Rents overheating in London and South East

Robyn Hall

September 12, 2012

Some 66% of tenants in London and 62% in the South East expect to be paying more for rented accommodation in a years’ time.

Some 31% of tenants in the South East and 29% in London are already spending more than 50% of ‘take-home’ pay on rent, both above the national average of 26%.

Miles Shipside, director and housing market analyst at Rightmove, said: “The view from the majority of tenants across the country is that rents are only likely to go one way and that’s up.

“London and the surrounding commuter belt of the South East have the greatest proportion of respondents predicting higher rents, suggesting that these markets are most at risk of ‘over-heating’ and most in need of further investment from investor-landlords. The continuing heat applied to rents is a double-whammy for the one in two tenants that would like to buy but can’t afford to.

“These ‘trapped renters’ are faced with the prospect of a downward spiral where spending more income on rent also means saving less for a deposit”.

‘Serial landlords’ more prevalent in the North East, North West, Scotland and Wales, while further south higher capital values limit portfolio expansion plans from experienced investors

The property investors being courted strongly by buy-to-let lenders are those with access to substantial deposit funds and who have identified properties with attractive monthly rental income to monthly repayment ratios. This group, considered ‘serial landlords’ as they have invested in buy-to-let property more than once before, is critical to helping deliver the level of supply required to satisfy the stock-starved rental sector.

Of those intending to buy an investment property in the next 12 months, the highest proportions of ‘serial landlords’ tend to be in northern regions where capital values are lower. 37% of likely investors in Wales and the North East are serial landlords, as are 35% in the Scotland and 34% in the North West. The really ‘hot’ lettings markets of London and the South East, where property prices are higher, are regions with the lowest levels of experienced landlords intending to add to their portfolios.

Shipside added: “Serial landlords seem more active in northern regions, perhaps attracted by lower capital values, and yet it is the London-centric regions that are most in need of supply-side investment. This will potentially give some renters in the north greater choice and take some of the pace out of rent rises, but will be of concern to some London and commuter-belt tenants where upwards pressure on rents is even more extreme.”

Rental yield research backs serial landlords activity in the north – average returns typically above 6% in favoured northern regions, with yields in London and the South East below 6%.

Rightmove’s research shows that an average return for a rental property is currently greater in many of the more northern regions than in London and the South East. The average rental yield in the North East is 6.5%, the highest in the UK ahead of North West (6.4%) and Wales (6.2%). In contrast, primarily because of the higher capital values in the south, investors in London are seeing an average rental yield of 5.7%, and in the South East 5.6%.

Shipside said: “For the most attractive and immediate rental returns, the north wins. Investors in London and its surrounds may eventually find that the streets are paved with gold, but they’ll have to wait and see what happens to capital values just to find out.

“The statistics also show that more experienced investors are interested in securing a steady northern-based return now rather than a potential gain some years hence further south. If you need to supplement your pension income stream in the near future, immediate returns for a lower capital outlay have a strong appeal. Lower entry costs further north also mean an investor can buy more property units, spreading the risk rather than perhaps having all their eggs in one basket with a higher value single investment further south”.

Matthew James, consumer and market insight manager at Rightmove, said: “The Rightmove Consumer Confidence Surveys provide a fascinating early indicator of the trends that we can expect to see a bit further down the line. The rental market can be difficult to judge but plays a key role in the state of the wider UK property market. Drawing upon the views and expectations of tenants themselves,provides a valuable insight into how the market can be expected to perform.”

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