Tenants are facing the first rises in market rents since the autumn, according to the latest Buy-to-Let Index from Your Move and Reeds Rains.
Average rents are now increasing on a monthly basis for the first time since September 2015, up 0.1% between January and February.
Rents across England & Wales now stand at £791 per month as of February, 3.3% higher compared to this point last year – or an extra £25 per month for the average tenant.
“Spring is here for the rental market. Rents are rising and demand is growing. In a warming market, tenants are beginning to feel the heat when signing new tenancies,” said Adrian Gill, director of lettings agents Your Move and Reeds Rains.
“But this delicate ecosystem of soaring demand from tenants and steady investment from landlords is under threat. Rent rises could now accelerate further, and gentle spring warmth could start to feel less comfortable. If government attacks on landlords bite – having worsened again in this week’s Budget – the flow of investment from landlords could wilt.
“Landlords are increasingly deliberate in their actions and savvy in their business decisions. But all landlords investing steadily in new property to let are the heroes of the buy-to-let industry, not the villains. Thanks to the business acumen and persistence of landlords, Britain’s private rented sector has become home to millions of households and the only real backstop against the weakness of other tenures.
“All landlords, regardless of the number of properties they own, want to provide a quality service as part of earning a reliable return on their investment. For those with the right advice, this is part of operating a successful business model. Avoiding void periods and ensuring a good relationship with reliable tenants is essential. So it is hard to understand the logic behind restricting the flow of new investment, and the competition between existing landlords.
“Additional taxes on the purchase of new buy-to-let properties will not support the stated aims of these policies – namely to improve home ownership. By attacking buy-to-let, the government will only serve to push up market rents more quickly, stymieing the efforts of many tenants to raise a deposit to buy a home – while also boosting returns for existing landlords with the best advice to navigate new complications.”
On a regional basis rents are led by the midlands. East Midlands tenants have seen the fastest annual rent rises, up 7.0% over the last 12 months. This is followed by the West Midlands with 6.3% and the East of England with rents 6.2% higher than in February 2015.
These three regions all stand ahead of London on this basis, with rents in the capital 4.8% higher than 12 months ago. As recently as November, London consistently led the field in terms of annual rent rises.
Meanwhile, at the other end of the spectrum rents are lower than a year ago in three out of ten regions. These exceptions are led by the North East where the average rent is now 2.5% lower than in February 2015, followed by Wales with rents down 1.5%, and the South East with a marginal 0.1% annual drop.
Five out of ten regions have now seen rents rising month-on-month. On this basis the East of England leads with rents in February 1.1% higher than in January 2016. The South East and the East Midlands are joint second on this measure with rents up 0.6% between January and February. By contrast, rents in Wales and the North East are now 0.9% lower and 0.7% lower than in January, respectively.
On the back of the latest monthly increases, monthly rents in the West Midlands have set a new an all-time record high, at £596, alongside a new all-time record for Yorkshire & Humber rents at £559. The East Midlands, while home to the fastest annual rent rises in the 12 months to February, has seen rents remain just £1 short of the all-time record high set at £610 in November 2015.
Rental yields are proving resistant to rising purchase prices. The gross yield on a typical rental property in England and Wales (before taking into account factors such as void periods) is steady at 4.8% in February, the same as in January 2016. On an annual basis, this is fractionally lower than the 5.0% gross yield seen a year ago in February 2015.
Taking into account both rental income and capital growth, the average landlord in England and Wales has seen total returns of 12.7% over the 12 months to February. This is up from 11.7% in the 12 months to January – and now also represents a seventeen-month record, since total returns previously reached 12.7% in the year to September 2014.
In absolute terms this means that the average landlord in England and Wales has seen a return of £23,227 over the last 12 months, before any deductions such as property maintenance and mortgage payments. Of this, the average capital gain contributed £14,767 while rental income made up £8,460 over the 12 months to February.
Gill said: “Rising property prices and rising rents are two sides of the same coin. There is not enough supply of housing across the UK to match soaring demand. This is powering a sellers’ purchase market and a landlords’ rental market. Housing costs are rising, and housing wealth is rising – two very different perspectives on the same issue.
“Faced with this dilemma, investment in property is a rational response, and has been proving extremely lucrative for landlords and some home-owners alike. Building more new homes would be an even better response, and where possible is even more profitable. But it is government inaction preventing more homes being built to fill the gap – just as it is a government decision to attack those willing to navigate the risk and complexity of property investment.
“Until this country builds new homes at the rate needed to match our rising population, property investment and buy-to-let activity will continue to be especially profitable. Even if that ever happens, it could take decades of sufficient home building to make up for the decades of undersupply. The only caveat is that property investment decisions are becoming more complicated thanks to the plethora of additional regulations and tax changes. These decisions will be harder to make, and the buy-to-let industry will demand a more professional approach to the business of being a landlord. But for those who already own properties, or have the capital to invest, there are opportunities to be found.”
Paying the rent on time became marginally more difficult for tenants in the private rented sector in February. On average late rent now stands at 8.8% of all rent due, compared to 8.2% in January 2016.
Tenant finances have also worsened compared to the same point a year ago. The latest arrears rate of 8.8% compares with 7.6% rent arrears previously in February 2015.
On a longer-term basis levels of late rent remain more encouraging. This February compares to the all-time high of 14.6% of all rent payable in arrears – seen in February 2010.
Gill added: “For half a decade we have tracked a reliable long-term improvement in total levels of late rent. That is levelling off now.
“It may be that we have reached a point where a residual possibility of communication, organisation and practical issues mean some late rent is inevitable. Despite this possibility, a real optimist would hope that late rent could continue to improve towards zero. In fact our latest figures on the most serious rental arrears are more encouraging, which would support the idea that we aren’t anywhere near more fundamental limits to the improvement. Better communication between landlords and tenants, and quality property management will be key in helping the market push this risk even lower.
“The only cloud on that horizon is that more serious affordability issues are marginally more likely after the latest restrictions on buy-to-let investment. I am an optimist – but the entire buy-to-let industry is becoming more complicated, and will require more nuanced and bespoke answers for landlords in different situations.”
