The Rental Market, Q1 2016 1st Apr 2016As we hurtle through 2016 - is it really April already - let’s take a look back at how the rental market has performed overall in 2015, and more specifically in the first quarter of 2016.
The latest research (Your Move) suggests that rents have risen modestly in the last year, with a rise of 2.1% year on year. Although there has been a fall in rents in some parts of Scotland, such as the Highlands, in most areas there has been an upward move in the first quarter of 2016. The rise is due to a shortage of supply and an improvement in tenant wages, making affordability higher.
A regional breakdown of figures shows that Edinburgh is leading rent growth across Scotland with the strongest year on year rise at a speed of 7.7%. Rents are now peaking at £644, up from £598 in February 2015. South of Scotland rents are also at a record high of £515 per month, up from £498 in February 2015.
The Your Move report establishes that in Scotland, the average gross yield on a rental property was 4% in December 2015 - consistent with the previous month, and showing no change on an annual basis. Average total annual returns for a landlord stand at 6.3% over 2015 (taking into account property price growth and void periods between tenants, but before any cost deductions such as mortgage repayments or maintenance) – this is a decrease from 8% in December 2014. In real terms these figures equate to a return (before mortgage or maintenance costs) of £10,000 in 2015. This comprises £5,900 in rental income and £4,100 in capital appreciation. In 2016 these returns could reach 11.4%, or over £18,000 if house price growth continues.
The introduction of the 3% tax surcharge in the Land and Buildings Transaction Tax has led to an increase in the number of buy to let loans being taken out in the first quarter of 2016, as landlords race to beat the changes. This has distorted the market flow, as investors put more properties onto the rental market in the first quarter. There is a lot of speculation about what will happen over coming months if investors choose to put their money elsewhere, with rents then being very much affected by supply.
Recent reports also reveal that the typical seasonal spike in rent arrears has not happened, with tenant arrears actually dropping for the second month in a row in December. A welcome decline, although this must be considered against the overall year on year increase in arrears.
Furthermore, time to let figures have reduced Scotland wide (with the exception of Aberdeen), confirming that supply is not meeting demand.
Scotland has urgent housing needs which are not being met. An estimated 30,000 new homes a year have to be built to meet demand, yet we are barely fulfilling half this requirement. It is imperative that everything is done to increase the capacity of the growing rented sector, and it therefore has to remain an attractive investment proposition for landlords. Certainly there are challenges, but looking at supply and demand figures, buy to let investment could still be the best move to make for many.