UK rents continue to increase
Landlords pushed up rents for the sixth consecutive month, raising them by 0.5% in July, according to the latest Buy-to-Let Index from LSL Property Services.
The average UK rent is now £676, 2.3% higher than a year ago. This rise follows the increase of 1.4% in June. Rents are now just £12 per month shy of their peak two years ago. With the increase in rents, the average yield was 4.9% in July.
David Brown, commercial director of LSL Property Services plc comments:
“Rents are still playing catch-up with the gains house prices made in the last year. The recovery in prices 12 months ago caused an exodus of accidental landlords from the market, ending the glut of supply of rental accommodation.
"Although house price rises have levelled off, landlords are still reaping the benefits of the constrained supply, and the improving yields have restored a healthier balance to the dynamics of property investment.
“And we don't expect rents to fall away any time soon. With inflation well above the MPC's target, interest rates can only go one way, north. When they rise, many landlords will face increased monthly mortgage repayments, and many will try to raise their rents to cover the difference.”
Tenant finances were in their best shape in at least two years, with arrears dropping to just 9.2% of all rent across the UK. This was a fall from 11.2% at the turn of the year, and is the lowest level since LSL Property Services plc began compiling the figures in 2008.
In July, £212.9m of rent was unpaid – a substantial drop from its peak of £361m in August 2008. Just 434,803 tenants fell into arrears in July – 26,761 less than in June. The drop in arrears means that the average yield, adjusted for voids and arrears, was 4.5% in July - an increase from 4.4% in June.
David Brown explains:
“There's no evidence that the increase in rents has led to a surge in arrears. In fact as rents have risen in the past six months, arrears have steadily dropped. The key is the current tenant mix.
"Thousands of frustrated first-time buyers are staying for longer in the private rental sector. These tenants are in better financial state, and are better able to meet rising rents in full and on time.”
As a result of the recent declines in house prices, the total return from investing in buy-to-let over the last year dropped slightly to 10.1% in July. The average landlord would have made a total return of £15,961 in the past year, £8,706 in capital gains and £7,255 in rental income.
An investor buying property now could expect a total annual return of 3.5%, the equivalent of £5,838. The lack of house price inflation in the past three months means that if conditions remain constant, all of these gains will be driven by rental income.
David Brown concludes:
“Rents are still heading upwards towards their peak level two years ago, and yields are at their highest this year. The current market presents a golden opportunity for property investment before house prices resume their long-term upwards march.
"The underlying fundamentals that underpin sound property investment – demand and rental income – look set to remain strong. With a sensible investment model, a landlord can expect to see healthy returns, with any future capital appreciation a bonus.”