Latest rental index shows that residential property rents are increasing more steadily

Residential tenant arrears have declined by £6 million in England and Wales as rents increase more steadily, according to new research.

Rents increased by 0.1% between April and May, in comparison with the recent average of 0.3% per month yet the average rent in England and Wales stands 3.5% higher than in May 2012.

Rents in London have been rising the most and are 7.2% higher higher than in May last year, while the South West has seen no annual change, according to the latest Buy to Let Index from LSL Property Services which owns the UK’s biggest lettings agent network, including national chains Your Move and Reeds Rains.

The average rent in England and Wales increased by 0.1% since April, to £737 per month. This is slower than the average monthly rise of 0.3% over the past 12 months but the recent rise still leaves rents up by 3.5% up on last year and brings rents in May to the third highest level on record.

The number of new lettings in May gained from better tenant finances and slower rent increases, contributing to a 3% rise in the number of new tenants, in comparison with April. On an annual basis, there were 5% more new tenants than in May 2012.

Six out of ten regions saw experienced increases in rents in May. The quickest rises were in the East Midlands, where rents are up 0.4%, followed by the North West with a 0.3% monthly increase. London, the South East, and the East of England all saw rents 0.2% higher than the month before. Nevertheless, rents in Wales dropped by 0.7%, followed by a 0.4% fall in the West Midlands, while rents in Yorkshire and the Humber are down by 0.3% in comparison with April.

On a yearly basis, there remains significant variation in the rate of rent increases. Once again, London towered above, with rents 7.2% higher than last year. Second quickest was Wales, where rents are up by 5.2% since May 2012, followed by the North East with annual rent increases of 4%. In nine out of ten regions rents are higher than a year ago, with only the South West seeing no change since May last year.

‘Despite a strong increase in new tenants, rents rose more slowly than other household costs.  But that demand would have been even stronger had it not been for a recent spurt in the number of first time buyers,’ said David Newnes, director of LSL Property Services.

He said that looking further ahead, maintaining the rise in new buyers will depend on how many tenants are able to build big enough deposits to get a mortgage.  ‘With wage growth so weak compared to inflation and house price growth, it looks like deposits will become less affordable which will keep demand for rented accommodation high,’ he explained.

He pointed out that the rental market has shown its flexibility in May, but will need to continue to adapt to deal with the long term change towards levels of demand unprecedented in recent decades. ‘May’s figures are consistent with our longer term predictions that private renting will become a more and more vital aspect of the economy,’ said Newnes.

The data also indicates that due to slower capital accumulation, the total annual return on a rental property dropped to 5.3% in May. This constitutes an average return of £8,747 with rental income of £7,797 and a capital gain of £950. The average yield on a rental property was constant on a monthly basis, at 5.3% in May, in comparison with 5.2% in May of last year.

If rental property prices continue the same trend as the past three months, the average investor in England and Wales could foresee to make a total annual return of 6.2% per property over the next 12 months, equivalent to £10,316 per property.

‘With the real heat of the summer market just around the corner, a slightly cooler market in late spring is likely only to be a mild interlude. But despite the very temporary reasons, last month will have been very welcome for tenants and landlords alike, with more lettings activity going hand in hand with more affordable rent rises. A slower monthly increase has had no significant effect on landlords’ annual returns, bolstered further by the better financial position of tenants,’ Newnes added.

The total amount of rent late or unpaid has improved by £6 million  in one month. Total arrears in May were £276 million, in comparison to £282 million in April. This is equal to 8.2% of all rent across England and Wales, in comparison to 8.4% of all rent in April.

Newnes said that tenants are steadily paying down rental arrears and this is part of a broader shift where consumers are focusing on decreasing their financial leverage and shedding their bad debts. ‘It’s a clear long term trend, despite the occasional more difficult month. Landlords will be equally happy that tenants facing financial trouble have found an opportunity to pay down arrears,’ he pointed out.

