Rent rises in Scotland cool off from August peak, latest index shows

Average rents in Scotland fell by 0.2% in September to £536 per month but they climbed to a new peak in Edinburgh, according to the latest buy to let index.

Rents fell in four out of the five years and annual growth has now cooled to 2%, the Scotland Buy to Let Index from Your Move also shows.

This comes after rents reached a record high in August and the monthly fall is the first for three months and the pace of growth could cool further with the latest LSL Landlord Survey finding that landlords expect rents to rise just 1.8% over the next 12 months.

However, talk of tenancy reforms to cap rents seems widely out of touch with reality, according to Gordon Fowlis, regional managing director of Your Move, as rent rises are slowing on an annual basis and retreating back in line with the target rate of inflation.
 
‘The last time the Scottish government tinkered with lettings legislation, their good intentions didn’t filter down to the thousands of everyday renters on the ground. Indeed, the abolition of one off tenancy fees hoisted rent rises up to an artificial pace after years of stability,’ said Fowlis.

‘Now, adding more strings to the web of legislation encircling landlords may push them to cut loose altogether, as well as stop attracting new buy to let investment. In this way, rent controls will actually accelerate rent rises from the healthy trajectory they are currently on,’ he explained.

‘At a time when the country is facing an acute shortage of housing, and as the government is already increasing the tax burden on many home buyers with their Land and Buildings Transaction Tax (LBTT), putting a cork in supply will only sour tenant finances,’ he added.

A breakdown of the figures shows that the biggest month on month drop was recorded in Glasgow and Clyde, with rents falling 0.9% between August and September. In the South rents dropped 0.8%, while rents in both the East and the Highlands and Islands are down 0.1% since August.

The only region to experience growth on a monthly basis was Edinburgh and the Lothians. The average rent has risen £9 or 1.5% in the month to September, to reach a new record high of £611 per month.

On an annual basis, rents are higher than a year ago across all but one region. Edinburgh and the Lothians have seen the biggest annual change, with average monthly rents increasing by 5% in the year ending September. This is followed by 3.8% annual growth in Glasgow and Clyde, with a £21 uplift taking the average rent to £570 a month.  The South is the only region to experience a price fall in the year to September, with average monthly rents dropping 0.1%,
 
As of September the gross yield on a typical rental property in Scotland stands at 4%. This represents a fall of 0.2% since September 2013, when the gross yield on a rental property averaged 4.2%, as well as monthly dip from 4.1% in August.
Taking into account price growth alongside void periods between tenants, the total annual return on an average rental property stands at 9.5% in the 12 months to September. This has climbed from the 3.8% annual return buy to let investors could expect in September 2013, and also represents a rise on a monthly basis from 9.2% in the year to August.

In absolute terms this means the average landlord in Scotland has seen a return, before any mortgage payments or other deductions, of £14,392 in the last 12 months.

Looking ahead, if rental property prices continue to rise at the same pace as over the last three months, the average buy to let investor in Scotland could expect to make a total annual return of 5.0% over the next year, equivalent to £8,019 per property.

‘Robust gross yields are emboldening aspiring property investors to build on the number of available homes to let, attracting further investment on a reassuring foundation of solid and sturdy returns. Recovering house price growth and steady rental income has renewed interest in buy to let as an alternative capital investment or plan for retirement,’ said Fowlis.

‘And it’s not only landlords who reap these benefits. Up against ceaseless tenant demand, the only market mechanism that can keep rent rises bridled is supply. So by contrast, if further investment is discouraged by external factors, competition for homes to let will unleash wilder rent growth,’ he pointed out.

The index report also shows that September saw a slight improvement in the health of tenant finances. The proportion of late rent has eased from 6.5% in August to 6.4% in September. However this still equates to a setback for tenant finances on an annual basis, as the proportion of rent paid in arrears has increased 0.5% points from 6% in September 2013.

According to Fowlis slackening rent growth has given tenants some welcome elbow room to muscle their way out of the red. ‘But paying rent on time is still a considerable strain for thousands of households, and the only way to relax this pressure every month is to raise wages,’ he explained.

‘The unemployment rate in Scotland has been falling at breakneck speed, parachuting thousands of people out of financial difficulty, as economic growth reaches heights not charted since before the crisis. But pay packets now need to hit the ground running to close the gap between what’s coming in every month and the cost of living,’ he added.