Tenant arrears drop by £6m as rent rises slow in May

Rent rises in May were slower than recent months, according to the latest Buy-to-Let Index from LSL Property Services plc.

The average rent in England and Wales rose by 0.1% since April, to £737 per month.  This is slower than the average monthly increase of 0.3% over the previous twelve months.However, the latest increase still leaves rents up 3.5% up on an annual basis – and brings rents in May to the third highest level on record.   The number of new lettings in May benefited from better tenant finances and slower rent rises, contributing to a 3% increase in the number of new tenants, compared to April.

On an annual basis, there were 5% more new tenants than in May 2012.   Six out of ten regions saw rents rise in May. The fastest increases were in the East Midlands, where rents are up 0.4%, followed by the North West with a 0.3% monthly rise.  London, the South East and the East of England all saw rents 0.2% higher than the month before.

However, rents in Wales fell by 0.7%, followed by a 0.4% drop in the West Midlands, while rents in Yorkshire and the Humber are down by 0.3% compared to April.   On an annual basis, there remains significant variation in the rate of rent rises. Once again, London dominated, with rents 7.2% higher than a year ago.

Next fastest was Wales, where rents are up 5.2% since May last year, followed by the North East with annual rent rises of 4.0%.  In nine out of ten regions rents are higher than a year ago, with only the South West seeing no change since May 2012.

David Newnes, director of LSL Property Services, owners of estate agents Reeds Rains and Your Move, comments:

“Despite a strong increase in new tenants, rents rose more slowly than other household costs.  But that demand would have been even stronger had it not been for a recent spurt in the number of first-time buyers.  Looking further ahead, sustaining the increase in new buyers will depend on how many tenants are able to build big enough deposits to get a mortgage.  With wage growth so weak compared to inflation and house price growth, it looks like deposits will become less affordable – which will keep demand for rented accommodation high.  The rental market has demonstrated its flexibility in May, but will need to continue to adapt to deal with the long-term change towards levels of demand unprecedented in recent decades.  May’s figures are consistent with our longer-term predictions – that private renting will become a more and more vital aspect of the economy.”

Due to slower capital accumulation, the total annual return on a rental property fell to 5.3% in May. This represents an average return of £8,747 with rental income of £7,797 and a capital gain of £950. The average yield on a rental property was unchanged on a monthly basis, at 5.3% in May, compared to 5.2% in the same month last year.   If rental property prices maintain the same trend as the last three months, the average investor in England and Wales could expect to make a total annual return of 6.2% per property over the next 12 months – equivalent to £10,316 per property.

David Newnes comments:

“With the real heat of the summer market just around the corner, a slightly cooler market in late spring is likely only to be a mild interlude.  But despite the very temporary reasons, last month will have been very welcome for tenants and landlords alike, with more lettings activity going hand-in-hand with more affordable rent rises.  A slower monthly increase has had no significant effect on landlords’ annual returns, bolstered further by the better financial position of tenants.”

The total amount of rent late or unpaid has improved by £6 million in one month. Total arrears in May were £276m, compared to £282m in April. This equates to 8.2% of all rent across England and Wales, compared to 8.4% of all rent in April.

David Newnes concludes:

“Tenants are gradually paying down rental arrears – part of a broader shift where consumers are focusing on deleveraging and shedding their bad debts. It’s a clear long-term trend, despite the occasional more difficult month.  Landlords will be equally happy that tenants facing financial trouble have found an opportunity to pay down arrears.  But while this month will come as a relief for everyone, in the longer-run it’s still unemployment levels and wage growth which matter the most to the affordability of rent.  Those factors will depend on the wider economic recovery, and the latest jump in inflation will make that long term struggle all the more gradual.”

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