Rents across England and Wales are at the second highest level on record, according to the latest Buy-to-Let Index from LSL Property Services plc.
The average rent in England and Wales reached £743 per month in August, after a monthly increase of 0.7%. This acceleration in August compares to July when rental inflation was much lower, at 0.2% month on month.
On an annual basis, this leaves rents 1.3% higher than a year ago, and only £1 behind the all-time record high set in October 2012.
Meanwhile, the pace of new lettings accelerated in August, as the number of new tenancies across England and Wales increased by 8.8% compared to July. On an annual basis, there were 13.7% more new tenants in August than in August 2012.
Eight out of 10 regions saw higher rents in August. Rents in the South East rose the fastest of all, up 2.0%, while Welsh rents were 1.0% higher. The third fastest monthly rise was in the North West, with rents rising 0.9% compared to July. By contrast, rents in the North East fell by 0.8% in August, while the average rent in the East Midlands was 0.3% cheaper than the previous month.
On an annual basis, five regions out of ten have seen rents rise in the last 12 months. By a significant margin, London saw the fastest annual increases, with rents up 4.8% in the last year. This was followed by Wales, where rents are 2.3% higher than 12 months ago, while the East Midlands saw the third largest annual rise, with rents up 0.9% since August 2012.
By sharp contrast rents in Yorkshire and the Humber are 1.6% lower than in August 2012, followed closely by a 1.5% annual fall in the North West, while rents in August were 1.0% lower than a year ago in the West Midlands.
David Brown, commercial director of LSL Property Services, said: “The summer saw a step-change for first time buyers. Better availability of finance has allowed some households to leave the rental market. And rents certainly felt the short-term impact of that. But releasing a blast of that pent-up pressure to buy a home is unlikely to change the long-term trend to renting.
“Although government schemes are helping, buying a first home is still extremely hard on the back of low salary growth. As hundreds of thousands of new households look for homes, it’s increasingly private renting that’s absorbed the pressure. Autumn brings the seasonal peak for the rental market, in part due to the spike caused by student renters, and the sheer volume of lettings activity shows demand this year is as strong as ever.”
Gross yields on a typical rental property remained steady at 5.3% in August. However, taking into account void periods between tenants and capital accumulation, total annual returns on an average rental property rose to 6.2% in August, compared to 5.6% in July. In absolute terms this represents an average return of £10,207, with rental income of £8,051 and a capital gain of £2,156.
If rental property prices continue to rise at the same pace as over the last three months – which with renewed housing market activity has been at higher levels – the average buy-to-let investor in England and Wales could expect to make a total annual return of 13.1% over the next 12 months, equivalent to £22,065 per property.
Brown said: “A powerful surge of capital accumulation is re-joining solid rental income. And it seems that potent combination means landlords can look forward to even better returns over the next twelve months. Healthier tenant finances are supporting bottom line returns, and are also a sign of the increasing maturity of the market.”
The total amount of rent late or unpaid fell in August, with the amount of outstanding rent £10 million lower than in July. Total arrears in August were £263m, compared to £273m outstanding in July.
This equates to 7.8% of all rent across England and Wales, down from 8.1% of all rent in July.
Brown added: “The forces of inflation and weak wages are still aligned – and still stretching household budgets. But rents are a significant part of monthly expenditure for most tenants, and the reprieve of the last few months compared to recent years has been very welcome. Things aren’t completely sorted, and household finances are still damaged from an economic storm that’s lasted five years. But while finances are strained, the chance of wreckage is receding for most households.
“People are no longer battening down the hatches like they were last year, or even a few months ago. Meanwhile the construction industry is finally looking much healthier – and alongside what could be a real increase in the supply of all homes, sustained growth in buy-to-let lending will allow the private rented sector to grow in a balanced way, meeting demand.”