The average rent in England and Wales in July rose by 1% to £725 per month, surpassing the previous high of £720 pcm in October 2011. The pace of annual rental inflation has also increased, climbing to 2.9% from 2.4% in June.
David Brown, commercial director of LSL Property Services, said: “The backlog of frustrated first-time buyers in the private rented sector showed no sign of clearing in July – in fact, it is still growing.
“As lending to those without substantial deposits remains depressed, demand for rented accommodation can only go one way in the long-term – providing further upwards momentum for rents.
“The rental market is also entering its summer peak, as recent graduates and those with new jobs begin to look for new accommodation.
“With more tenants on the move, alongside long-term underlying demand, fierce competition for properties is enabling landlords to increase rental prices to new highs. ”
On a monthly basis, rents rose in eight out of ten regions in England and Wales. Rents in the South East climbed the fastest, increasing by 2.2%. The West Midlands saw the next largest increase, rising by 1.8%. Rents dropped by 0.4% in both the South West and the East of England. London’s rents hit a new high for the third consecutive month, following a monthly 1% rise to £1,057.
Rents fell on an annual basis in two regions, decreasing by 1.2% in the South West, and 0.4% in the East Midlands. The steep monthly increase in rents in the South East increased annual rent inflation to 4% in July. However, rents are still rising fastest on an annual basis in London, with rents in the capital climbing by 4.8%, compared to 4% in June.
Landlords saw an average total annual return of 4.5% on a rental property in July. This represents an average return of £7,459 with rental income of £7,763 and a capital loss of £305. If property prices maintain the same trend as the last three months, an average investor in England and Wales could expect to make a total annual return of 8.3% per property over the next 12 months – equivalent to £13,647 per property.
Following the rapid increase in rents, the average yield on a rental property increased to 5.3% in July, its highest level in 2012 and an increase from 5.2% in June.
Brown added: “Rents have returned to record highs, average yields have hit their highest level this year, and returns are healthy, tempting many investors into the market.
“Banks and Building Societies are tapping into this robust demand, and buy-to-let is the only sector of the mortgage market showing consistent growth, with lending increasing 18% year on year. It’s crucial that lenders continue to increase their commitment to property investors to allow the private rented sector to expand at the rate needed to accommodate the growing number of frustrated would-be buyers.”
Tenant finances deteriorated for a second consecutive month in July, with 9.3% of all rent late or unpaid at the end of the month, an increase from 9.2% in June. In total, unpaid rent amounted to £295m, 2% more than the £289m late or unpaid in the previous month.
Brown said: “With the economy still in recession, and rents climbing to a new record high, the minority of tenants experiencing difficulty in meeting the monthly rent cheque on time is steadily climbing.
“However, this has not yet fed through into increased mortgage arrears for landlords, with the number of buy-to-let mortgages over three months in arrears actually falling compared to last year.”
“Question marks remain over whether there is worse to come from the economy and the labour market. If conditions deteriorate, placing more tenants’ jobs at risk, and rents continue to rise, rental arrears are unlikely to see any sustained long-term drops.”
David Whittaker, managing director of Mortgages For Business, said: “We’re fast approaching the rental market’s busiest few weeks of the year.
“The early autumn period when demand reaches its peak and rents have the potential to soar as multiple renters vie for the same properties.
“The fact that rents have hit a new high before the summer has even finished is a measure of how high demand is already and tenants should be prepared for rents to climb even higher over the next few months.
“But landlords must be careful. There will come a point when there is a danger of pricing their properties out of the market. Investors should avoid chasing higher and higher yields and focus on the most important things, occupancy and tenure.
“There’s nothing more draining than a tenant in arrears or an empty buy-to-let property.”