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Stamp duty rush eases rental sector pressure

Wednesday 21st March 2012

Rents dipped in February as an increased number of tenants considered moving into the sales market to beat the end of the stamp duty holiday, according to the latest Buy-to-Let Index from LSL Property Services.

In February, the average rent in England and Wales fell by 0.6% to £707 per month, following a rise in January. Despite the monthly drop, rents continue to rise on an annual basis, with rents increasing by 3.5%, representing a £24 rise in the past year.

The biggest decreases were in the Midlands, with rents falling by 2.2% in the East Midlands, and by 1.8% in the West Midlands. Rents rose in three
regions, increasing by 0.7% in the North East and 0.5% in both Wales and the South West. Rents dipped by 0.4% in London, only the second monthly
fall in the past 14 months.

In the last 12 months the largest increases in rents have been in London, where rents rose by 5.6%, and the East of England, where rents increased by 5%. On an annual basis, rents have only fallen in one location, dropping by just 0.2% in the East Midlands.

David Newnes, director of LSL Property Services, owners of Your Move and Reeds Rains, said: "The looming spectre of the end of the stamp duty holiday has taken its toll on tenant competition in the run‐up to the deadline, easing the upwards pressure on rents. In February, an increased number of tenants either became owner occupiers, or seriously considered property purchase, rather than renewing their contract or seeking a different rental property. With fewer tenants than usual actively competing for properties, combined with a slight improvement in the number of rental properties becoming available, many landlords priced less aggressively to avoid the prospect of a void period.

"In the longer‐term, it’s difficult to see a prolonged decrease in the tenant demand underpinning rental inflation. There are already indications that mortgage lending is falling back, and that mortgage rates are beginning to climb, which will limit the number of prospective homebuyers leaving the rental sector. While the NewBuy scheme may support a limited number of first‐time buyers, its impact will undoubtedly be offset by the removal of the stamp duty holiday. As a result, and given the growing number of households, the pressure will remain on the private rented sector."

Strengthening property prices in the last two months has pushed up the total annual return on a property to 4.2%, up from 3.6% in January. In cash terms, this was an average of £6856 - equivalent to £7602 in rent with a capital loss of £745. In London, the annual growth in house prices means the average total annual return was 8.2% ‐ equivalent to £19,526.

If property prices maintain the same positive trend as the last three months, an average investor in England and Wales could expect to make a total annual return of 8.7% per property over the next 12 months – equivalent to £14,232 per property.

The average yield on a rental property was 5.2%, compared to 5% a year ago.

Newnes said: "Stabilising house prices have bolstered the total annual returns property investors currently enjoy. In addition, healthy rental yields and historically attractive mortgage rates are drawing in investment from prospective landlords. However, to accommodate the UK’s growing number of households, and given the lack of money available for social housing, the private rented sector must continue to expand – and the Government must address this in the Budget.

"A simple change to capital gains tax, allowing landlords to reinvest capital gains without it being taxed would help stimulate further growth, reducing the strain on the current provision of rental accommodation."

Rental arrears dropped in February as tenant finances improved. 9.3% of all rent late or unpaid at the end of the month, with unpaid rent totalling £285million. This represents a drop from the 10.7% of rent late or unpaid in both January and December.

Newes said: "Tenant finances have been boosted by the easing level of inflation at the start of the year, allowing many to get their monthly budgets in order – and this has reined in the overall level of rental arrears. Nevertheless, it’s clear that the bulk of arrears are being accounted for by a growing minority who are falling further and further behind with monthly payments. As unemployment rises, we anticipate this proportion of renters will climb."

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Mike Jones

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