Rents have increased more slowly than inflation over the last year, according to the latest Buy-to-Let Index from LSL Property Services plc.
The firm, which owns the UK’s largest lettings agent network, including national chains Your Move and Reeds Rains, found the average rent in England and Wales reached £738 per month in July after only modest rises. This amounts to a monthly increase of just 0.2%.
By comparison, in July 2012 rents rose by 1% on a monthly basis. The average rate of monthly rental inflation in July has been 0.9% since 2008.
Coming after rents saw no change at all in June, this means the average rent in England and Wales has risen by only one pound since May 2013. On an annual basis, this leaves rents 1.8% higher than a year ago – meaning the year-on-year increase has fallen below the rate of CPI inflation (2.8% in July).
Meanwhile, the number of new tenants in July has grown strongly. Between June and July the number of new tenancies increased by 6.6% across England and Wales. On an annual basis, there were 12.3% more new lettings in July than in July 2012.
Regional variation remains significant. Six out of ten regions saw rents increase in July. Wales and the South East saw the fastest monthly rises, with rents in both regions up by 0.8% since June. Rents in the North West were just behind, 0.7% higher than last month, while London came in fourth place after a 0.3% monthly rise between June and July.
By contrast, rents in the South West fell by 1.1%, and the North East saw rents drop by 0.8% on a monthly basis. In the West Midlands rents were cheaper in July for the third month in a row, down by 0.6%.
On an annual basis, seven regions out of 10 have seen rents rise in the last 12 months. By far the most rapid of these increases has been in London, at 5.7%. Although this has brought rents in the capital to a fresh record, the pace of annual rises has slowed. The second fastest rises were in the East Midlands, with rents up 2.2%, and the North East where rents are 1% higher than in July 2012.
Aside from London, nine out of 10 regions in England and Wales have seen rents rise more slowly than inflation over the last year.
David Brown, commercial director of LSL Property Services, said: “This summer, the house purchase market has jerked into motion. And everyone is feeling the impact of that sudden change of gear. Buying a first home might only be possible for those with a big enough deposit and sufficient earnings, but the effects are reverberating through the rental market too. The supply of rental accommodation is increasing, while demand has softened slightly because of the improvement in first-time buyer numbers.
“In the medium-term we expect rents to at least keep up with wider inflation. Alongside the continued struggle for the majority of would-be first-time buyers, more tenants are entering the market. And this record demand is still confronted with a shortage of new homes to let. It’s also worth bearing in mind that the UK economy as a whole is still struggling with the same constraints on wages and inflation.
“However, every section of the economy is now building up a head of steam – and reigniting the property market is a natural part of that. It’s unlikely July will be typical after the initial change of pace in the purchase market, but a few months of more affordable rents are a win-win for everyone.”
Despite slower rent rises, rental yields have held steady for landlords. Gross yields on a typical rental property remained steady in July at 5.3%, up slightly from 5.2% last July. Taking into account void periods between tenants and capital accumulation, total annual returns on an average rental property fell slightly to 5.0% in July, compared to 5.4% in July 2012. In absolute terms this represents an average return of £8,320, with rental income of £8,000 and a capital gain of £320.
LSL said that if rental property prices continue to rise at the same pace as over the last three months, the average investor in England and Wales could expect to make a total annual return of 8.9% over the next 12 months – equivalent to £14,735 per property.
Brown added: “Private renting is still acting as a shock absorber, in the wake of the worst recession in living memory. But as the economy gradually picks up, a longer-term trend is becoming clear too. The sheer numbers of new tenants in July are also the latest chapter in a shift towards private renting that started around 20 years ago.
“The flexibility and relative affordability of renting are advantages for some households in a booming economy as well as in difficult times. Rents and capital accumulation together are providing stronger and stronger incentives for new investment. And more homes available to let will be good for tenants too, keeping rents from spiraling upwards too dramatically.”
The total amount of rent late or unpaid fell in July, with the amount of outstanding rent £7 million lower than in June. Total arrears in July were £273m, compared to £280m outstanding in June. This equates to 8.1% of all rent across England and Wales, down from 8.3% of all rent in June.
Brown said: “Households have already had a snippet of good news this week, with consumer price inflation dropping to 2.8%. But that’s still well above target and a good 1% faster than wage growth. More affordable rents have had much more impact. While rent rises are unlikely to stay below inflation for very long, the effect on tenant arrears seems clear.
“And we’re expecting tenants’ finances to keep getting gradually healthier. Just over the last year tenants have paid down £33 million pounds in late rent. Clearly this is great for tenants themselves, but as an encouraging sign for landlords to invest, healthier tenant finances are a critical factor in the capacity of the private rented sector to keep providing new homes.”