Scottish rents are rising at their slowest pace for over two years, according to the latest Scotland Buy-to-Let Index from Your Move.
The average monthly rent in Scotland has risen just 1.1% in the year to February 2015 – representing the smallest annual increase experienced since April 2013. But despite this slower and more affordable pace of rent growth in Scotland, the financial health of tenants has declined over the same period, and February saw the highest proportion of late rent since December 2012.
The average residential rent across Scotland has increased only £6 in the last year, reaching £537 per month in February. This represents a significant downtrend in annual rent rises, which peaked at 4.3% a year previously in February 2014 (equal to a £21 annual boost in cash terms).
On a monthly basis, Scottish rental prices have climbed a modest 0.2% since January, but this marks the first monthly rent rise witnessed since November 2014, as the market slows down.
Brian Moran, area lettings director at Your Move, said: “Such an incremental rise in Scottish rents over the past year shows admirable stability in the private rented sector. Despite high demand for homes to let in the face of the current housing shortage, rent inflation in the lettings market has remained remarkably affordable for tenants.
“After cruising along on a pretty even keel until late 2012, we then saw steep rent rises stack up against tenants – as the abolition of tenancy fees in Scotland knocked the market out of kilter.
“The Scottish private rented sector has subsequently been on quite a rollercoaster ride, but rent growth has its feet firmly on the ground once again, and is making steady strides forward.
“But while improvements in the affordability of the lettings market mean that tenants are able to keep up with rent rises, other economic factors are holding them back from making solid financial progress and continuing to drag tenants into the red.”
Rents are now higher than a year ago in three out of five regions of Scotland. Edinburgh & the Lothians have experienced the strongest annual rent growth, with prices climbing 2.5% (equal to £15) in the 12 months to February 2015. This is closely followed by Glasgow & Clyde, where rents are up 2.3% (£12) year-on-year. The East of Scotland witnessed a 2.2% annual rise in average rents, setting a new record of £530 per month.
In two regions of Scotland, rents have fallen in the past year. The Highlands & Islands experienced the biggest annual drop in average rents, falling 1.6%, equivalent to £9 in cash terms. Meanwhile, monthly rents in the South of Scotland are 1.5% lower than in February 2014.
On a monthly basis, rents have increased in just two out of five regions of Scotland. For the first time in eight months, rents in the South rose on a monthly basis, up 1.3% since January 2015 to £489. In the East of Scotland, rents climbed 0.4% (£2) during the month, to reach a new peak.
In February 2015, rents dropped in three of five regions in Scotland. Despite having the strongest annual rent inflation, Edinburgh & the Lothians witnessed the biggest monthly downturn, with rents falling 0.9% in a month to £598 in February. Both Glasgow & Clyde and Highlands & Islands experienced rent drops of 0.2%.
In February 2015, tenant arrears in Scotland reached the highest level for more than two years. The proportion of late rent rose to 8.1% in February, climbing from 7.1% in January. This also represents a significant rise on an annual basis, up from 6.8% in February 2014. Tenant finances were only in worse shape during December 2012, when rent in arrears reached 8.5%.
Moran said: “Scottish rent rises have decelerated, but while this should have freed up tenant finances, too many renters are stuck in the mud of late payments. For those Scottish households who are still finding their rent a bitter pill to swallow every month, the fruits of the recovery have a long way to go before they can be tasted.
“Low fuel and food prices have been one welcome crutch, but have not sufficiently improved the financial health of Scotland’s tenants, and the root of the sickness can be found the jobs market. With unemployment rising in Scotland and now overtaking the rest of the UK, more needs to be done to get people into work, and earning a healthy salary, before tenant finances rally.”
As of February 2015, the average gross yield on a rental property in Scotland is 4.0%. This has held steady since the previous month, and represents a dip on an annual basis from 4.1% in February 2014.
Taking into account property price growth and void periods between tenants, the average total annual return on a rental property in Scotland stands at 8.2% in the year to February 2015. This marks an uptick from 8.1% last month, and also represents an improvement on 7.0% a year ago, as house price growth picks up again after the conclusion of the referendum on Scottish independence.
In absolute terms this means the average buy-to-let investor in Scotland has seen a return, before any mortgage payments or maintenance costs, of £12,689 over the twelve months to February 2015. This rises to £20,955 in Edinburgh on average.
Looking ahead, if the value of rental properties continues to climb at the same rate witnessed over the last three months, the average landlord in Scotland could expect to make an overall annual return of 10.8% in the coming year, equal to £17,487 per property.
Moran added: “The Scottish housing market has braved the choppy waters around the independence referendum, and as property prices sail forward once more, landlords are seeing more buoyant total annual returns February. But it’s not just attractive capital gains on the horizon, and while rents have remained affordable for tenants, rental income and gross yields have continued to stay afloat too, and this has encouraged more and more landlords to add to the pool of available homes to let.
“The rental market acts as a compass of the direction of the economy and the jobs market, and as a result landlords in the Scottish capital are experiencing some of the strongest returns as heightened demand to live and work in Edinburgh pushes house price higher and sparks more competition for homes to let.
“Luckily for tenants, the current economic backdrop makes buy-to-let an increasingly attractive investment for many – with rock bottom interest rates facilitating generous buy-to-let mortgage deals and slashed stamp duty; it’s easier than it has been in a long time to invest in property. This investment gives tenants some vital elbow room to start saving up for their own leap onto the housing ladder, as more choice of homes on the rental market keeps rent rises at bay.”
