As with house prices, the discussion around rents often focuses on developments at a national level. Rents in England and Wales may have risen on average to a new record high of £741 per month in September, but like the sales market, there is huge variation on a regional level. For example, while rents in London have hit a new peak of £1,092 per month, in the North East they are half this level at £529 pcm.
But the regional variation in trends is crucial to understanding the dynamics of property investment in different parts of the country. In areas like London and the South East, where house prices have outperformed the rest of the country, capital gains are still a key component to many landlords’ investment strategies. In other areas, where prices are lower or falling, rental income is even more important, with higher yields providing the basis for long-term investment plans.
Take, for instance, the North West. While the average rent is £594 – 80% of the national average, lower property prices mean that the average investor in the region is enjoying a yield of 7.3% on their investment, a figure which compares favourably with the national average of 5.4%.
However in these areas, stronger yields are often countered by weaker capital appreciation. For instance, while an investor in the North West may have enjoyed a rental yield of 6.9%, had they bought a year ago, in the last year the total annual return has actually been 4.1%, as a result of falling rental prices – as well as adjusting for void periods.
Conversely, where yields are lower, it’s often the case that capital appreciation is the larger component of a landlord’s annual return. In London for instance, despite average rents being 47% higher than the national average, the average yield is 5.1% – 0.3% lower than the average yields for England & Wales because of the higher value of properties.
Despite this, in the last year, investors in London have seen the highest total annual returns of all regions, as a result of the strong capital gains seen in the capital. In September, London landlords saw a total annual return of 10.3%, compared to the national average of 6.2%, seeing a return of £25,008 in cash terms.
However, in areas where house prices have performed more strongly, not only is the initial cost of investment higher, but so too are mortgage payments. While rents in London are often characterised as being excessive, it’s worth noting that landlords need to set rents high enough to cover 125% of a mortgage payment, as well as responding to competition and demand from tenants.
While the dynamics of investment may vary across the national market, a unifying concern is tenant arrears. Whether the investment relies more heavily on rental income to drive total annual returns, or the landlord has larger mortgage payments to meet, having a non-paying tenant in situ is a real financial headache. In regions with higher unemployment, tenants may be more likely to go into arrears. With more public sector cuts to come, areas which are more dependent on public sector employment like the North East may face the increased prospect of higher levels of tenant arrears. But the risk is something landlords across the country can take appropriate steps to manage by applying careful scrutiny to potential tenants, and referencing and credit checks must form a key component of best practice when letting a property.
Similarly, the prospect of void periods are a universal concern for landlords, wherever their location. Sensible pricing can help save landlords money in the long-term by ensuring their property attracts tenants, while researching an area’s likely tenant demand is a must prior to investing. However, one of the common causes of void periods is a lack of investment in refurbishment. It can be a false economy to allow a property to become worn to save money, as it is likely to play into longer void periods until rectified – not to mention attract a less desirable type of tenant.
As with the residential sales market, the rental market varies from street to street, let alone region to region, and the story for landlords is different across the country. National figures may be the focus of national papers, but it’s crucial that prospective landlords and their advisers know their local market inside out to tailor their investment strategies accordingly.
David Brown is the commercial director of LSL Property Services PLC
