Rents stall as buyers leave market

Sam Cordon

July 19, 2013

The average rent in England and Wales remained the same as in May, at £737 per month. This comes after monthly rental inflation has been slowing for a number of months and compares to an average 0.8% monthly increase in June over the five years since 2008.

The continued slowdown leaves rents only 2.6% higher than in the same month last year – below the rate of CPI inflation (2.9%).

David Brown, commercial director of LSL Property Services, said: “The proportion of households in the private rented sector is still growing strongly a trend that’s set to continue for the foreseeable future.

“Yet with better access to finance in the first half of this year the immediate picture has become far brighter for tens of thousands of first-time buyers.

“And now these green shoots are starting to bear fruit for those still renting too as milder competition for tenancies has kept a lid on the cost of renting.”

The number of new tenants in June also indicated a slightly cooler rental market. Across England and Wales there were 0.8% fewer new tenancies in June than in May.

However activity has still seen strong annual growth. The number of new lettings in June increased by 3.5% compared to the same month in 2012.

Regional variation remains. Five out of 10 regions saw rents rise in June. The sharpest monthly increase was in the East Midlands where rents have risen 0.7% since May.

Second fastest were the North West and South West with average rents in both regions seeing a 0.5% monthly rise.

The quickest monthly falls were in Wales where average rents are down 1.9%. Rents in Yorkshire and the Humber fell by 0.6% since May while the West Midlands saw average rents drop by 0.5%.

Meanwhile, rents in the South East have fallen by 0.4% between May and June, representing a sharp decline from only the previous month.

By comparison, between April and May the average monthly rent in the South East had grown by 0.2%.

On an annual basis rents in seven out of 10 regions remained higher than in June 2012. London remained the region with the fastest annual rent rises up 6.4% from a year ago.

But June’s figure is much slower than the recent peak of 7.9% rental inflation registered in the capital in March.

The East Midlands experienced the second fastest annual rises, with rents up 3.4% in June, followed by the North East with rents on average 2.5% higher than a year ago.

Brown said: “In the longer-term the number who can afford to buy a first home will be limited by some fundamental constraints – earnings, and the building of new homes. That’s why we expect average rents to at least match wider inflation in the coming years.”

For landlords the total annual return on a rental property remained steady at 5.3% in June after stronger capital accumulation countered slower rent rises.

In absolute terms this represented an average return of £8,763 with rental income of £7,861 and a capital gain of £902.

Gross rental yields averaged 5.3% in June, an improvement from 5.2% in June last year.

If rental property prices continue to rise at the same pace as over the last three months the average investor in England and Wales could expect to make a total annual return of 9.5% per property over the next 12 months – equivalent to £15,773 per property.

Brown said: “Rents are still showing strong annual increases. Total returns are the same as a month before and rental yields still represent a far more generous income than other assets of the same stability.

“A reinvigorated purchase market will drive more investment in the private rented sector, not less. So as we’ve started to witness in June more supply could be good news for tenants as well as landlords.”

The total amount of rent late or unpaid increased slightly in June rising by £4m since May. Total arrears in June were £280m compared to £276m in May. This equates to 8.3% of all rent across England and Wales, compared to 8.2% of all rent in May.

Brown said shop price inflation has been above the 2% target since 2009 and the latest spike will have made life even more difficult in June.

He added: “In real terms, wages are still well below their pre-crash levels as anemic wage growth turns each successive month of inflation into a more painful dent in the pocket.

“In that context, frozen rents for at least one month will be a welcome relief, and may have contributed to a smaller increase in levels of unpaid rent than might have been seen otherwise.

“The long-term trend is for tenants to pay down arrears, and we expect levels of late rent to keep up with the long-term improvements that have been clear since 2010.”

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