Rental prices in Scotland increased at end of 2015, latest index shows

There was a last minute end of year surge in Scottish rent growth with average residential rents up 0.4% in December, the highest monthly rise since June, the latest index report shows.

This was uptick from a modest 0.1% rise the previous month and took the average monthly rent in Scotland to £548, just £1 below the summer peak reached in July, according to the data from lettings agent network Your Move.
 
On an annual basis, rent growth is also starting to accelerate. Year on year rent rises had been steadily slowing since June when they stood at 3.1% but Scottish rents are now on average 2.2% higher than a year ago, up from 1.4% in the 12 months to November.
 
The rise is due to a shortage of supply and an improvement in wages means that tenants can afford the rents, according to Brian Moran, lettings director at Your Move Scotland.

‘Outside of the summer months, the New Year often sees the second biggest cycle of new tenancies, and ushers in a busy time for the lettings market. It’s the period where people typically take up fresh career opportunities, and implement new life changes and this wave is already evident in the uptick of rents over November and December, as savvy tenants act quickly to beat the January rush,’ he explained.
 
He pointed out that one major factor likely to affect the market in 2016 include the extra 3% property tax on buy to let properties from April. ‘It is likely to distort the natural flow of the market, with any further buy to let investment likely to be front loaded into the early months of the year. Once that deadline passes, and if investment into the private rented sector becomes more hesitant, tenants’ rents may become much more exposed to the problem of supply,’ added Moran.

A breakdown of the figures show that in December, three of five regions saw month on month rent increases. The South saw the biggest with average rents rising 1.3% while Edinburgh and the Lothians saw a rise of 0.7% and Glasgow and the Clyde up by 0.5%.
 
The Highlands and Islands saw the most significant monthly fall in rents in December with a fall of 0.9% while in the East of Scotland they fell by 0.3% month on month.

On an annual basis, rents are higher across four of the five regions of Scotland. The biggest rise was in the Highlands and Islands with rents up 4.9%, Edinburgh and the Lothians they increased 4.8%, in Glasgow Clyde rents were up by 0.2% and in the East of Scotland rents dropped 0.7%.

The report also shows that while there is typically a seasonal spike in arrears around the Christmas period, tenant arrears in Scotland dropped for the second month in a row in December, with the proportion of rent in arrears falling to 11.9% of all rent due in the month. Arrears peaked at 13.8% in October 2015, but now appear to be starting a steady decline.
 
However there is still a lot of ground to be made up. On an annual basis rental arrears have climbed significantly, compared to 7.2% of rent late in December 2014.
 
‘It’s surprising and encouraging that the burden appeared to be lifted somewhat in the immediate run up to Christmas, and that paying the rent actually became easier for some tenants. The festive season is notoriously a tough time for families to balance the books, but wider economic factors are starting to have a tangible impact helping incomes go a little bit further. Improvements in average earnings in Scotland have come to the rescue in time for Christmas for some households, but this is just a drop in the ocean at the moment,’ said Moran.
 
‘The greatest monthly outgoing for households is often housing, and in the Scottish private rented sector this cost is not only rising, but starting to accelerate now too. The current gulf between supply and demand can’t widen any further without hitting affordability for tenants, so it will be interesting to see how the additional stamp duty on buy to let purchases in April affects things for renters in the long term,’ he added.
 
In Scotland, the average gross yield on a rental property was 4% in December 2015. This is consistent with the previous month, and also shows no change on an annual basis.
 
Taking into account property price growth and void periods between tenants, but before any costs such as mortgage repayments or maintenance, the average landlord in Scotland has seen total annual returns of 6.3% during the course of 2015.

However, the report points out that as property purchase prices stabilise, this represents a marginal dip from 6.5% in November, and a more considerable decrease from 8% in the year to December 2014.
 
In absolute terms this means the typical buy to let investor in Scotland has seen a return, before any mortgage payments or maintenance costs, of £10,000 in the past year.  Of this, rental income accounts for £5,900 of the total, while capital appreciation on buy to let property amounts to £4,100 over the 12 months to December.

But if house price growth continues to pick up speed at the same rate as experienced over the last three months, the average Scottish landlord could expect to an overall annual return of 11.4% in the next year, equivalent to more than £18,000.

‘Slowing property price growth in the short term has suppressed existing landlords’ returns recently, but not enough to significantly eat into rental yields. Rising rental incomes are keeping the all-important gross yields steady and attractive for budding property investors at the moment,’ said Moran.

‘But as the housing market puts the implementation of the Land and Buildings Transaction Tax behind it, existing landlords will also see the capital value of their portfolios start to make real progress again, which may hold back yields, especially if there is a spring time surge in buy to let purchases before the new stamp duty changes come into play in April,’ he explained.
 
‘In future, new investors may have a harder job reconciling their rental income against their initial start-up costs or expenses with additional transactions costs on second homes, plus larger mortgages as property prices are pushed upwards. Ultimately, the sector needs to remain an attractive investment proposition to prevent higher rents being levied on tenants, and a squeezed supply of homes to let come April,’ he concluded.