The Rental Market
Autumn 2014

According to LSL Property Services’ Buy-to-Let Index, although the annual growth in rental rates in England and Wales declined to 1.5% in September, compared to its peak of 2.4% last month, it is significantly higher than the annual rise of just 0.6% seen last April. In fact, average rental rates are now at record levels, with 50% of regions seeing higher rents than the previous year. In London, the picture was also positive with an annual increase in rents of 2.2% and a monthly increase of 0.5%. On a monthly basis, although this is the lowest increase in the last five months, it is still a significant turnaround from the 0.4% fall in rates we had seen in March and again in April.
Figure 5

In prime central London (PCL), according to Knight Frank’s Rental Index, rental rates have now risen for the seventh consecutive month, increasing 0.2% in September 2014. Although this rate of growth is lower than it has been in previous months, it is now the third consecutive month in which annual growth in rental rates has been positive. In fact, at 1.6% for the 12 months to September 2014, it is the highest it has been for the past 30 months. The prediction that growth rates would be back in the black by July were clearly correct and the longest period of decline since the inception of the Knight Frank index is officially over. Quarterly PCL figures show an increase of 1.2% since June 2014, which is the third quarterly rise in three years. South Kensington, Hyde Park Estate, and Kensington were the areas with the highest quarterly growth in rental values (see figure 5).

The downward shift in the rental market began in mid-2012, when many jobs were lost in the financial sector. According to Knight Frank’s data, the recovery, which finally got underway at the beginning of the year, has been slow, but is now in full swing. In the second quarter of this year the size of the economy had actually grown 2.7% above its peak before the downturn. As rental values also begin to make a marked recovery, further buoyed by the lack of confidence surrounding next year’s general election, so to are rental yields improving (see figure 6). In September yields on PCL properties were up to 2.84% from 2.82% the previous month, which is the highest increase in over three years.

Figure 6According to LSL Property Services, the same picture is being seen across England and Wales. Although gross yields on rentals declined to 5.0% in September 2014, compared to 5.4% in September 2013, average total annual returns were 13.4%, compared to 7.9% in the same month a year ago and up slightly on August’s annual figures too. This is a new record, beating the peak seen in April 2010, when annual returns were 12.9% and out-performing LSL’s prediction that it could take another year to reach these levels again. LSL are now predicting annual returns in England and Wales could reach 22.1% over the next year, if rates continue to rise as they have in recent months. London is now averaging a monthly gross yield of 4.2%, having declined slightly over the last couple of months.

  • LSL Property Services Plc’s Buy-to-Let Index, August 2014 and September 2014;
  • Knight Frank’s Prime Central London Rental Index, September 2014.