Across Scotland the average rent now stands at £542, but Edinburgh and the Lothians shun the wider slowdown with a record 10.5% jump in rents since last year.
The data from the Your Move index also shows that tenant arrears are escalating as the level of late rent climbed for the second consecutive month, up to 11.6%.
The annual rise represents a significant downturn in rates of year on year growth from 1.1% recorded in March, and 2.1% in February and average rents are at their lowest since April 2015.
Brian Moran, lettings director at Your Move Scotland, pointed out that overall rents haven’t risen at such a leisurely place for three years but the market is seeing many price fluctuations and also isn’t uniform across the country.
‘The lettings market is always at the mercy of local supply and demand, and in Edinburgh and the surrounding areas we’re seeing extraordinarily fast rent rises, as tenant competition shines brightest around the glow of the jobs market. Supply and demand need to strike a lasting equilibrium to prevent rent growth taking off and leaving tenants by the wayside and that’s a tall order in today’s regulatory environment,’ he explained.
He also pointed out that landlords are up against a considerable number of hurdles, including a higher rate of stamp duty on property purchases, reductions in tax relief, and the Private Tenancies Bill. ‘While levied at landlords, these measures could soon hurt thousands of tenants too if buy to let investment retreats as a result and there are less houses and flats to rent,’ he added.
On a monthly basis, rents were cheaper in all but one region of Scotland in April. The Highlands and Islands had the fastest drop in average rents in April, falling 1.7% on March, reducing typical rents in the region to £537 per month, the lowest level seen since December 2014.
Rents in Glasgow and Clyde fell on a monthly basis for the fourth consecutive month, down by 1% in April to £538 while in the East of Scotland rents were 0.6% lower in April than in March, while the South experienced the smallest month on month reduction, down by 0.1%.
Edinburgh and the Lothians is the only region to experience an increase in rents since March, up a solid 0.8% month on month following on from rises of 0.2% in March and 0.3% in February.
In the longer term, rents also fell across the majority of Scotland year on year in April. Of the three regions to see rents decrease on an annual basis, Glasgow and the Clyde had the steepest drop with average rents 3.9% lower than in April 2015.
Rents in the East of Scotland fell by 3% compared to a year ago, taking the typical rent to £513 per month, a 19 month low while in the Highlands and fell by 1% in the year to April.
Despite the wider slowdown across the country, annual rent rises in Edinburgh and the Lothians continued to rise, reaching a peak pace of 10.5% in April. This has taken average monthly rents in the region to a record high of £651, up £62 from a year ago.
The South of Scotland is the only other region to show a year on year rise in rents, but this rise was a more modest 2.6% since April 2015 taking the typical monthly rent to £513, below their February peak.
The index report shows that more muted annual rent growth and host of monthly drops, are failing to translate into healthier tenant finances in Scotland. Instead, Scottish tenant arrears have climbed for the second successive month in April.
The proportion of late rent increased to 11.6% of all rent due in April, compared to 11.3% in March. On an annual basis, tenant arrears have worsened too, with late rent standing at just 9.2% in April 2015.
‘With unemployment in Scotland on the rise, tenants can’t afford for the current housing shortage to continue. More homes to let are needed in the places where the jobs market has something to offer, and a better balance of supply and demand is vital to iron out these lasting obstacles in rental arrears. Ironically, Scotland needs landlords to keep investing and expanding the supply of rental homes on the market at the very time when the Government is targeting them with regulatory weapons,’ said Moran.
In the 12 months to April 2016, Scottish total annual returns were -4.8%, an improvement from -5.6% return over the year to March, but Moran explained that it is still being adversely skewed by the introduction of the Land and Buildings Transaction Tax (LBTT) in April 2015, and the impact of this on sold house prices last spring.
Compared to last year, total annual returns have declined from 17.5% recorded in April 2015, which was the result of inflated house prices feeding into considerable capital gains in the run up to the LBTT implementation.
As a result of this property value turbulence, in absolute terms the typical Scottish landlord has witnessed a paper loss, before any mortgage payments or maintenance costs, of £8,600 in the past year. This comes despite rental income standing at £5,900 over the past twelve months, with capital gains impacted by distorted sold house prices a year ago.
The average gross yield on a buy to let property in Scotland was 4% of April 2016, holding steady on a month on month basis and up from 3.7% in April 2015.
‘It is a matter of waiting now until the anomalies of last spring drop out of view. With property prices climbing to a considerable peak before the introduction of the LBTT in April 2015, Scottish landlords haven’t seen any compelling capital growth in the past twelve months, to complement with their regular rental income,’ said Moran.
‘But that’s not to say it hasn’t been a wise investment. Existing landlords will have saved themselves an extra 3% stamp duty on their buy to let purchase, which all future landlords will have to factor into their financial planning. And despite any artificial inflation in house prices a year ago, those who bought a property to rent out last April or afterwards will have benefitted from the more favourable tax regime under the new LBTT, which reduced stamp duty costs for the majority of Scottish home purchases,’ he explained.
‘While total annual returns are in a state of flux, gross yields are the constant keeping a remarkably steady course and offering landlords a much fairer and sunnier picture of the investment case. But with the new stamp duty surcharge comes a potential barrier to entry for many landlords, and it remains to be seen how much investment will be scared off by this measure,’ he pointed out.
‘In Scotland, slower property price growth and the softer LBTT system may help to soothe some of these concerns, but anyone looking to start or grow a buy to let portfolio will have more financial factors to consider,’ he concluded.
