Rents hit record high

Rents rose for the 10th consecutive month but growth is slowing in the run-up to Christmas, according to the latest buy-to-let index from LSL Property Services plc.

In November, the average UK rent rose to £692 per month – squeaking ahead of October’s record high of £691. However, the growth of 0.1% represents the smallest increase since rents began to rise in February.

However, recent rent increases seem to have ended in several parts of the country. The east of England and the east midlands reported falls of 3.1% and 2.4% in November, whilst rents dropped by 1.9% in the south east and by 0.6% in the north west.

The marginal monthly national gain was largely driven by rents rising by 1.8% in London, where they hit £992 per month – an increase of 9.2% in the last year.

The average yield rose slightly to 5% in November, thanks to increasing rents, contrasting with a slight decline in the value of an average rental property.

David Brown, commercial director of LSL Property Services plc, commented: “In the run-up to Christmas, we tend to see the rental market slowdown somewhat. Tenants prioritise Christmas spending over setting aside money for moving home. But with the limitations placed on the supply of rental property by the lack of mortgage finance, rents have continued to increase - even though the rental market’s peak season is behind us.

“Nevertheless, rent increases have begun to slow in several regions, and we expect this trend to continue across the country in December and January. However, the UK’s buy-to-let market still faces a shortage in the supply of rental properties and we don’t anticipate that the slowdown in rent rises will last long into 2011.”

Following a slowdown in the annual growth of rental property prices, the total annual return on a property has fallen from its peak of 13.4% in May to 7.3% in November. This is now the equivalent to £11,857 - £7,359 in rent, and £4,498 in capital gains. An investor entering the market now could expect to make a total annual return of £3,433 per rental property.

Brown continued: “Returns are slowing as annual house price growth steadies. But investors are faced with a fantastic opportunity. With property prices beginning to dip, and yields improving, it is a great time for landlords to expand their portfolios and lock-in high rents.

“Even off-peak, tenant demand has remained robust enough to lift rents and the chronic lack of affordable housing and mortgage finance for first-timers will continue to augment demand from tenants, keeping rents high in the long-term.”

However, tenant arrears provided less positive news for landlords in November. Tenant finances were in worse shape than October, with 9.7% of all UK rent unpaid, rising from 9.3% in the previous month. Unpaid rent totalled £231m across the UK in November, up from £221m in the previous month.

David Brown concluded: “The one cloud on the horizon for landlords is tenant arrears. Without the timely cheque from tenants each month, landlords cannot pay their mortgages, and risk dipping into rainy-day funds or falling into mortgage arrears. And with public sector spending cuts set to take their toll on employment and tenant finances in the next year, it’s crucial that landlords act quickly to nip potential issues with rent payment in the bud before they escalate.”