Rental returns continue to rise

Nia Williams

November 16, 2012

This represents an average return of £10,819 with rental income of £7,926 and a capital gain of £2,892, according to the latest Buy-to-Let Index from LSL Property Services plc.

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 4.3% per property over the next 12 months – equivalent to £7,067 per property. The average yield on a rental property rose to 5.4%, compared to 5.3% in October 2011.

David Brown, commercial director of LSL Property Services, commented: “Landlords’ prospects now look even better on paper, with capital gains contributing to overall returns.

“But there are grounds for caution. With the long-term headwinds facing the housing market, there’s no guarantee prices will rocket upwards in the next few years, and steady rental income is crucial for an investor’s return – let alone to pay the mortgage.

“In this context, it’s even more important that landlords avoid void periods, and prospective investors who research the areas with the biggest rental demand before purchasing will do well.”

The total amount of rent late or unpaid fell to the lowest level since January 2011, with total arrears of £265m, down from £297m in September. This equates to 8.1% of all rent across England and Wales.

Tenants saw average rents rise by 0.4% in October, the slowest rate of increase since May, according to the Index. Despite the slowdown in rental inflation, the monthly rise represents double the size of the 0.2% increase seen in the same period last year.

After seven months of rent rises, rents are 3.4% higher than at the same point last year, with the average rent in England and Wales at a new high of £744 per month.

In London and the South East rents continued to rise, albeit at slower rates of 0.9% and 0.7% respectively. But five regions saw rents fall in October, with the sharpest falls in Wales and the East Midlands. Rents in Wales fell by 1.6%, while those in the East Midlands fell 1.8% – the first fall in this region since March.

On an annual basis, rents rose the fastest in London. They increased by 7% to £1,102 – breaking the £1,100 barrier for the first time. The South East saw the next highest rise, 3.2% higher than a year ago. Meanwhile after monthly falls, rents in both Wales and the East Midlands are lower than at this point last year – by 2.2% and 1.5% respectively.

Brown commented: “Rents may be rising but the good news for tenants is that the rate of increase is at its lowest in five months.

“A combination of improved buyer activity and a seasonal slowdown has taken some of the heat out of the rental market as it enters the traditionally quieter final months of the year.

“However, despite the deceleration, the fact that monthly rents rose by twice the rate seen a year ago points to the underlying strength of tenant demand.

“Looking ahead, it’s difficult to see rents remaining stationary once the winter lull has passed. Admittedly, the sales market has shown signs of life in the last month, and the Funding for Lending Scheme seems to be acting as a catalyst for a modest improvement in the mortgage market. However, banks still need to set aside large sums of money for high LTV lending, so in the longer term the number of first-time buyers won’t return to the level necessary to significantly undercut the strong demand for rental property.”

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