Figures suggest rocky future for landlords and tenants

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March saw the sharpest month-on-month fall in Scottish rents on record, according to Your Move’s Scotland Buy-to-Let Index.

Average residential rents in Scotland dropped 0.7 per cent in the month to March, the steepest monthly fall since the index began.

In absolute terms, this £4 drop between February and March takes the typical rent in Scotland down to £544 per month.

Those who signed a new tenancy in March will be feeling confident they snapped up a competitive deal before the Scottish rental market begins to gear up towards the annual autumnal peak.

But tenants in big cities like Edinburgh haven’t enjoyed the same reprieve with the ratio of supply and demand still stacked greatly against them.

Investment from landlords needs to follow the tune of the jobs market and economic activity.

Affordability is the main warning light to watch out for and, with the frequency of arrears on the rise once again, this reminds us of the considerable obstacles ahead.

Landlords now face an additional 3 per cent Land and Buildings Transaction Tax (LBTT) on property purchases, and the Private Tenancies Bill has passed through Scottish Parliament, so we’re entering unchartered territory.

What we do know is that if landlords hit the brakes and cause a roadblock of supply in the private rented sector, tenants will be the casualties paying higher rents in the longer term. Despite the widespread monthly falls in rents in March, the proportion of late rent in Scotland has risen for the first time since October 2015.

Reversing the recent trend of improving tenant finances, tenant arrears rose to 11.3 per cent of all rent due in March.

This is a very unwelcome about-turn. Up until now Scottish tenants had been making good ground over the spring months, and paying down levels of late rent – but there’s still a mountain to climb for many households.

External factors and the wider economic climate obviously have a vital impact and the delicate balancing act between monthly income and outgoings, but landlords on the ground can help keep a lid on affordability pressures.

Good management of buy-to-let properties and regular communication between landlords and their tenants is crucial to signpost any early concerns and avoid the likelihood of rental arrears.

Tenants need properties they can afford and landlords need tenants with a healthy grip on their household expenses, so it’s about striking a fair deal for both.

As for annual returns for landlords, they have dipped to -6.3 per cent in the year to March.

This is a considerable fall from a positive return over the year to February, as a result of the distorted property price movements in the spring of 2015 ahead of the implementation of the LBTT.

On the surface, the LBTT – benefitting the vast majority of Scottish buyers – made it more expensive to become a landlord last spring, with average property prices sent skyward after an onslaught of high value house sales at the top end of the Scottish housing market.

This short-term scramble impacted on values; many existing landlords experienced faster capital growth than they were counting on last year and, on the flip side, those who entered the fray at the peak of the rush seemingly paid a premium that they may not have obviously recouped back yet.

But it’s worth remembering that they’ll have saved themselves the extra Stamp Duty now liable on buy-to-let purchases.

As property prices come back down to earth and business resumes as usual, last year’s LBTT distortion will gradually work its way out of the cycle, and we’ll see annual returns reach a firmer footing.

Investing in property is ultimately a long-term game – total annual returns are only important if you’re an existing landlord wanting to sell-up.

For those in it for the long haul, perhaps looking ahead to their retirement, gross yields are the best weather gauge, and sturdy rental income has kept these pointing in the right direction.

Brian Moran is lettings director at Your Move Scotland.