Average residential rents in Scotland have climbed 0.6% in the twelve months to April 2016, in the slowest annual rise witnessed since March 2013. This marks a significant downturn in rates of year-on-year growth from 1.1% recorded in March, and 2.1% in February.
In absolute terms, this £3 annual increase means that the average rent in Scotland now stands at £542 per month. This is the lowest Scottish rents have been since they stood at £539 in April 2015.
On a monthly basis, typical Scottish rents have fallen for the second consecutive month, down 0.4% since March. This is at odds with the trend seen south of the border, with average rents across England & Wales rising 0.3% month-on-month in April.
Brian Moran, lettings director at Your Move Scotland, comments: “Tenants looking to rent a property now may find themselves able to bag a bargain, after a slight spring slump in rent growth. Rents haven’t risen at such a leisurely place for three years. However, this year-on-year snapshot hides the many price fluctuations we’ve seen in between this April and last, and also isn’t uniform across the country. The lettings market is always at the mercy of local supply and demand, and in Edinburgh and the surrounding areas we’re seeing extraordinarily fast rent rises, as tenant competition shines brightest around the glow of the jobs market.
Supply and demand need to strike a lasting equilibrium to prevent rent growth taking off and leaving tenants by the wayside – and that’s a tall order in today’s regulatory environment. Landlords are up against a considerable cocktail of hurdles, including a higher rate of stamp duty on property purchases, reductions in tax relief, and the Private Tenancies Bill. While levied at landlords, these measures could soon hurt thousands of tenants too, if buy-to-let investment retreats as a result and there are less houses and flats to rent.”
Rents by region
On a monthly basis, rents are cheaper in all but one region of Scotland in April.
The Highlands & Islands witnessed the fastest drop in average rents in April, falling 1.7% on March. This amounts to over £9 in cash terms, reducing typical rents in the region to £537 per month – the lowest level seen since December 2014.
Rents in Glasgow & Clyde fell on a monthly basis for the fourth consecutive month, down by 1.0% in April to stand at £538.
In the East of Scotland rents were 0.6% lower in April than in March, while the South experienced the smallest month-on-month reduction, down by just 0.1%.
Meanwhile, Edinburgh & the Lothians is the only region to experience an increase in rents since March, up a solid 0.8% (£5 in absolute terms) month-on-month. This also marks an uptick in monthly growth for Scotland’s capital and the surrounding areas, strengthening from 0.2% in March and 0.3% in February.
In the longer term, rents also fell across the majority of Scotland year-on-year in April.
Of the three regions to see rents decrease on an annual basis, Glasgow & the Clyde witnessed the steepest drop – with average rents 3.9% (or £22) lower than in April 2015.
After this, rents in the East of Scotland fell by 3.0% compared to a year ago, amounting to a £16 reduction in the average monthly rent in the region. Typically, tenants here can expect to pay £513 per month to rent a property, which represents a 19-month low.
The Highlands & Islands rounds off the trio of regions experiencing negative annual growth in rents, with typical rents showing a more moderate 1.0% fall in the year to April.
Despite the wider slowdown across the country, annual rent rises in Edinburgh & the Lothians continue to accelerate, reaching a peak pace of 10.5% in April. This has taken average monthly rents in the region to a record high of £651, up a considerable £62 from a year ago.
The South of Scotland is the only other region to show a year-on-year boost to average rents, but this rise was a more modest 2.6% since April 2015. Standing at £513 per month, typical rents here are below their February peak.
Tenant arrears ticking up
The more muted annual rent growth and host of monthly drops, are failing to translate into healthier tenant finances in Scotland. Instead, Scottish tenant arrears have climbed for the second successive month in April.
The proportion of late rent increased to 11.6% of all rent due in April, compared to 11.3% in March. On an annual basis, tenant arrears have worsened too, with late rent standing at just 9.2% in April 2015.
Brian Moran comments: “It appears that paying the rent on time is becoming slightly harder for Scotland’s tenants. When coupled with the fact of slowing rent growth recently, this certainly rings alarm bells for the state of tenant finances across the country. A few months ago it felt like there was some real headway being made, and levels of late rent were dropping – but there’s been an unfortunate rebound.
With unemployment in Scotland on the rise, tenants can’t afford for the current housing shortage to continue. More homes to let are needed in the places where the jobs market has something to offer, and a better balance of supply and demand is vital to iron out these lasting obstacles in rental arrears. Ironically, Scotland needs landlords to keep investing and expanding the supply of rental homes on the market – at the very time when the Government is targeting them with regulatory weapons.”
Landlord returns reflect LBTT turbulence
In the twelve months to April 2016, Scottish total annual returns stand at -4.8%. This marks an improvement from a -5.6% return over the year to March, but is still being adversely skewed by the introduction of the Land and Buildings Transaction Tax (LBTT) in April 2015, and the impact of this on sold house prices last spring.
Compared to last year, total annual returns have declined from 17.5% recorded in April 2015, which was the result of inflated house prices feeding into considerable capital gains in the run up to the LBTT implementation.
As a result of this property value turbulence, in absolute terms the typical Scottish landlord has witnessed a paper loss, before any mortgage payments or maintenance costs, of £8,600 in the past year. This comes despite rental income standing at £5,900 over the past twelve months, with capital gains impacted by distorted sold house prices a year ago.
The average gross yield on a buy-to-let property in Scotland stands at 4.0% as of April 2016, holding steady on a month-on-month basis. Compared to a year ago, this marks an improvement from 3.7% in April 2015.
Brian Moran concludes: “Our reading of landlord’s financial returns are going a bit wayward at the moment – but it’s a matter of waiting now until the anomalies of last spring drop out of view. With property prices climbing to a considerable peak before the introduction of the LBTT in April 2015, Scottish landlords haven’t seen any compelling capital growth in the past twelve months, to complement with their regular rental income. But that’s not to say it hasn’t been a wise investment. Existing landlords will have saved themselves an extra 3% Stamp Duty on their buy-to-let purchase, which all future landlords will have to factor into their financial planning. And despite any artificial inflation in house prices a year ago, those who bought a property to rent out last April or afterwards will have benefitted from the more favourable tax regime under the new LBTT, which reduced Stamp Duty costs for the majority of Scottish home purchases.
While total annual returns are in a state of flux, gross yields are the constant keeping a remarkably steady course – and offering landlords a much fairer and sunnier picture of the investment case. But with the new Stamp Duty surcharge comes a potential barrier to entry for many landlords, and it remains to be seen how much investment will be scared off by this measure. In Scotland, slower property price growth and the softer LBTT system may help to soothe some of these concerns, but anyone looking to start or grow a buy-to-let portfolio will have more financial factors to consider.”
