Total returns from buy-to-let properties have risen to the highest levels since November 2014, according to the latest Buy-to-Let Index from Your Move and Reeds Rains.
Taking into account both rental income and capital growth, the average landlord in England and Wales has seen total returns of 12.0% over the twelve months to January. This is up from 11.2% in the 12 months to December – and now also represents a fourteen-month record, since total returns stood at 12.3% in the year to November 2014.
The estate agents claimed in absolute terms this means that the average landlord in England and Wales has seen a return of £21,988 over the last 12 months, before any deductions such as property maintenance and mortgage payments. Of this, the average capital gain contributed £13,594 while rental income made up £8,394 over the 12 months to January.
The gross yield on a typical rental property in England and Wales (before taking into account factors such as void periods) is steady at 4.9% in January, the same as in December 2015. On an annual basis, this is fractionally lower than the 5.0% gross yield seen a year ago in January 2015.
Adrian Gill, director of estate agents Reeds Rains and Your Move, said: “Buy-to-let returns are building and property prices are picking up – as the housing shortage across the UK intensifies. Landlords’ balance sheets are looking healthier than at any point since 2014, and property investors are looking at an excellent rate of return from their portfolios. With house prices rising rapidly into the New Year, this acceleration will be a welcome addition to the wealth of landlords on paper, while solid rental yields are underpinning total returns pushing well into the double digits.
“Stamp duty premiums on new buy-to-let purchases are the rhino in the room – everyone is talking about the 1st April deadline and the extra purchase costs are perceived by some commentators as potentially hazardous. But this is a little simplistic. Landlords are long-term investors and generally take good advice before making a new purchase, while the real changes will come when some landlords see gradual changes to their tax relief on mortgage interest. The rules around UK property are changing – but there is no bull in the buy-to-let china shop.
“Right now in 2016 the big shift is likely to be in favour of existing landlords, potentially at the expense of those planning to start up as a landlord for the first time or expand their portfolio. As such, it will be interesting to see how the rental market responds if there is a disruption to investment in supply.
“But this is likely to be a short-term effect. Over the longer term there is a consistent and developing lack of housing for across all tenures, for a spiraling population. Owners and renters alike will see the cost of somewhere to live continue to rise, whether expressed in rents or prices. Stamp duty surcharges could funnel more money from the industry to the Treasury, but ultimately will not change the level of demand from tenants.”
Average rents across England & Wales have accelerated into the New Year. Compared to the same point a year ago, rents in January 2016 have risen by 3.6%. This is up from 3.4% annual rent rises over the 12 months to December. This puts average rents at £790 per month, as of January 2016.
An accelerating annual pace of rent rises comes despite recent seasonal month-on-month drops in the latest market rents, dipping by 0.4% between December and January.
While rents have fallen on a monthly basis over the winter period, this trend is beginning to reverse into January, with the 0.4% latest month-on-month drop comparing to a 0.6% fall in December, 0.9% in November and a 1.2% monthly drop into October 2015.
Gill said: “Right now, canny tenants are taking advantage of the slightly cooler winter rental market, and securing tenancies with rents a little lower than in the peak autumn market last year. There are good deals to be had. But underneath this seasonality, rents are beginning to accelerate once again on an annual basis.
“There is a huge shortage of housing in the UK, particularly compared to an accelerating population and an economy that continues to outpace neighbouring countries. Meanwhile, real wages continue to rise meaning many tenants are able to pay a little more rent if necessary. In a competitive market that is a recipe for rent rises.”
On a regional basis annual rent rises are now led by the East Midlands and East of England, with rents up 5.9% and 5.8% respectively since January 2015. This pushes London to third place on this measure, with rents in the capital 5.7% higher on an annual basis, marginally slower than 6.3% in the capital in December.
At the other end of the spectrum rents are lower than a year ago in the South East and North East regions, both seeing a 1.0% annual fall. Meanwhile the slowest annual rent rises are in Wales, up just 0.6% since January 2015.
Six out of 10 regions have witnessed monthly falls in rents, in line with the overall month-on-month trend across England & Wales. This is led by London, with rents in the capital 0.7% lower than in December.
Tenants in the private rented sector have paid down outstanding rent in January. On average late rent now stands at 8.2% of all rent due, representing an improvement on December’s figure of 9.3%.
However, tenant finances remain slightly more difficult to manage than a year ago, with the latest arrears rate of 8.2% comparing with 6.8% in January 2015.
On a longer-term basis late rent remains reasonably steady compared to the all-time high of 14.6% of rent in arrears seen in February 2010.
Gill said: “Some tenants seem to be applying New Year’s resolutions to keep up with the bills. But the best news is that they are able to do so and the money is there.
“December is the most difficult month for most tenants, a fact which always shows up in all our statistics on late rent. That was no different at the end of last year. But regardless, renters have proven resilient and it’s encouraging to start off 2016 with tenants’ finances going the right way.”