Average rents in Scotland down 0.7% in March, biggest monthly fall on record

Average residential rents in Scotland fell by 0.7% in March, the first decline in six months and the biggest monthly drop on record, the latest index data shows.

This took the typical rent in Scotland down to £544 per month and suppressed annual growth to just 1.1% in March, a significant downturn from 2.1% in the year to February 2016, according to the buy to let index from lettings agent network Your Move.

Annual growth in the rental market is now at a 13 month low and Edinburgh was the only place to see rents rise in March to a new peak for the city of £645 a month. One reason for the growth in Edinburgh is a lack of available properties, according to Brian Moran, lettings director at Your Move Scotland.

He believes, however, that rents could start to rise again with buy to let landlords now facing an additional 3% stamp duty and the effects of the new Private Tenancies Bill still to come. ‘What we do know, is that if landlords hit the brakes and cause a roadblock of supply in the private rented sector, tenants will be the casualties paying higher rents in the longer term,’ he said.
 
Rents fell across the majority of Scotland. The steepest monthly drop in rents was experienced in Glasgow and Clyde, with the average rent in March 1.5% lower than in February, taking the average monthly rent to £544.
 
In the Highlands and Islands there was a 1.4% fall in rents since February, and rents in the East dropped 0.8% on a monthly basis. The South of Scotland saw a more modest 0.2% dip in rents month on month.
 
Edinburgh and the Lothians was the only region to buck this trend, with the average monthly rent climbing 0.2% to reach a new peak price of £645 per month in March.
 
However, taking a longer term view, only two of the five regions of Scotland have seen rents fall on an annual basis. Edinburgh and the Lothians are continuing to see record annual rent rises, up 8.5% year on year in March. Rent growth in the capital has been accelerating steadily since June 2015.

After this, rents in the South of Scotland have seen the next fastest annual rise, with rents up 3.2% since March 2015. The Highlands and Islands saw a 1.6% uptick in rents compared to a year ago.
 
But two regions have seen rents fall compared to a year earlier. Both Glasgow and Clyde and the East of Scotland have witnessed a 2.5% drop in rents across the twelve months to March 2016.
 
The index report also shows that despite the widespread monthly falls in rents in March, the proportion of late rent in Scotland has risen for the first time since October 2015. Reversing the recent trend of improving tenant finances, tenant arrears rose to 11.3% of all rent due in March, up from a seven month low of 10.9% in February and up from 8.6% a year ago.

‘March has seen a very unwelcome about turn in the direction of tenant finances. Up until now Scottish tenants have been making good ground over the spring months, and paying down levels of late rent but there’s still a mountain to climb for many households,’ said Moran.
 
‘External factors and the wider economic climate obviously have a vital impact on tenants’ bottom line and the delicate balancing act between monthly income and outgoings, but landlords on the ground can help keep a lid on affordability pressures too,’ he explained.

‘Good management of buy to let properties and regular communication between landlords and their tenants is crucial to signpost any early concerns and avoid the likelihood of rental arrears. Tenants need properties they can afford, and landlords need tenants with a healthy grip on their household expenses, so it’s about striking a fair deal for both,’ he added.
 
Headline annual returns for Scottish landlords have dipped to -6.3% in the year to March 2016, a considerable fall from a positive 2.1% return over the year to February, as a result of the distorted property price movements in Spring 2015 ahead of the implementation of the Land and Buildings Transaction Tax (LBTT).

On an annual basis, this shows a drop from 19.2% in the 12 months to March 2015, which was buoyed up by strong capital accumulation as property prices rose sharply before the LBTT came into force, after an influx of high value sales.

In absolute terms, this equates to the average Scottish landlord seeing a paper loss, before any mortgage payments or maintenance costs, of £11,300 in the past year despite healthy rental income of £5,800 over 12 months.

Property price stabilisation compared to last year has dragged the measure of capital accumulation down in March 2016, but existing landlords will have made a saving by investing before the additional 3% stamp duty was liable on buy to let property purchases.
 
The report points out that if the house price recovery continues at the same pace as over the last three months, Scottish landlords can expect to see a total annual return of 1.3% over the next 12 months or £2,100 in absolute terms. 
 
As of March 2016, the average gross yield on a buy to let property in Scotland stands at 4%, consistent with the previous month. On an annual basis, gross yields have risen from 3.6% in March 2015.  
 
‘On the surface, the new LBTT benefitting the vast majority of Scottish buyers made it more expensive to become a landlord last Spring, with average property prices sent skyward after an onslaught of high value house sales at the top end of the Scottish housing market,’ Moran pointed out.

‘This short term scramble and the impact this had on values at the time meant that many existing landlords experienced faster capital growth than they were counting on last year, and on the flip side, those who entered the fray at the peak of the rush seemingly paid a premium that they may not have obviously recouped back yet. But it’s worth remembering that they’ll have saved themselves the extra 3% stamp duty now liable on buy to let purchases,’ he explained.
 
Moran believes that as property prices come back down and business resumes as usual, last year’s LBTT distortion will gradually work its way out of the cycle. ‘Investing in property is ultimately a long term game and total annual returns are only important if you’re an existing landlord wanting to sell up. For those in it for the long haul, perhaps looking ahead to their retirement, gross yields are the best weather gauge, and sturdy rental income has kept these pointing in the right direction,’ he said.

‘Ultimately, the LBTT will have helped mitigate the more recent additional transaction tax levied at landlords, and with Scottish property prices overall in calmer waters, you can definitely still catch a fruitful buy to let investment,’ he added.