Moderate yields for landlords despite soaring rental rates

Rental rates in London have soared over the past year and are expected to go up even more in the next 12 months, a report has found.

The average price of renting a property in London went up 5.9% in the past year, higher than the national average of 4.3%, as tenants felt the squeeze in a tough economic climate.

More bad news is on the way for hard-up tenants in the capital because rental rates are forecast to go up by 7.8% over the next year, according to the Royal Institution of Chartered Surveyors (RICS).

The expected rise in London is significantly higher than the outlook for the country as a whole, which is set for an average 3.9% increase, driven by the “scarcity” of mortgage finance and a shortage of good-quality properties for tenants to sign up for.

But London’s landlords have little to cheer about despite the soaring rental rates. Average yields are just 4.5% in the capital, compared to 9.6% in Yorkshire and Humberside. Rental yield is the amount of income an owner receives per year expressed as a percentage of the property’s value.

North Finchley estate agent Jeremy Leaf said: “Continuing demand, especially from aspiring first-time buyers still finding it difficult to obtain mortgage finance, is creating shortages of one and two-bedroom flats as well as higher rents.

“Buy-to-let investors are still able to outbid purchasers on the bottom rungs of the property ladder.”

Many would-be sellers are now looking to take advantage of high rental rates by putting their properties up to let for a couple of years before moving them on, according to Nik Madan from John D Wood Co. in Kensington.

Madan said: “Much of our client base is comprised of discretionary sellers, and we are seeing a clear trend of these clients moving their property over to the rentals market to take advantage of the higher rents in the short-term, two to three years, and then looking to sell in the future.

“I anticipate that this trend will continue through the remainder of the year.”

Would-be house buyers have become trapped in the rental market because they cannot get a deposit together or meet the tough mortgage criteria of lenders, resulting in the increased rates.

It is also thought many people are renting due to the uncertainty surrounding the housing market.