ensure that this stability continues. A stable market isn’t just good for landlords – it’s good for tenants. But we need to make certain that that the resting point between rents and yields is in the best interests of all parties involved. Building more homes is the only way to ensure that tenants and landlords alike can prosper from the recovery.”
As of February, 7.6% of all rent was in arrears – an increase on both a monthly and annual basis. In January, just 6.8% of all rent was in arrears, while this figure stood at 6.9% in February 2014.
Gill added: “With arrears, more than any other indicator, it’s important to keep an eye on the longer term trends. It’s no good predicting joy or doom every time the figure fluctuates on a monthly basis – just look at the longer term trend. This February increase is a very minor setback in the face of the dominant downward trend in arrears.
“This type of uptick is a perfectly natural part of the market’s movement and has occurred many times before. The long-term message is clear – we’re seeing far less rent in arrears than five years ago, and this is a very good thing for the rental market.”