Lettings members of the National Association of Estate Agents reported a strong marketplace for UK residential lettings over the last quarter of 2006.

But the effects of the interest rate increase in November are yet to be fully absorbed by the market. If rates continue to rise throughout 2007 this sector of the market will inevitably be effected, said the agents’ association. Some landlords may be forced to increase rents in order to cover the increased overheads.

The lettings market was “thriving”, said the NAEA, boosted by a number of issues including affordability, a significant increase in immigration, specifically from Eastern Europe, and an ever-strong interest in bricks and mortar as an investment.

2006 saw the implementation of a number of new legislative initiatives in the sector, including new rules surrounding Houses of Multiple Occupation (HMOs). Despite the increase in rules and regulation, the sector has performed well and it is likely it will continue to do so throughout 2007, when the proposed Tenancy Deposit Protection initiative is due to come into force.

Tenancy deposit protection

The new tenancy deposit protection (TDP) initiative will come into force in April 2007. From then onwards, landlords will be required to either opt into an insurance scheme or a custodial scheme in order to ensure tenants will have their deposit returned to them in a fair and regulated manner.

While the scheme is unlikely to have such an effect on the residential lettings market as the recently implemented Houses in Multiple Occupation legislation – (when surveyed on the new HMO rules, 35% of NAEA members reported that HMO landlords were selling up rather than face the increase in bureaucratic red tape) – landlords could experience slightly reduced returns as a consequence of TDP.

Time taken to let

The time taken to let a property was up slightly in the fourth quarter of 2006. It took an average of 13 days to find a suitable tenant, as people proved reluctant to make a move before Christmas. This is compared with an average of 12 days in the third quarter – traditionally a much busier time of year for the residential lettings market.

Rents continue to rise

Rents continued to rise at a significant pace right to the very end of 2006. The increase per month in the last quarter of the year averaged at 1.5%, with rents increasing in December by 1.79%. During the same period in 2005 agents reported an increase in rents of just 0.72%.

The interest rate rises in August and November left many buy to let landlords with additional outgoings, where ultimately tenants will pay the difference. There has also been additional demand for rental property due to increased immigration, particularly from Eastern Europe, as well as an increasing typical first time buyer age.

Jan Bartlett, lettings expert at NAEA said: “The lettings market remained steady and strong throughout the latter part of 2006. The market is looking particularly healthy, aided by rising property prices and increased immigration in 2006.”

“Interest rate rises are a concern as many landlords may choose to sell and ‘cash in’ on their investment at the threat of increasing expenses. However, I am confident that there is still significant return to be gained from buy to let property and I hope that the initiation of the tenancy deposit protection initiative will not deter investors.”