LSL Property Services : May 16 Buy-to-Let Index

51b26a4b-06fa-4a5b-9f58-261d026b83ac.pdf STRICTLY UNDER EMBARGO UNTIL 00:01 FRIDAY 17TH JUNE 2016 May 2016

Rents feel short-term chill of tax changes

• Short-term tide of homes to let pushes rents into an unseasonable May chill - down 0.2% since April
• Average rents of £793 across England & Wales represent growth of 1.8% over the last twelve months
• Cooler property purchase market trims landlords' total returns - to 10.2% in year to May before costs
• Tenant rental arrears worsen to 9.3% of rent due in May, even as cases of most serious arrears improve

Rents have reversed their spring trajectory as a tide of homes to let bought before the Stamp Duty Surcharge have reached the private rented sector, according to the latest Buy-to-Let Index from letting agents Your Move and Reeds Rains.

Average rents for homes to let across England & Wales now stand at £792 per month, as of May 2016.

This represents a drop of -0.2% since April, and compares to a long-term average monthly rise of

+0.4% over every May since the recession.

On an annual basis, rents are now 1.8% higher than in May 2015 - or half the annual rate of rental growth seen at the start of 2016, when in January this stood previously at 3.6%.

Adrian Gill, director of lettings agents Your Move

and Reeds Rains, comments: "This is the equivalent of a flash flood for the rental market.

"Just a month ago rents were heating up and spring was in the air - but this has been put on hold as a tide of new properties to let has disrupted the normal dynamics of supply and demand. Landlords escaping a much larger stamp

duty bill by completing their purchases before 1st April have now finished their repairs and paperwork, with these homes to let competing for tenants in May and into June. That short-term mismatch has made May an exceptional month, with excellent deals available for some prospective tenants.

"But all tides go out again - and this is definitely no exception. Overall the tax changes to the buy-to-let industry will discourage some property investors, and most of the properties that became available to let in May will have been planned purchases brought forward from later in the year. The net effect will not be more properties to let - quite the opposite. If new regulations and taxes produce a drought of homes to let, then the overall shortage of housing in the UK will only bite harder for tenants. Meanwhile, this heightened shortage and possibly higher rents as a result could also protect landlords somewhat from the financial effects of more punitive rules and regulations."

Midlands regions eclipse London for rent rises

Rent rises in London have slowed to just 1.0% over the twelve months ending May 2016. This compares to a peak seen in September 2015 when rents in London were 11.6% higher than a year before at the time.

£595

£515

£555

£612

By contrast, the East Midlands have witnessed rent rises of 7.3% over the twelve months ending May 2016, followed by the West Midlands with 5.5% annual rent rises and the East of England with 3.6%.

£559

£602

£784

£849

£1,220

All ten regions of England & Wales have seen rents in May higher than a year ago. However the joint-slowest annual rent rises have been in Wales and the South East, both seeing rents rise just 0.5% over the last twelve months.

£678

Monthly rents in May: By region

London also leads the negative trend on a monthly basis - with average rents in the capital falling 0.7% between April and May, a faster drop compared to a more modest drop of 0.2% in the month before. London is followed by the East Midlands where rents are 0.6% lower than a month ago and Yorkshire & the Humber with a 0.3% month-on-month fall.

At the other end of the spectrum, Wales leads with a 1.4% month-on-month jump in rents. The North East and the South East follow with month-on-month rent growth of 0.6% and 0.5% respectively.

Rental yields steady - but total returns dip on house price stumbles

Taking into account both rental income and capital growth, but before property-specific costs such as maintenance, the average existing landlord in England and Wales has seen total returns of 10.2% over the twelve months to May. This is slightly lower than 10.7% seen a month before, over the twelve months to April, as property price growth has abated.

However compared to the year ending May 2015, when this measure stood at 9.4%, landlords have seen stronger returns over the most recent twelve month period.

In absolute terms this means that the average landlord in England and Wales has seen a return of £18,769 over the last twelve months, before any deductions such as property maintenance and mortgage payments. Of this, the average capital gain contributed £10,057 while rental income made up £8,712 over the twelve months to May.

While existing landlords have seen total returns cool due to slowing purchase values, the same factors have supported gross rental yields. Despite rents dipping in May, rental yields are showing resilience thanks to a similar dip in property prices on a monthly basis. The gross yield on a typical rental property in England and Wales (before taking into account factors such as void periods) is now 4.9% as of May 2016, the same as the 4.9% a month previously in April.

Adrian Gill continues: "Landlords are vital in matching an escalating demand for homes from tenants. Such a scale of demand doesn't look set to change dramatically just because of a few tax tweaks - so professional and accidental

landlords will always be an essential part of the solution. Financial rewards for investing in property, taking on risk and maintaining homes will have to reflect the importance of landlords for our economy and our society.

"Due to the nature of some of the tax changes on the horizon, the impact on landlords will depend heavily on their own personal finances and their wider portfolio. A higher rate tax payer with a larger property portfolio could see their tax bill change considerably due to the shift in the tax treatment of mortgage interest. But an accidental landlord with a single property could have a very different experience. Professional advice is essential, as is a solid business plan and an informed approach to letting property."

Setback for rental arrears in May - despite improvement in most serious cases

Tenant finances have deteriorated somewhat in May, with 9.3% of all rent due in the month standing in arrears of one day or more. This compares to 8.1% in April 2016.

In a longer-term context, the trend remains encouraging. May still compares very favourably to the all-time high of 14.6% of all rent payable in arrears - set in February 2010.

While tenants have been more likely to fall a little behind with their rent (one day or more)

in May, the chance of more serious problems developing has fallen.

Tenants are now less likely to fall serious behind on their rent (two months or more). In the first quarter 3,100 fewer households were in serious rent arrears defined this way, compared to Q4 - or a 4% fall - according to the latest Tenant Arrears Tracker from Your Move and Reeds Rains.

Adrian Gill concludes: "Tenants are benefiting from a resurgent jobs market, responsible for the long-term trend in household finances away from the bad old days of the recession. This is having a particularly positive impact when it comes to the chances of tenants building up more significant arrears - or ultimately losing their home. Such progress, even in absolute terms, is hugely encouraging as the private rented sector continues to grow rapidly.

"But the latest uptick in shorter-term arrears goes to show that there's no room for complacency. Rents have dipped unexpectedly in May but remain far higher than in previous years, while household earnings have lagged the wider recovery for some time. Landlords need to be aware of such risks - and always keep lines of communication open."

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