With rent growth building up pace, the average residential rent in Scotland has reached a new peak of £549 per month in June 2015. Scottish rent growth has accelerated to 3.1% in the year to June, up from 2.7% in May and just 1.6% in April. June’s figure represents the fastest year-on-year increase witnessed since April 2014, when annual growth stood at 3.5%.
There was also an upswing in rents on a monthly basis, rising 0.8% in June. While this represents a slight slowdown from the 1.0% jump in the month to May, over the preceding six months rents were climbing at a rate of only 0.1% per month.
Brian Moran, lettings director at Your Move Scotland, comments: “The volume has been cranked up in the Scottish rental market after a muted winter, and a much faster beat of rent rises is now audible. Rents are hitting all-time local records in the parts of Scotland that have traditionally been more affordable to live, where rental prices are lower.
It’s not just the big urban centres of Edinburgh and Glasgow which are coming up against an urgent shortfall of housing – there is furious demand for homes to let the length and breadth of the nation, and that is underpinning this build-up in rental prices.
The delicate market equilibrium may also be imbalanced by the ripples of the Summer Budget. With landlord’s tax relief compressed, the vital bedrock of the private rented sector – investment – could fall short of what’s required to meet the towering demand on the market. There are two ways that this could tighten tenant purse strings. Firstly, if potential Buy-to-Let investors now look to other asset classes instead, the supply of homes to let could stagnate, heightening competition for available properties and amplifying rent prices. But secondly, there is a danger that many existing landlords may have to pass these additional costs down the chain, raising rents and pressuring tenant incomes.”
Rents by region
On an annual basis, rents have risen across all five regions of Scotland – and as rent growth accelerates across the country, new price records have been set in the East, Highlands & Islands and the South.
Glasgow & Clyde have seen the biggest boost in rents year-on-year, with typical rental rises up 4.6% (equal to £25) since June 2014. Rents in the Highlands & Islands have jumped 4.3% in the past twelve months, taking the average monthly rent to a record high of £563.
Similarly, rents in the East and South of Scotland have both reached a new peak following annual rent rises of 4.0% and 2.1% respectively. In contrast, Edinburgh & the Lothian’s has experienced the smallest yearly increase of only 0.8% - but this marks an improvement from negative growth in the year to May 2015.
Rents in all five regions of Scotland are also higher month-on-month. The average monthly rent in the Highlands & Islands has risen at the quickest pace since May, increasing by 2.4%. Compared to the previous month, Edinburgh & the Lothian’s have seen a 1.7% (£10) jump in June. This brings the average rent in the area to £604 – as it continues to be the most expensive location in Scotland to rent.
In Glasgow & Clyde rents are 0.6% higher since May, and the South has witnessed a 0.5% monthly climb in rental prices. The East of Scotland has seen a more modest 0.2% uplift in the month to June 2015 – a considerable slowdown.
Landlord returns buoyant
As of June 2015, the average gross yield on a rental property in Scotland stands at 3.8%. This is on par with last month, however represents a reduction on a year ago, when gross yields were 4.0% in June 2014.
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 13.8% in the twelve months to June 2015.
This has stabilised month-on-month as the property market adjusts to the implementation of the new Land and Buildings Transaction Tax – but shows a considerable climb in the last year, with total annual returns at 9.5% in June 2014.
In absolute terms this means the typical Scottish landlord has seen a return, before any mortgage payments or maintenance costs, of £21,900 in the year to June 2015. Of this, rental income makes up £5,800 while capital accumulation on an average buy-to-let property amounts to £16,100 in the past year.
Brian Moran comments: “Buoyant total annual returns are providing a welcome boost to landlords across Scotland – and represent a nice perk above steady monthly rental income. But most importantly, rental yields are also cruising along on an even keel, and have absorbed some of the recent shockwaves of the new Land and Buildings Transaction Tax, which has disrupted the course of property price growth more recently.
The Summer Budget announcement will cause a slight wind-change to conditions, and landlords need to be aware of the changes to tax relief, and other policies such as wear and tear allowance for furnishing homes to let. By removing some of these incentives and bonuses for landlords, the flow of investment into the private rented sector might slow down, and put extra strain on the selection of homes to let available on the market. If supply is squeezed, competition will only build up, and force faster rent rises.
However the move will be phased in gradually, allowing existing landlords a valuable buffer to consider the future of their portfolio and consider future investment carefully. But with rents at record levels, buy-to-let investment remains an exciting and attractive proposition, and the current rock-bottom mortgage and interest rates will still entice further investment into the sector.”
Tenant finances slip backwards again
The proportion of rent in arrears rose in June to 9.0%, up from 8.8% in May, as tenant finances worsen again. May’s level represented a small monthly improvement – but this appears short-lived, and the general trend is of rising tenant arrears.
A year previously, rent in arrears stood at just 6.1% of rent due in the month - and tenant finances have only worsened in the last twelve months.
Brian Moran concludes: “Despite the prospering economy giving many households a smoother ride, when it comes to paying the rent on time, many Scottish tenants are still hitting a speed bump. It’s become clear over the past year that this isn’t a problem that’s going to fix itself –the situation has only gone downhill. In the grand scheme of things, we’re only talking about a very small minority of the millions who rely on renting, but this can have much more severe repercussions if arrears build up month on month. Greater supply of homes to let is the only way to definitively address the housing shortage, and ease the financial pressure in the market.”
