In May, the average rent in England and Wales rose by 0.5% to £696 per month, surpassing the previous high of £692 in April. The growth means that the average rent is now £30 per month higher than May 2010 – an annual inflation of 4.4%.
The average yield remained at a record high of 5.1% in May.
The figures mask huge differences in regional fortunes. In the past 12 months, rents have risen in all but two regions in England and Wales. Rents have risen the fastest in London, where they increased 7.8% in the past year.
The next biggest rises were in the North East, and the East Midlands where rents increased by 6.4% and 6.2% respectively. In the last year, average rents have only fallen in the South West, where they declined by 0.4%, and the East of England, where they have fallen by 1.2%.
Over the last month, rents increased the fastest in the East of England and the North East, rising by 1.4% and 1.1% respectively. Rents only declined in three regions – the West Midlands, where they fell by 0.7%, the South West and Wales, where rents fell by 0.6% and 0.2% respectively.
David Brown, commercial director of LSL Property Services, comments:
“Tenant demand has been especially bubbly in recent months. Soaring inflation has taken its toll on would-be buyers’ deposit funds. The rocketing cost of living, combined with ongoing difficulty first time buyers are experiencing in obtaining a mortgage is increasing the number reliant on rental accommodation.
"With the fierce competition for homes, rental gazumping is becoming more commonplace and properties are being let beyond asking price, putting further upwards pressure on the market. For tenants, unable to buy, renting is becoming less affordable as demand booms. Rents are increasing at twice the rate of wages.”
The total annual return on a rental property now stands at 2.9% with high yields offset against a slight annual decline in rental property prices. The total annual return is the equivalent of £4,891 - £7,414 in rent, with a capital loss of £2,523.
If property values continue on their current trend, a property investor could expect to make a total annual return of 5.7% over the next year – equivalent to £9,404 per property.
In London, where property prices have performed strongly compared to the rest of the UK, annual returns are nearly five times the national average. The average London landlord has seen a total annual return of 9.5% - £22,339 per property.
Property investors in the South East saw the next highest annual returns of £4,798 (2.6%) while the landlords in the East of England saw total annual returns of 4,690 (2.5%).
David Brown continues:
“The values of rented properties are slightly lower than a year ago, and this is reining in the total returns. However, with rental income continuing to escalate, landlords are still looking at a healthy return on their investment – especially on long-term investments.
"It is rental income that pays the mortgage each month, and must be the key foundation to underpin any sensible investment plan.”
Tenant arrears decreased in May, with 11.5% of all UK rent unpaid or late by the end of the month. Although this is a slight decrease from the 11.8% in the previous month, it remains well above the 10.6% average of 2010.
Unpaid rent totalled £277m across the UK in May, a decrease of 2.5% from the £284m unpaid in April.
Brown concludes:
“Arrears fell away slightly after an abnormal April, which was distorted by the additional bank holiday at the end of the month. Nevertheless, their elevated level in a more ‘normal’ month should provide a note of caution for landlords.
"Tenant finances are coming under increasing strain from rampant inflation and soaring rents. The labour market has remained surprisingly robust, but public sector job losses will begin to have a deeper impact on many tenants’ finances as the year progresses.
"It is critical that landlords notice and react quickly to any potential payment problems to prevent tenant arrears spiralling out of control.”
Paul Jardine, director of Templeton LPA, the specialist surveyors practice, comments:
“Tenant arrears fell away slightly last month, but the drop cannot disguise the growing financial pressure on tenants’ household budgets. Despite the monthly decline, the total amount of rent late or unpaid in May was still 13% more than the average in 2010.
"It’s clear that record rents, and the soaring costs of living are taking their toll on many tenants’ ability to pay their landlord on time each month.
"With the full impact of public sector job losses yet to be felt across the UK, and inflation unlikely to plummet any time soon, it is crucial that landlords remain vigilant against payment issues, and resolve any problems early to prevent a tenant from entering severe arrears – and they themselves from falling into mortgage arrears with their lender.”
John Heron, Paragon Mortgages Managing Director said:
"The rising rent costs reported give an indication of the continued lack of properties in the buy-to-let sector due to the constrained finances of professional landlords.
"There are a number of products available for smaller scale landlords, with only one or two properties, but for the professional landlord with a large portfolio there is limited finance available.
"Whilst we are seeing a gradual growth in the number of buy-to-let products available, more are needed because it is the professional landlord that is going to drive the growth in this sector."
Richard Sexton, director of e.surv chartered surveyors, says:
“The London rental market is in hyperdrive because of the lack of appropriate mortgage products for lower income buyers. LTV’s over 75% accounted for less than one-third of all house purchases in May, compared to over two-thirds in May 2007, because less well off borrowers simply cannot piece together the large deposits demanded by lenders.
"The trend is reflected in the profile of property transactions. In May 2007, over half of all purchases were for archetypal first time buyer properties – homes up to £250,000. Those transactions came down to just 39% last month.
"This inability to get a mortgage and get a foot on the property ladder has built up a backlog of first time buyers who are marooned in the rental market. That in turn has driven rents and those high rents are making buy to let investment very attractive.
"Until more people qualify for mortgage finance the lowest end of the property market will remain subdued, and the rental market will continue to enjoy an Indian summer.”
