Assetz® News - Crunch proof rents?

Crunch proof rents?

26th August 2008 |

Those investing in property in the UK for buy-to-let purposes will be keen to ensure that their rental yields remain healthy. What many will ask is how the credit crunch, should it continue for some time, could affect this.

According to David Salusbury, chairman of government-backed tenancy deposit scheme mydeposits.co.uk, the issue of rental yields is something that can be currently seen in two different ways.

In the first instance - on the basis of the level of rent compared to the value of properties, the average rent is "quite low" in historical terms, he stated.

However, he acknowledged, some may consider that this is a distorted picture, commenting: "One could argue, conversely, that is because property values are rather higher than they should be and, as we know, there is an adjustment underway, called the credit crunch, which is having an effect on property values."

But will this lead to a major drop in rents? Not necessarily, Mr Salusbury suggested. He said: "Whether or not that will have an effect on rents is a different matter because rents will be as much a function of supply and demand as anything else. Indeed there are signs that rental yields are in fact rising which is probably bringing them closer to the historical norm."

This view could be backed up by the latest figures from the Rentright Residential Rental Price Index. This showed that in August 2007 the average monthly rent in the UK was £726. By June this year it was £636 and in July it was £577. But the trend may now be showing signs of reversal, with an increase this month to £588.

September's figures for the index may give a clearer picture of whether a sea change has taken place in this regard or whether the figures are a blip. But for investors, Mr Salusbury's comments may come as a relief, coming as they do at a time when some are warning that the credit crunch could have some time to run yet.

One such warning came this weekend in the US at an international meeting of central bankers. The deputy governor of the Bank of England Charles Bean stated that it is quite possible for the worldwide financial crisis to continue, with an improvement in the state of credit markets being central to the eventual recovery.

The other factor that will help is a fall in inflation and on this point Mr Bean expressed optimism, saying: "On the assumption commodity prices remain stable and if anything fall back, then inflation should drop back as we go through next year."

Such a situation could have obvious beneficial consequences for a process Charles Bean himself is partly responsible for, as a member of the Bank's monetary policy committee (MPC). An easing of inflationary pressures would allow more scope for interest rate cuts, which in turn could lower borrowing costs for those buying property.

Expectations of a cut in the UK this year have risen sharply among economists, according to one poll. Bloomberg has reported that half of those surveyed on August 22nd believe the MPC will cut the base rate before the end of the year, compared with only a quarter just a fortnight earlier.

So while investors may hope that Mr Salusbury is correct and a continuing credit crunch will by no means bring about a fall in rents, investors hoping for better times ahead may yet have good reasons for optimism.