Past Rental Market Performance: Buy to let winners and losers

publication date: Sep 3, 2012
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Past Rental Market Performance: Buy to let winners and losers

What's happened to rents in the past doesn't really affect tenants as the time and money has, but it does matter to landlords. All landlords should be concerned with how well their buy to let portfolio is performing versus average, local, buy to let performance figures. For landlords, the main way of tracking success would be to measure the property's and portfolio's capital growth and the yield, ie how much income a property earns versus the cost of the property (or asset).
The two main industry measures for capital growth and rental performance over the last eight years are Paragon Mortgages and Association of Residential Letting Agents (ARLA).

Capital Growth & Rental Performance

*Combined returns include capital growth and income.
  The lower figures are for properties bought with cash, the higher returns are for mortgaged properties

What these figures show is over time, capital growth and rental returns have been pretty good. On average, according to Savills and Rightmove, they estimate property grows at 6.7% per annum and together with the Nationwide, residential property (on average) grows at 2.8% per annum, taking into account inflation.

But over the last five years, capital growth has been severely lacking, denting many a buy to let investor's portfolio returns. Since the credit crunch, property has on average, fallen in nominal terms by up to 20% or more and in real terms, ie taking into account the effect of inflation, 25-30% or more for some properties and areas. This means there are many landlords out there whose plans of early retirement and ‘financial freedom' via huge capital gains are a long way off. This is particularly the case for those who bought through the huge number of property investment clubs such as ‘Inside Track' during the boom buy to let sales years of 2003-2006.

However, for those who invested prior to 2003 and especially if a landlord put their money into property for income (‘yield' in buy to let terms), versus other assets, returns will be looking pretty good.  It hasn't been all good news on the income front though. In 2008, rents took a step backwards as accidental landlords flooded the market with properties - even in areas such as London. Rents fell on average by five percent and in some areas, supply increased versus demand so much, rents fell by 20%.

Over the last five years, according to the Belvoir Lettings Index some areas such as London, Yorkshire and the West Midlands have recovered and surpassed 2008 rental heights. For most other areas such as the North East and West, the East Midlands and East Anglia, properties are renting out today at up to four percent less than landlords were securing five years earlier.

From a landlord's perspective, tracking rental rises and falls are important to bear in mind, especially if you are looking to rental income to supplement your pension or help you retire early. As with capital growth, rents are affected by inflation. If inflation has risen by 10% over the last five years and average rents haven't changed, then landlords' income has actually fallen by 10%. If rents have risen by five percent, but inflation has increased by 18% over the last five years, landlords would be 13% worse off.

If you are a landlord it's useful to compare your rental returns to average returns. According to the recent Savills and Rightmove report "the average gross income yield across the UK is 5.8%, a figure that rises to 7.7% for investors able to secure discounts of bulk purchases". The report concludes, different property types give different returns. For example, the report estimates average returns for one beds are 6.7%, two beds are delivering 7.8%, while three beds rented as a whole achieve 5.3%.


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