In December, the average UK rent dropped by 1.2% to £684 per month - the lowest average since July 2010 according to the figures.
Despite the decrease, rents in December were 3.8% higher that a year ago. The average yield fell slightly to 4.9% in December, the first drop since January 2010, as rents declined at a faster pace than rental property values.
Rents fell fastest in Wales, down 2.6%, while the average rents in the south east and London decreased by 2.5% and 2.3% respectively. However, rents did drop in all regions of the UK. The west midlands and south west saw rents rise by 2.2% and 1.7%, while there were smaller increases in the east midlands and north east.
David Newnes, estate agency managing director of LSL property services, owners of Your Move and Reeds Rains commented: "December is traditionally a slower month for the rental market. Many prospective tenants are either away from home, or prioritise Christmas spending over budgeting to move. This year, the added arctic weather temporarily dampened demand, deterring many renters from hitting the streets and viewing properties.
"But the recent slowdown in rents is down to landlords' pricing strategies. Landlords offering properties during the holiday season often lower the asking rent to avoid a costly void period. If a landlord cuts the rental price by 5% to fill a property immediately, he will save £275 over the year rather than seeing their property vacant for the duration of the month. Nevertheless, with the supply of mortgage finance to both first-time buyers and would-be landlords still constrained, we are likely to see rents re-start their upwards march before the spring."
Following a steady fall in property prices over the past three months, the total annual return on a property has dropped to 7% in December - the lowest return since November 2009. This is now the equivalent to £11,431 - £7,332 in rent, and £4,099 in capital gains.
If property prices continue to decline at the same rate of the last quarter, an investor entering the market now could expect to make a total annual return of £3,259 per rental property according to LSL - equivalent to £8,211 in rent and capital losses of £4,953.
Newnes continued: "Landlords have seen an end to the post-crunch bounce-back in annual returns, and must view their portfolios as long-term investments. As the months of strong house price inflation fall by the wayside, the prospects for short-terms gain are slender. But with rents remaining historically very high, and tenant demand set to increase, buy-to-let provides very good investment prospects over the long-term."
John Heron, managing of Paragon Mortgages, said the data should not be considered a reversal of a strong trend of rising rents in the lettings market.
“Other data sources are still showing tenant demand at record levels, landlords not buying enough property to meet demand and rents rising so this index looks a bitout of kilter,” he said.
“It’s important to remember it’s one piece of data and our experience with house prices indices would suggest there can be quite a lot of disparity between one survey and others. That said, rents in any one month will be quite volatile and the rental market in particular is subject to strong seasonal factors.
“December sees the whole of the lettings industry shut down for a couple of weeks which could explain the drop but we would expect activity to pick up substantially in Spring. I don’t think this data suggests a reversal of more long term fundamental trends of falling owner occupation and constraints in the social rented sector.”
