Landlords' returns aren’t as healthy as currently reported

publication date: Oct 30, 2012
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Landlords' returns aren’t as healthy as currently reported

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) (see chart below).

Chart comparing latest buy to let returns versus 2004

Buy to Let Returns versus 2004

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

Chart showing average yields for buy to let landlords over the last 12 months    

Average Yield Movement and Portfolio Value
Source: Paragon Mortgages 

As the charts above show, rental returns for landlords have, if anything, reduced since 2004 and despite headlines of ‘rents at their highest ever' haven't changed much year on year. ARLA's figures show yield on mortgaged investments have remained the same since 2004, while Paragon suggest they have fallen from 7.2% to 6.5% and are currently recording 6.2% - no improvement from Quarter 1 in 2011.

Capital growth has also been hit very hard over the last five years, with some properties not even showing any growth since 2002 - that's 10 years ago! Considering inflation over this time has increased by over 30% (an average of 3.2% per year), investors are far from cashing in at the expense of tenants as they are often portrayed, in fact their returns are suffering and especially those who invested from 2006 will have to hang onto their properties for a serious amount of time to come before they actually make any money from their property.

For some amateur landlords, investing in buy to let has been great for their tenants. They've been able to rent brand new properties at far less than it would cost them to buy and run, but pretty rubbish in terms of delivering to landlords.

Examples of some flats which haven't increased their value since 2002:- 

Flat Values in Nottingham

Source: Land Registry sold property price data

Some investors are clearly losing vast sums of money with properties in central Nottingham being sold for half their value.     

Flat Values in Nottingham

Source: Land Registry sold property price data

So, far from cashing in at the expense of tenants, not all investor landlords are doing well during the recession and in some cases, tenants are the ones benefiting from landlord's investment by having an option of somewhere decent and cost effective to stay.

North South Divide buy to let returns favour the North
As ever with the property market, the national trends aren't the same across the UK. According to ARLA's Buy to Let review for Quarter 3, rental returns (yields) show "rental returns in the North East and North West have been rising steadily since the end of 2011. Last month (August) they hit 5.7 and 6 per cent respectively, making the North West the region with the highest rental return in the UK".

One of the reasons for this yield rise is the fact that from a property price perspective, prices have also fallen the most in these regions, so when rents have been stable, this drives yields up. The Land Registry data shows average property prices have fallen by 22% over the last five years in the North East region and 19% in the North West. In comparison on London, prices have risen by 3.7%. Inflation over this time has increased on average by just over 3% each year since the credit crunch, so few landlords' property investments have actually performed well over the last five years.

ARLA's Q3 report reflects this stating capital growth comes from the south and more specifically, Prime Central London. "The overall average capital asset value of rented houses has risen by 1.9% over the last three months". This increase comes from "the average value of rented houses for those managing properties in Prime Central London (up by 3.7%) and for the Rest of the UK (up by 3.2%)." However, not everywhere is on the up. ARLA's stats show these increases in returns on house rentals are "outweighed by a decrease of 1.1% for the rest of the South East."

Flat returns in comparison haven't changed that much with the South East showing a decline of 2.2% and Prime Central London even picking up a small fall of 0.5%.

So according to ARLA, returns for landlords aren't increasing dramatically as headlines would suggest. Paragon, one of the UK's top professional landlord mortgage providers, their data suggests most landlords are holding their rents, not increasing them, with 68% of landlords reporting that rental income had remained the same throughout Q3, while 27% had increased rents and 5% had actually seen rents fall.

The returns of buy to let investors haven't changed that much over the last 12 months. Rental incomes and yields are, on average, the same as this time last year and if anything, many landlords' portfolios haven't kept up with inflation, both from a rental and capital growth perspective.

For more information on calculating buy to let returns, visit Property Checklists, a new website which gives free checklists and calculators for investors and tenants.

For more statistics on the buy to let market, returns, reviews and research, subscribe to the UK's only residential market property information portal at Designs on Properrty for just £99 + VAT. Contact for more information.        


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