The UK remains obsessed with the property market – and buy-to-let plays a key role
This article was supplied by Foundation Home Loans
The UK remains obsessed with the property market: be this in the form of house prices, rents, the costs associated with borrowing, the margins for landlords, I could go on.
Buy-to-let has long played a key role within this obsession, largely due to its past performance, image, perceptions and, of course, its misconceptions. Although it’s no secret that the appetite, aspirations and practicalities attached to being a private landlord in the UK have changed greatly over the years.
I won’t chart all the influencing factors and regulatory impact, as these have been well-documented, but the shift from this being a sector dominated by amateur or accidental landlords to becoming the domain of portfolio landlords has become increasingly evident, especially in more recent times.
Inevitably, yield continues to play a key role for all landlords and while we’ve seen average gross yields remain strong over the years, there’s an ever-changing array of additional costs which landlords have to carefully account for.
This was evident in the latest research from Benham and Reeves which analysed the gross rental yield of the average buy-to-let property before comparing this to the net yield actually secured once annual running costs are considered. This concluded that investing in the average buy-to-let property across the UK will set landlords back £289,824, with the average property currently commanding £1,276 per month in rent. This equates to an income of £15,312 per year, a gross rental yield of 5.3%.
The good news is that this gross rental yield has climbed over the last year, up from 4.8% in the last 12 months. However, the research then looked at the net yield secured once the cost of maintaining a buy-to-let is accounted for. The costs incurred included letting agent fees (£1,837), general maintenance costs (£2,898), the cost of an annual gas safety certificate (£80), an electrical safety report certificate (£225) and landlord insurance (£427).
In total, these additional costs for the average UK landlord amounted to £5,468. As a result, the net yield secured on the average buy-to-let property comes in at just 3.4%, albeit this figure has climbed from 3% over the last year.
The positive to take from these figures is that while the average net yield may sit at just 3.4% currently, this has increased in strength over the past year to help underline the longevity and consistency attached to a buy-to-let property which is well maintained, in a good area and property managed. Although, on the other side of the coin, these average yields may not stack up as well as those experienced in the past and we also have to point out that this doesn’t include the average cost of repaying a BTL mortgage which has obviously risen for many.
But I like to stay positive and, whilst we have used the word average a lot over the past few paragraphs, a strong proportion of portfolio landlords who have taken a far more methodical approach when adding to and restructuring their portfolios in recent years to help bridge this yield gap are far from average in their attitude and performance.
Based largely on the major ingredient of high historic yields, one key property type which continues to capture the attention of such landlords is HMO’s. This is a factor which was highlighted in the Q2 2023 Landlord Panel research from BVA BDRC – in conjunction with Foundation Home Loans – which outlined that HMOs and MUBs were generating significantly higher average rental yields when compared to other property types (6.0%).
Within the research, there was also an increased focus on landlord divestment and it was interesting to note that terraced houses and individual flats were suggested to be the primary target for divestment. In contrast, HMOs, MUBs and bungalows were reported to be more protected. A factor which is likely linked to the more robust rental yields being achieved by these property types.
With the next iteration of the research currently being collated, it will be interesting to see if there is any movement in the yield table. I’ll report back accordingly, but what is unlikely to change is the continued dominance of the portfolio landlord in the BTL marketplace. In addition to an increased emphasis on specialist BTL lenders to generate innovative and competitive solutions for this product type and in supporting the wider needs of the portfolio landlord going forward.
