Rents fell for a second consecutive month in March, according to the latest Buy-to-Let Index from LSL Property Services. The March data shows that the average rent in England and Wales fell by 0.3% to £705 per month, a decline from £707 in February. Despite the monthly drop, rents continue to rise on an annual basis, with rents 2.7% higher than a year ago.

The biggest decreases were in the South West and the East Midlands on a monthly basis, with rents falling by 1.5% and 1.4% respectively. Rents also dipped in London, falling by 0.3%, the second monthly decline in the first quarter of 2012 while rents rose in two regions, increasing by 0.7% in the South East and 0.6% in the East of England.

Despite a monthly decrease in average monthly rents, rents have increased by 4.9% annually in London, the region with the fastest long-term growth. Despite recent declines, London’s average rent was 0.2% higher in March than at the end of 2011. The next biggest annual increase was in the East of England, where rents rose by 3.4%. On an annual basis, rents have only fallen in two locations, dropping by 2.2% in the East Midlands, and 0.4% in the North West.

According to David Brown, commercial director of LSL Property Services, “The recent dip in rents will be welcome news for tenants, with the cost of renting at its most affordable level since July.

“The rental market was still feeling the knock-on effect from the stamp duty deadline in March, with an increased number of tenants rushing to leave the sector in the first part of the year, easing tenant competition. On top of this, a growing number of investors have been entering the market or expanding their portfolios, to take advantage of strong yields and improving annual returns.”

Brown says that the drop-off in rents is likely to be short-lived and with the passing of the stamp duty deadline increasing the cost of moving, he believes that banks funding conditions are likely to limit high value mortgage lending to first-time buyers so that would-be buyers will be more reliant than ever on rented accommodation.

“As we head into a traditionally busier period for the market, a redoubling of tenant demand is likely to push rents higher once more,” he added, “despite the improved supply.”

Strengthening property prices in the first quarter of the year have pushed up the total annual return on a property to 5% representing an increase from an average of 2.7% a year ago, and marks the highest level since December 2010.

If property prices maintain the same positive trend as the last three months, an average investor in England and Wales could expect to make a total annual return of 10.7% per property over the next 12 months - equivalent to £17,657 per property. The average yield on a rental property is now 5.1%, compared to 5% a year ago.

“Following the recent pick-up in house prices, capital losses are no longer eroding the contribution of rental income, and landlords are looking at their highest annual returns in over a year,” said Brown. “Nevertheless, given the pressures on mortgage lending, property prices are unlikely to rocket up this year, and rental income will continue to make up the bulk of a landlord’s annual return. While many landlords, especially those in London - may once again be seeing short-term capital gains, long-term factors such as tenant demand in an area and rents will remain the driving forces behind prudent investment planning, rather than speculation on the probability of house price inflation.”