Rents reached a new high of £741 per month in September, according to the latest Buy-to-Let Index from LSL Property Services.
In England and Wales the average rent rose by 1.1% in September, surpassing the previous record high of £734 in August. While this is slower than the previous 1.2% monthly increase, rents climbed by 3.2% across England and Wales on an annual basis, accelerating from an increase of 2.9% in August. This is the fastest annual increase since February.
In the last month, rents rose across seven regions. London and the South East saw the strongest increases, with rents rising by 1.7% and 1.9% respectively. With rents reaching a record £1,092 pcm, London’s rents rose at their fastest monthly rate since November 2010. Three regions saw rents fall in September: the East of England, Yorkshire & the Humber, and the West Midlands.
On an annual basis, rents have risen the fastest in London, where they climbed by 6.2% and the South East, where they increased by 4%. Rents fell in two regions annually, dropping by 1.5% in the South West and 1.4% in Wales. However the rate of decline was slower in both regions than in August.
“Rents have risen consecutively for half a year as tenant demand strengthens on the back of a historically subdued mortgage market,” said David Brown, commercial director of LSL Property Services.
“However, every pound monthly rents go up by is another pound that renters can’t save for a deposit for their first home. This is lengthening their stay in rented accommodation, and increasing competition in the private rented sector.
“New tenants may see some relief in coming months as the rental market exits its peak season – the rental market tends to cool in the final part of the year. However, over the long-term, any sustained fall in rents will be closely tied to a consistent and significant improvement in lending at higher LTVs to prospective first-time buyers.”
Landlords saw an average total annual return of 6.2% on a rental property in September, up from 5.5% in August. This represents an average return of £10,216 with rental income of £7,909 and a capital gain of £2,307.
If rental 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 9.2% per property over the next 12 months – equivalent to £15,226 per property. The average yield on a rental property increased slightly to 5.4%, from 5.3% in August.
Brown added: “Rising rents may be a source of financial pain for many tenants, but they are underpinning annual returns for landlords, increasing the appeal of entering the buy-to-let sector. Yields are climbing steadily, comparing favourably with other forms of investment, and in the context of historically low mortgage rates, the key ingredients are in place for lucrative long-term investment.
“If lenders can support the growing appetite for property investment, it should lead to an improvement in the supply of homes available for tenants.”
Tenant finances deteriorated slightly, after seeing an improvement in the previous month. 9.1% of all rent was late or unpaid at the end of September. However, this remains below the average of 9.5% seen in the previous twelve months. In total, late or unpaid rent amounted to £297m, 3% more than in the previous month.
Brown said: “September’s rise in rental arrears looks like a bit of a set-back for tenants’ finances, but arrears are still down on the average seen in the last 12 months. That things aren’t much worse is testament to the stringent scrutiny applied by landlords as well as a reflection of the higher proportion of tenants who are financially robust yet unable to secure the mortgage finance necessary to leave the sector.
“Nevertheless, it’s clear that the monthly rent cheque is taking up a larger and larger chunk of a tenant’s disposable income and landlords cannot afford to drop their guard against potential payment problems.”
