Bright future for buy-to-let investors

Total returns continue to make property investment the number one asset

Recent research from two respected sources concludes that buy-to-let property investors can look forward to a bright future. Competition from tenants is increasing, rents are rising, and landlords selling in 2017 made an average of 69% total return after just 8.5 years of ownership. And it looks like there is better yet to come.

Buy-to-let market steadies in Q1 2018, as tenant numbers outpace supply

ARLA Propertymark’s latest quarterly Private Rented Sector Report concludes that the buy-to-let market has steadied for landlords, though there are supply issues for tenants to overcome.

The number of tenants per ARLA Propertymark branch increased by 8%, from an average of 61 in February to 66 in March. Meanwhile, the supply of rental property fell by around 2.5% per branch.

Rents are rising for buy-to-let

Landlords are increasing rents, as they respond to the changes to property taxation. It is expected that many landlords will continue to push rents higher, as they seek to recoup losses from the phasing out of mortgage interest tax relief at higher rates.

The number of tenants reporting rent increases rose to 23% in March.

ARLA Propertymark Chief Executive David Cox said that the report’s conclusion was “business as usual”. However, he noted that tenants are likely to face more rent increases as landlords attempt to recoup the costs of tax changes and new landlord regulations.

PRS – the outlook is positive

In its latest report on the private rented sector (PRS), Hamptons asks “What next for buy-to-let?”. It concludes that the outlook remains positive.

Hamptons notes the generally negative impact of government policy on the sector but believes that the buy-to-let market will continue to grow as the number of households renting explodes. Its research indicates there are 4.7 million households renting today, and forecasts this will rise to 6 million by 2025.

Average rental yields are as high as 7.9%

The extended period of price growth in the South has pushed rental yields lower, with average yields now 5.4% in London. In the North West, where price growth has been more subdued, average rental yields are still at 7.9%.

Total return is key for investors for buy-to-let

Increasingly, property investors are considering total return rather than the need for higher rental yield to cover short-term costs. Many investors are accepting lower yields in exchange for the potential of higher capital growth. The combination of rental income and capital growth has combined to produce extremely healthy total returns on the average property investment.

Gross returns average 69% in 8.5 years

Hamptons has found that the average gross return made by investors selling in 2017 after 8.5 years is 69%. This is made up of:

  • 60% rental income
  • 40% capital growth

However, this ROI mix depends upon where the property is located. In the South, where rental yield is lower and capital growth is higher, investors are more reliant on price appreciation.

The North is currently more attractive

As expectations of price growth recede in the South, the North of England is now home to some of the best places to invest in property UK. Cities such as Birmingham, Manchester, Leeds and Newcastle offer higher yields at more affordable prices. Lower property prices also mean less impact from the stamp duty surcharge introduced in April 2016.

More landlords are buying with cash to buy-to-let

Though one strategy to reduce the effect of the changes to mortgage interest tax relief is to set up a limited company to invest in property, Hamptons has found that more investors are simply buying in cash. It found that a whopping £21 billion was invested in buy-to-let properties via cash purchases in 2017 – almost two-thirds of all investor purchases.

Property investment performance outpaces inflation and wage growth

Though the government has tried to make buy-to-let less attractive, the performance of residential investment property as an investment asset remains highly attractive, especially when compared to other places to put your money, says the Hamptons report (we certainly wouldn’t argue with this).

Property prices have consistently outpaced wage growth and inflation. This dynamic continues to push house prices beyond the reach of many people. The result is a decline in homeownership and expansion of demand in the PRS.

Summing up, you can expect:

  • Higher rents to compensate for mortgage interest tax relief changes
  • Increasing demand from a rapidly growing tenant base
  • A good mix of rental income and capital gain producing attractive total returns

Do you want to know where you should be investing in 2018? Contact one of our team today on +44 207 923 6100 and sign up for the Gladfish Newsletter to stay abreast of all the property investment news that matters. We give it to you straight. No BS. No hype.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
June 12, 2018


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