June 29, 2012

Bob Young is managing director of CHL Mortgages


Rental prices seem to know no bounds at the moment, with the latest increases pushing monthly averages to their highest level on record in some areas.


Figures from LSL Property Services show that rents in London rose by 0.6% in May, meaning the average tenant in the capital now parts with £1,038 every month, surpassing the £1,033 record set in November 2011.


The average across England and Wales increased by 0.4% over the month, meaning the national median rent now stands at £712 and marks something of a return to the form the market showed at the beginning of the year after a slight dip in the Spring.


This is in all likelihood attributable to the Stamp Duty deadline causing a rush of former renters into the owner-occupier market.


Despite London’s average rents breaking records, it wasn’t the region with the most impressive growth over the month, with the North West (1.7%) and East Midlands (1%) recording stronger increases.


Looking at the annual picture to garner some longer-term perspective, rents rose in all but three regions and London and the South East continues to display the fastest rate of growth.


With no miracle solution in sight for the thousands of first-time buyers effectively locked out of the owner-occupier market, it all points to the demand for rental property remaining high for the foreseeable future.


As well as the amount collected from tenants reaching record levels, landlords are also subsequently enjoying strong yields with Paragon Mortgages’ latest survey revealing the average increased by 0.3% in the last quarter to now stand at 6.5%.


Property investors remain buoyant about current levels of demand too, with 55% reporting a stable level of appetite and 26% claiming tenant interest is growing.


Looking ahead, 44% of landlords are predicting further increases in tenant demand and just over a fifth are intending to expand their portfolios.


While all the signs point to a private rented sector enjoying a strong period of growth, it’s difficult to know how much further the market can progress without an increased supply of new properties.


UK construction rates may be showing some small shoots of recovery, but it is likely to be some time before the flow of new accommodation catches up with demand.


In any case, once the supply shortage is rectified, landlords won’t be able to command such competitive rates for their properties so, in a sense, they should be making hay while the sun shines.


The only obvious way that the supply shortage can be addressed is through the construction of new-build properties, but there are certainly lessons to be learned from the last big wave of such developments before the global financial crisis.


Many projects were mothballed or left half-finished as the credit crunch hit and construction firms were left out of pocket or bankrupted by aborted developments.


A lot of new-build properties were beset by problems such as over-valuations and poor build quality, so hopefully next time round the industry as a whole will be able to heed the warnings of the past.


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