Hometrack has claimed that there are now two very distinct rental markets – one in London and another for the rest of the UK.

It said rents in London are largely double those for a comparable property elsewhere.

With the exception of London, rental growth in 2011 was lower than in 2010 across all regions. Rents in London were up 9.6% in 2011 and although growth has slowed since Q3 it remains stronger than the rest of the UK. The continued growth in the capital’s rents reflect the sheer size of the city, the high cost of buying and the corporate rental sector which drives some of the highest rents in the country. In contrast, demand across other cities is largely domestic, driven by those unable to access owner occupation.

Hometrack said affordability pressures on tenants mean that rental growth is expected to remain relatively subdued. On average Hometrack expects rents to rise by 2-3% in 2012, pushing gross yields slightly higher towards 5.5% by the year end.

The report added that there is a highly segmented sector where typically the bottom 25% of the market comprises private tenants in receipt of housing benefit a larger ‘core’ rental market, where households are unable to buy outright or who wish to maintain flexibility and at the top end, a rental market driven by corporate lets but subject to the volatilities of the wider economic cycle.

In London 22% of lettings are over £2,000 pcm for a typical two-bed property whilst outside London just 4% of lettings are over £1,000 pcm.

The core London market, where tenants typically pay between £1,000 – £1,500 pcm, accounts for 37% of the private rented sector. Outside London rents in the core market are typically set between £500-750 pcm – representing some 50% of the overall lettings sector.

On benchmarking the cost of renting to an 80% loan to value (LTV) first-time buyer mortgage, a clear north/south divide emerges, Hometrack said. Renting is only cheaper than buying in cities such as London, Bristol, Oxford and Cambridge, where the cost of getting on the property ladder is prohibitively high.
in lower capital value markets tenants are paying a premium to rent over the cost of buying an equivalent property.

Local market dynamics dictate the sustainable LTV that an investor is able to withstand for a given level of rent. Assuming a 5.5% interest rate for a buy-to-let loan and rents equating to 125% of the interest payments rates on the mortgage, the maximum sustainable LTV in high capital value areas is less than 75%. In London the maximum LTV stands at 55.4%, in Edinburgh 66.8% and Oxford 67.6%. In other areas of the country, the maximum sustainable LTV is much lower – 91.5% in Birmingham, 88.4% in Manchester and 87% in Southampton.

Richard Donnell, director of research at Hometrack, said: “The rise in private rents has been driven by growing tenant demand and a shortage of supply. With no major improvements in mortgage availability likely in the near future so rental demand is set to remain strong.