Average rents in England and Wales up 1.6% year on year

Average residential rents in England and Wales now stands at £753 per month, despite a seasonal dip, and have increased by 1.6% in the last 12 months, the latest buy to let index shows.

Landlords have seen a record 8.9% total return over last 12 months, amounting to £14,592, the data from the LSL Property Services Index also shows.

Overall rents have risen at twice the annual rate of weekly earnings which have risen by just 0.8% on an annual basis but tenant finances have also improved as the proportion of late rent has dropped to 6.6%.

November also witnessed annual growth in lettings activity. The number of new tenancies agreed across England and Wales increased by 1.5% compared to November 2012. This was despite a slowdown on a monthly basis, with 6.3% fewer new lettings than in October.

‘Economic reality now resembles the most optimistic dreams of last year. But for so many households, the dream of home ownership is still relegated to the imagination,’ said David Newnes, director of LSL Property Services, owners of estate agents Reeds Rains and Your Move.

‘It’s not just wages. Savings rates have been swamped by inflation for half a decade so building up even a 5% deposit is a real struggle for first time buyers. Help to Buy is having a perceptible impact, with thousands of first time buyers benefiting already. Yet millions of new households have joined the queue at the bottom of the housing ladder and private renting is the only tenure to have taken up much slack,’ he explained.

He pointed out that eight out of 10 regions saw rents fall on a monthly basis between October and November, in line with a monthly fall across England and Wales as a whole.

The sharpest monthly drop was in the West Midlands, with rents down 2.6% since October. This was followed by a fall of 1.8% in the South East and a 1.3% monthly decrease in the East of England. However, the South West experienced rent increases of 1.1% between October and November, while rents in Wales also rose slightly on a monthly basis, up by 0.2%.

On an annual basis, London saw the steepest rent rises, some 4.4% higher than in November 2012. This was followed by a 3.4% annual increase in the South West, while rents in the South East are 3.2% higher than 12 months ago.

Meanwhile, rents in the East of England have fallen by 5.5% or £42 over the last year. This was followed by a 2.8% annual drop in the West Midlands, while rents in both the North East and Yorkshire and the Humber are 2% lower than November 2012.

Newnes said that as the economic recovery spreads throughout the UK the property market is the leading edge of that wave. ‘As the home purchase situation heats up, the effect on the rental market is even less uniform with rises accelerating in some areas and slowing in others. Across the UK, every town and city is its own market, and requires local knowledge,’ he explained.

The monthly report also shows that gross yields on a typical rental property remained steady at 5.3% in November, consistent with the past three months. However, taking into account capital accumulation and void periods between tenants, total annual returns on an average rental property rose to 8.9% in November, up from 8.1% in October, with the increase due to accelerating house price rises.

In absolute terms this represents an average return of £14,592, with rental income of £8,243 and capital gain of £6,349. If rental property prices continue to rise at the same pace as over the last three months, the average buy to let investor in England and Wales could expect to make a total annual return of 10.5% over the next 12 months, equivalent to £17,294 per property.

‘Over 12 months the availability and affordability of buy to let finance has achieved a quiet revolution with a very real effect on the private rented sector. Demand for homes to rent is still soaring, yet heavy investment by landlords in 2013 has brought rent rises in most areas below inflation,’ said Newnes.

‘In 2014, one thing will remain certain and that is that demand from new tenants will continue to grow. Supply of new homes to rent will be critical in maintaining relatively affordable annual rent rises, compared to rampant house prices,’ he added.

Tenant finances improved in November, with the total amount of late rent across England and Wales reaching a new record low of £228 million. Since November 2012 the total amount of late rent has fallen by £20 million. As a proportion, such tenant arrears now represent 6.6% of all rent, down from 7.1% in October, and significantly lower than 7.4% of all rent in arrears in November 2012.

‘Homes of all tenures have become more expensive for most people. That’s partly because the UK is poorer than it was five years ago, with wages only gradually struggling to recover. But more fundamentally, housing is also becoming more expensive because there aren’t enough homes to keep up with an expanding population,’ said Newnes.

‘Building more homes at a serious pace is the only way to avoid the risk of stagnation in the housing market. The property industry cannot grow by competing ever more fiercely over fixed resources. But to make new homes affordable they will also need to be purpose built for all tenures. Private renting has been growing for decades, and new supply will need to cater for the sector for decades to come,’ he added.

According to David Whittaker, managing director of Mortgages for Business, slow wage growth has been one of the key stumbling blocks for those hoping to raise a deposit to purchase a home.

‘As a result, record numbers now rely on the private rental sector and this has pushed up both rents and yields. With solid returns and low rates of tenant arrears landlords are certainly  in a strong position at the moment, but with property prices on the rise, and surveyors predicting even more price growth next year, landlords may find their returns being squeezed when expanding their portfolios in 2014,’ he pointed out.

‘If this is the case, we could see an increasing number of landlords purchase complex buy to let properties such as HMOs which typically accommodate a larger number of tenants and produce higher yields. The good news is this will provide the rental market with more accommodation and should help keep rents under control,’ he added.