After two months of modest falls, yields have now stabilised as a result of the significant rise in rental incomes achieved – even though landlords are now paying over 10% more for a property than three months ago and 20% more than a year ago.
An average buy-to-let property now costs the landlord investor £123,498, +3.27% on last month’s figure of £119,587, +10.6% on the quarter (from £111,712 in May) and +20.2% on August 2002 (£ 103,332).
Rental incomes grew by a slightly greater percentage than property values, +3.30% at £9,354, compared with £9,055 last month, following the generally upward trend seen since April, since when incomes have risen by 7.5%. Rents are now 2.7% higher than a year ago, slightly below the most recent retail price inflation figure (+3.1% over the past year).
With the larger increase in rental incomes than in property values, yields in August stabilised at 7.57%, fractionally (+0.03%) up on July’s figure.
Paragon Mortgages’ managing director John Heron comments: “This month’s strong increase in rents achieved provides evidence of sustained demand from tenants, at what is traditionally a busy time of the year for landlords as students and young renters sort out accommodation. While prices paid by landlords for properties are still rising strongly, the increase in rents has more than matched that rise, to reach the highest level we’ve ever seen. This has led to stable yields.”
While yields in the south remain significantly lower than in the north – a function of higher property values – there has been some convergence, as some higher yielding regions in the north have seen falls and lower yielding regions in the south east have seen rises. In the North, yields fell from 10.36% to below 10% (9.94%) while those in Yorkshire fell from 8.95% to 8.71% and the North West was unchanged at 9.42%. In the south, August saw yields rise from 6.56% to 6.71% in Greater London and from 6.90% to 6.96% in the South East.
John Heron continues: “After some months of declining yields, in London and the South East we are seeing signs of yields firming, thanks to a healthy rise in rental incomes this month. While better yields can still be achieved in areas well away from the south east, we may have turned the corner in London and the Home Counties.”
In terms of property type, terraced and semi-detached properties remain perennially popular with tenants and offer better yields to landlords – although terraced saw a modest decline in yields from 8.88% to 8.73%, and semi-detached from 8.14% to 8.08%. Flats and detached houses generate lower yields, although this month they saw small rises, from 6.87% to 6.91% for flats and from 7.49% to 7.75% for detached houses.
In terms of total overall return (taking into account both property value appreciation and rental income over the year), the Midlands – both East and West – have proved the most attractive places to invest in residential property over the past year. In the East Midlands, landlords have enjoyed total gross returns of 46.42%, down from last month’s 56.66%. In the West Midlands total returns stood at 36.47%, down from 43.85%, while Wales was in third place at 34.05% (July: 46.59%). The lowest overall return figures were in the North (16.71%) and North West (19.38%).
Overall, the average total return over the past year was £29,863 on a typical property bought a year ago, equating to 29.06%, slightly down on July’s figure of 29.30%.
