The latest Scotland Buy-to-Let Index from Your Move has found that Scottish rents are rising at half their summer speed.
The average residential rent in Scotland is now 1.6% higher than a year ago, meaning the typical tenant is paying £9 extra every month than in October 2014. However the rate of rent growth has almost halved since the summer, slowing from a 3.1% annual rise in June 2015.
After peaking at record prices in the summer, Scottish rents have been falling in recent months. But there are signs that growth is starting to rally following this autumnal dip, with residential rents in Scotland climbing a modest 0.2% between September and October 2015. This is the first month-on-month rise in Scottish rents since July, and takes the average monthly rent in Scotland to £546, £1 higher than the previous month in cash terms.
Despite widespread recognition that tenant demand is currently outpacing supply of available homes to let, landlords believe that rent rises are likely to continue on a slower trajectory than witnessed earlier this year. According to the latest Landlord Survey from Your Move, landlords expect rents to increase by just 1.4% over the next 12 months. Only a third of landlords (32%) are intending to raise their rents next year, with the main motivation being to cover the cost of inflation.
Brian Moran, lettings director at Your Move Scotland, said: “While the debate rages on regarding the Private Tenancies Bill in Holyrood, on the ground in the lettings market, tenants have actually been granted somewhat of a breather. With the change of season has come a change in the pace of rent increases.This is giving Scottish tenants a much smoother ride than a few months ago, and there are indications from landlords that this trend will continue until 2016.
“Ultimately, rents in the private rented sector reflect what people are willing and able to pay, and are delimited by household incomes and monthly earnings – and that’s the fundamental market mechanism that is being lost in the noise surrounding enforced rent control zones and other government interventions. If the self-regulation of the private rented sector is disrupted, landlords will be more vulnerable to legislative headaches, and rents will find themselves at the mercy of limited supply.”
Rents are higher year-on-year in every region of Scotland except Glasgow & Clyde in October. Scotland’s second city has seen a 0.9% drop in rents since October 2014, equivalent to £5. This means the typical rent in the area now stands at £560, down from a record of £575 in the summer of 2014.
Compared to a year ago, the Highlands & Islands has experienced the biggest increase in rents – up 5.7%, or £31 in 12 months. However this rate of growth is starting to slow after a monthly price drop in October, and rents have come down from their historic peak in September. After this, average rents in the South of Scotland are up 2.6% (£13) year-on-year.
Annual rent growth in Edinburgh & the Lothians has accelerated from 2.0% in September to 2.5% in October, meaning that rents are now £15 more expensive than a year ago in Scotland’s capital city. Standing at £630 per month, this is a new record for rent prices in the region, and 15% higher than the average rent in Scotland overall.
The East of Scotland has experienced a more modest 1.0% uptick in rent prices in the past 12 months, with monthly rents rising by £5 to £522.
Three of the five regions of Scotland have seen rents increase in the past month. The urban centres of Edinburgh & the Lothians and Glasgow & Clyde have seen the strongest month-on-month rises, with rents up 1.1% since September. The East of Scotland has seen a 0.2% monthly increase in rent prices, in the first month-on-month rise since July.
The South of Scotland have experienced the biggest drop in rents on a monthly basis. Here, rents are 1.0% lower (£5) than in September. Average monthly rents have also fallen in the Highlands & Islands, down 0.5% month-on-month, the first monthly drop since April, following a sustained summer of growth.
Scottish tenant arrears have climbed to a fresh record in October, with the proportion of rent in arrears rising to 13.8% of all rent due in the month. This is the fifth consecutive month that tenant arrears have worsened, rising from 8.8% in May of this year, and up from 13.2% the previous month. On an annual basis, rental arrears have more than doubled – increasing from 6.5% of all rent in October 2014.
Moran said: “Since May, rental arrears have been moving in only one direction – and it’s not where we want them to be heading. More needs to be done to turn tenant fortunes around and divert them back onto the right road, but in the meantime, it’s vital that the channels of communication are kept open between landlords and their tenants.
“Scottish rent growth is coasting along at a sustainable speed, and can hardly be accused of going off the rails. It is unemployment in Scotland that has been accelerating over the summer, and is now higher than the UK average. Weaker job creation is a crucial factor holding back many households from paying their bills on time north of the border, and the rising proportion of Scots out of work needs to be halted in its tracks.”
As of October 2015, the average gross yield on a Scottish rental property stands at 4.0%, consistent with the previous month. Compared to a year ago, gross yields are also holding steady with October 2014, but there has been significant volatility within these 12 months, as a result of house price distortions surrounding the implementation of the new Land and Buildings Transactions Tax.
Taking into account property price growth and void periods between tenants, but before any costs such as mortgage repayments or maintenance, the average total annual return on a buy-to-let property in Scotland stands at 5.0% in the year to October 2015. This represents a modest dip from 5.6% in September, but a more significant fall from 9.3% in the 12 months to October 2014.
In cash terms this means the typical landlord in Scotland has seen a return, before any mortgage payments or maintenance costs, of £8,000 in the last year. Rental income makes up £5,900 of this sum, while capital appreciation on buy-to-let property amounts to £2,100 in the 12 months to October 2015.
If house prices continue to climb at the same rate as witnessed over the last three months, the average buy-to-let investor in Scotland could expect to make an overall annual return of 9.8% in the next year, equivalent to £15,900 per property.
Moran added: “Landlord’s rental yields are boosted when house prices stabilise, so as the purchase market comes back down to earth after the distortions of the past year, this renewed stability should help the investment case for buy-to-let. This is especially welcome at a time when there otherwise may not appear to be too much to recommend the industry. Dependable rental income and the added bonus of healthy annual returns on property values may boost the confidence of existing landlords – but there are many other factors threatening to rain on the parade at the moment.
“There is a dangerous perception problem now, perpetrated further by the Private Tenancies Bill, that investing in buy-to-let property is becoming too embroiled in regulatory red tape. Already, a tenth of existing landlords are considering selling up – despite widespread recognition of rising demand from tenants – as the legislation involved in letting out properties becomes more complicated. Landlords are still grappling with the loss of tax relief, and this proposed bill doesn’t help to attract new buy-to-let investment in Scotland.
“We need a bigger reservoir of rental properties to draw on, not a bigger web of regulation to be caught on. A rising population requires a rising supply of housing across all tenures. The number of properties in Scotland available to rent simply isn’t sufficient, and this will have a considerable bearing on affordability for tenants as demand for homes rises and rises.”