Rental yields drop again in Q2

But lender thinks yields will "stay pretty constant" as supply-demand imbalance exists

Rental yields drop again in Q2

The latest data from Fleet Mortgages has shown a drop in annual rental yields across England and Wales, but the buy-to-let specialist lender believes strong tenant demand – coupled with a relatively low level of supply – will likely keep yields at good levels.

Fleet Mortgages’ latest iteration of its Buy-to-Let Rental Barometer covering the second quarter of 2022 has revealed a slight fall in annual rental yields, down from 6.1% a year ago to 5.5%. However, the drop is only 0.2% on the previous three-month period, when the yield was 5.7%.

The yearly trend across all regions was down with every area of England and Wales seeing a drop in rental yields of between 0.1% and 0.9%.

Nevertheless, a more recent quarterly comparison with Q1 2022 shows that two regions – Wales and the East Midlands – have seen rental yields increase, three regions – the North West, West Midlands, and the South West – have seen no change, with the other five regions showing drops of 0.6% and below.

Read more: Rental yields fall in Q1 2022 – Fleet Mortgages.

The North East of England has the top rental yield regional figure for the eighth consecutive quarter, although the yield did slip slightly from 8.7% in the last quarter to 8.3% now.

Wales saw a 0.6% quarterly increase in rental yield and the East Midlands moved up by 0.3%.

According to Fleet, all regions running at rental yield figures higher than the England and Wales average were doing so because of the ongoing strength of tenant demand in those areas compared to the level of supply available.

The lender said it was continuing to see this strength in key town and city centres, with hotspots such as Liverpool, Manchester, Sheffield, Bristol and Cardiff.

Fleet said that while rental yields had dropped off the recent highs of the last 12 months, it was apparent that the imbalance between high tenant demand and low supply of rental space, will likely keep the yields at good levels across most of the regions in which it lends.

“Properties are highly sought after, and rents are strong due to the scarcity value of quality homes. Our anticipation is that, in most regions of the UK, yields will stay pretty constant especially while this supply-demand imbalance is in place,” Steve Cox, chief commercial officer at Fleet Mortgages, commented.

Fleet said landlords were keen to add to portfolios having secured capital increases on existing properties over the last two years, and it anticipated a positive buy-to-let remortgage market throughout the rest of 2022.

“We know that many landlords would like to remortgage existing properties in order to fund new purchases, however there are two areas to consider here. First is the increase in buy-to-let mortgage product pricing which has been obvious in the last couple of months, and secondly is a lack of supply to purchase,” Cox explained.

“Both might well hold landlords back from acting right now, however we do anticipate that 2022 will see strong levels of remortgaging throughout the rest of the year, and as lenders get on top of their current service issues, we will see a return to stability and pricing for buy-to-let mortgages, although this might not be visible until the early part of next year.”

Fleet said it continues to anticipate that rates will rise further, particularly as lenders sought to manage resources and service levels in a highly competitive marketplace.

“This is, without doubt, a very interesting period for landlords, lenders, and the wider private rental sector, as we seek to marry up a number of ongoing issues which are all having an impact,” Steve Cox, chief commercial officer at Fleet Mortgages, commented.

“The positive news is that, as our Rental Barometer shows, yields are holding up well, and while we have seen a drop-off since the highs of last year, in general, there has been a consistency across most regions on a quarterly basis.” 

Cox added that for existing landlords, the rental yield figures remain a strong source of comfort.

“While we believe the level of demand for PRS properties will dip, there is likely to still be enough – especially compared to property choice – to ensure they maintain good levels throughout the rest of 2022,” he pointed out.