‘But while this month will come as a relief for everyone, in the longer run it’s still unemployment levels and wage growth which matter the most to the affordability of rent. Those factors will depend on the wider economic recovery, and the latest jump in inflation will make that long term struggle all the more gradual,’ he concluded.

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Tenants’ retire from central London to get away from high rents

Tenants are continuing to vote with their feet in the most expensive parts of London, by moving out to cheaper areas.

Agents are reporting the ongoing departure, amid an oversupply of properties, with landlords having to freeze or cut rents.

Douglas & Gordon says there are currently 30% more properties available than a year ago.

Lettings director Virginia Skilbeck said: “One of the biggest changes we are seeing is the reduced demand in prime central London as tenants are forced to move further out to save money.

“Traditionally, corporate tenants have housed themselves in the best and most expensive parts of central London. However, we are seeing much greater demand from corporate tenants in the peripheral areas as many companies have reduced accommodation allowances.”

Chesterton Humberts says their supply of rental properties is 12% ahead of this time last year, and that tenant demand has ‘softened’ due to cuts in corporate budgets, City redundancies and cheap mortgage deals which are prompting people in rented accommodation to buy.

Landlords have become keener to renew existing tenancy agreements, and the firm said: “Many landlords are responding by offering to free rents for tenants and sometimes reduce them altogether.”

Chesterton Humberts’ and Douglas & Gordon’s reports follow on from a virtually identical study from Cluttons.

All three companies have been upfront about market forces driving rents down, at a time when London Mayor Boris Johnson has come under pressure to impose rent controls across London.

Lenders introduce new rates, fees, and products for a variety of buyers

In the UK a number of lenders have launched new products and reduced rates and fees for homebuyers and property investors in recent days.

The Leeds Building Society has introduced reductions in the headline rate on a number of landlord mortgages which they say is a response to continued demand for buy to let lending.

These products are available throughout the whole of the market and the associated fees remain unchanged at £999. They include a two year fixed rate buy to let rate reduced by 0.59% from 3.99% to 3.40% available up to 75% LTV and a two year discounted buy to let rate reduced by 0.70% from 3.99% to 3.29% available up to 70% LTV.

‘We are very pleased to support landlords and with interest rates at a historic low, we believe it's a good time to lock into a low fixed rate for greater certainty of cash flow. Our two year fixed rate buy to let deal has no higher lending charge, and allows 10% capital repayments each year without penalty,’ said Kim Rebecchi, Leeds Building Society sales and marketing director.

Whilst landlords with a loan to value of 75% or below have a rising choice of buy to let mortgages, product availability above 75% remains limited. Leeds Building Society offers a two year fixed rate buy to let mortgage at 4.99% for landlords with an LTV of up to 80%.

‘Landlords are faced with a plethora of mortgage products and many lenders have chosen to introduce lower rates at the expense of higher product fee. I'm delighted to be making genuine reductions that support our customers and our fees remain unchanged,’ added Rebecchi.

Tesco Bank has announced three new fixed rate mortgage products over two, three and five years at 60% LTV which they say offers competitive rates and fees. At the same time, rates on their range of tracker mortgages have been decreased.

Tesco Bank’s two, three, and five year fixed rate mortgage, and two year base rate tracker provide customers with a choice of fees and customers taking out a mortgage with Tesco Bank will also receive clubcard points as they repay their mortgage, collecting one point for every £4 on their monthly mortgage repayments.

‘The new fixed rate and tracker products we have announced today provide outstanding value to customers. We aim to provide customers with a combination of strong rates, competitive fees and the thank you of Clubcard points, that puts us in a unique position to meet the needs of Tesco customers,’ said David McCreadie, Tesco managing director of banking.

HSBC has released a new tracker mortgage rate in response to demand from customers with more than 50% equity in their homes. The new fee free, lifetime tracker rate is available to HSBC current account customers with a 50% deposit or equity. The rate tracks base rate plus 1.99%, currently 2.49%.

‘We are committed to offering our customers competitive rates, including those with smaller deposits. The fee free 50% LTV rate is in response to demand from our customers,’ said Peter Dockar, HSBC head of mortgages.’