Rents up again in May as London hits new high

On a monthly basis, rents rose in the majority of the regions, with the highest rises in the North West and East Midlands, where they rose 1.7% and 1% respectively. Compared to April, rents declined in four regions, with the largest falls in the North East, where they fell by 1%, and the West Midlands, where they decreased by 0.9%.

Rents rose annually in all but three regions, with rents falling by 1.5% in the East Midlands, 0.7% in Wales and 0.3% in the North East. Rents rose the fastest in London and the South East, where they increased by 4.2% and 3.1% respectively.

David Newnes, director of LSL Property Services comments: “The end of spring has brought with it renewed activity in the rental market, and rents have returned to the level seen before the impact of the stamp duty deadline rush by first‐time buyers. The reality is that thousands of frustrated buyers are still financially trapped between a rock and a hard place. Historically high rents and rock‐bottom savings rates are hampering attempts to save for the larger deposits banks now require – not to mention meeting the cost of the reinstated stamp duty tax. In turn, fewer tenants are able to leave the
sector, and the strong tenant competition is pushing up rents as a result, making saving for a deposit harder still.
“However, it’s not just involuntary renters that are adding to demand. Given the current concerns over the economy and labour market, the flexibility of renting is proving attractive for those adopting a wait‐and‐see approach to house purchase. Given this appetite for rental accommodation, rents are unlikely to see sustained declines any time soon.”

Following their annual increase, London’s average rents rose to their highest on record, with the 0.6% monthly increase in May meaning the average rent in the month was £1,038, surpassing the previous high of £1,033 in November.

David Newnes adds: “With London buyers needing to supply the largest cash deposits in the country, and the capital’s economy continuing to attract young professionals from around the UK, the rental sector is under greater strain than elsewhere in the country. This underlying demand is likely to be augmented over the coming weeks as tenants bring forward moves to avoid the disruption of the Olympics.”

Steadying property prices in May led the average total annual return on a rental property to rise to 4.8%, up from 3.7% in April. This represents an average return of £7,912, with rental income of £7,666 and a capital gain of £245. If property
prices maintain the same trend as the last three months, an average investor in England and Wales could expect to make a total annual return of 5.2% per property over the next 12 months – equivalent to £8,522 per property.1 Despite the improvement in rental property prices, the average yield on a rental property remained steady at 5.2%.

Newnes comments: “The resilience of property prices in May helped boost the average returns landlords are likely to see, but it is the lucrative rental incomes that are drawing investment to the sector. With buy‐to‐let mortgage lending continuing to expand, and tenant demand unlikely to diminish, the private rented sector is only going to increase in size as the year progresses.” Overall rental arrears improved after a seasonal increase in April, with 8.9% of all rent late or unpaid at the end of the month, down from 9.9% in March. In total, unpaid rent in May amounted to £275m, down from £306m in the previous month.

Newnes concludes: “Rental arrears took a turn for the better in May, following a seasonal spike  triggered by Easter holiday spending. In fact, while a minority of tenants may be facing severe financial difficulties, the general tenant population has broadly coped well with high rents and the rising cost of living so far this year. However, with the economy struggling and the labour market far from flourishing, households will remain under financial pressure, and it is crucial landlords are not caught flat‐footed by a deterioration in tenant finances.”

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