LSL Buy-To-Let Index: Tenant Finances Recover as Rental Dip Gives Breathing Space

  • January rents fall for third successive month after mortgage market improvement and seasonal lull
  • Rents hit lowest level since July, but remain 2.8% higher than a year ago
  • Tenant arrears in England and Wales recover to October levels –  8.1% of all rent

 

Tenants’ finances received a welcome boost as rents fell in January for the third consecutive month, according to the latest Buy-to-Let Index from LSL Property Services plc, which owns the UK’s largest lettings agent network, including national chains Your Move and Reeds Rains.

 

The average rent in England and Wales fell by 0.3% in January to £732 per month, as January saw a monthly dip for the fourth time in five years. Although the rate of decrease slowed to a third of that in December, rents are now at their lowest since July 2012.

 

Despite the seasonal fall, rents in January were 2.8% higher than a year ago, a climb of £20 per month.

 

Six regions saw rents decrease on a monthly basis, compared to seven in December. The largest fall was in the South East where rents dropped 1.5%, followed by Yorkshire & the Humber with a 0.9% monthly fall. Four regions saw rents rise on a monthly basis. The fastest was in the East Midlands, where rents posted 1.2% growth, followed by the West Midlands with a 0.9% rise.

 

On an annual basis, rents in London saw the fastest growth, rising by 5.2% – an increase of £54 per month. The South East saw the next biggest annual rise, with rents 3.5% higher than last January. The sharpest annual falls were in Yorkshire & the Humber and the West Midlands – where rents are 0.6% and 0.3% below levels seen a year ago.

 

David Newnes, director of LSL Property Services, owners of
Your Move and Reeds Rains
, comments:  “An improving mortgage market in January helped take a little pressure off the limited supply of rental property, at a time when the demand from tenants on the move is far from its seasonal peaks. But the dip in competition is not likely to last long. The pace of the fall in monthly rents has slowed, and we’re already seeing tenant activity pick up. The private rented sector is coiled for a spring bounce, and without a sudden widening in the supply of accommodation, rents are likely to resume their climb in fairly short order.”

 

The total annual return on a rental property stood at 5.7% in January. This represents an average return of £9,369 with rental income of £7,840 and a capital gain of £1,529. Despite the seasonal drop in rents, the average yield on a rental property was 5.3% in January, compared to 5.2% a year ago.

 

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 8.8% per property over the next 12 months – equivalent to £14,644 per property.[1] 

 

David Newnes comments: “Although landlords have seen rents fall seasonally in the last couple of months, a strengthening sales market has pushed up house prices.  If this trend continues further into 2013, capital gains will inevitably start to play a bigger role in landlords’ returns. However, the most encouraging short-term development for investors is the plummeting cost of finance. With fixed buy-to-let mortgage rates at their lowest level in six years[2], and rents still high, we expect to see more long-term investors turn their gaze on the sector as the year progresses.”

 

The total amount of rent late or unpaid fell back to levels not seen for three months. Total arrears in January were £261m, down from £326m in December. This equates to 8.1% of all rent across England and Wales, while December’s arrears represented 10.1% of all rent.

 

David Newnes concludes: “Many households had their own mini financial crisis over Christmas, struggling to balance the cost of the festive period with ongoing monthly living costs. But January saw a strong improvement in the state of tenant finances. With the expensive Christmas period behind us, lower rents – in concert with resilience in the jobs market – have helped push arrears back to their October level. While rents are likely to mount a new charge in coming months, January’s pause for breath has given many tenants a real opportunity to regroup financially.”


[1] Assuming house prices change at the average rate of the last three months and they achieve the average yield of 5.4%.

[2] Moneyfacts research, January 2013.

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