Rental rates fall slightly for second month
UK residential property rents fell slightly in January compared with December but they are still 4% higher than a year ago and are showing signs of renewed growth in several areas of the country, according to the latest buy to let index.
Average rents fell to £682 per month as increasing investment pushed up supply, the index from LSL Property Services shows. It also found that tenant arrears also declines but remain high with 11% of all UK rent in arrears and total annual returns declined again as annual house price growth declines.
This is the second successive month rents have fallen. The average yield fell slightly to 4.9% in January, as rents declined at a faster pace than rental property values.
‘The recent loosening in the buy to let mortgage market has boosted the supply of rental homes on the market, a crucial factor in the temporary drop in rents. In the last quarter of 2010, the number of buy to let loans leapt by 7% according to Council of Mortgage Lenders,’ said David Newnes, estate agency managing director of LSL Property Services, owners of Your Move and Reeds Rains.
‘With more products coming onto the market, there are signs that this trend is continuing into 2011, allowing a growing number of professional landlords to get onto the market, or broaden their portfolios, and take advantage of near record rental income and strong tenant demand. International investors, too, have played their part, looking to place their cash in UK bricks and mortar while yields look attractive and properties are affordable,’ he added.
Despite the slight decrease in rents, they are still 4% higher than a year ago – and are showing signs of renewed growth in several areas of the country. Rents in the East and West Midlands increased by 0.9% and 0.8% respectively, 0.8% in Yorkshire and the Humber, and 0.2% in London. However, the overall drop was driven by larger falls in the East of England, down 2.5%, Wales down 2.1%, the North West down 1% and decreases of 0.4% in the South West and South East.
‘Although rents have fallen, the strength of the rental market cushioned the additional impact of winter. Fewer tenants tend to move in December and January and many landlords drop rents to avoid experiencing vacant properties. Despite the seasonal downturn, and the increase in supply, there remains healthy demand for property and rents are still £26 per calendar month higher than last January,’ said Newnes.
Following steady falls in property prices over the past three months, the total annual return on a property has dropped to 3.7%, the lowest return since October 2009. This is now the equivalent to £6,120 to £7,295 in rent, with a capital loss of £1,117.95. However, following recent declines in property values, over the next 12 months, a property investor could expect to make a total annual loss of £61 per new rental property. The £8,186 in rent could be cancelled out by a capital loss of £8,247 if recent house price falls continue at the same rate for the rest of 2011.
‘Falling house prices have suppressed annual returns in many parts of the country, but many investors have leapt at the chance to pick-up bargains while yields are high. Recent capital losses should serve as a strong reminder that property investment is a long-term venture, not a get rich quick scheme and successful investment is based on the fundamentals of rent, yields and tenant demand,’ explained Newnes.
Tenant finances were in slightly better shape than in December, but high arrears remains a concern for landlords with 11% of all UK rent was unpaid or late by the end of January, a drop from 11.7% in the previous month. Unpaid rent totalled £258 million across the UK in January, down from £276 million in December.
‘Tenant arrears look to have improved following the impact of Christmas spending, but they remain high. Their failure to return to a much lower level points to an underlying issue with tenant finances. Rents remain near record highs, and many household budgets have become squeezed by inflation and the toll taken by public sector cuts. In a market where properties aren’t jumping up in value, rental income is even more crucial to investors’ returns and pays the mortgage bill each month. It’s vital that landlords act swiftly to head off any potential tenant issues at the pass before they become a recurring nightmare,’ Newnes added.