A study carried out by BM Solutions found the average yield in the UK to be 5.3% in the second half of 2016, and when inflation of 1% was factored in, investors were earning a 4% real return on their investment. The national average for rent was £766 during this period.
Across the north, average rents of £513 were achieved in H2 2016, producing a yield of 7% for investors. In the North West and Yorkshire and The Humber this dipped to 6.4% and 6.2% respectively.
By contrast, greater London yields were 4.4% despite rents being 108% of the national average at £1,591 and 45% higher than its closest rental rival, the South West where tenants paid £1,095 to live in the region.
Andrew Montlake, director, Coreco, said: “The reality is that London landlords have long accepted lower yields mean their borrowing capacity has been diminished to around 60 to 65% loan-to-value, especially given the new rental stress tests being imposed.
“Increasingly, landlords have started to look at ex-local authority properties where higher yields can be achieved or they have begun to look further afield, especially in cities with big student populations. Many, however, have simply had to put more cash into the property to make a transaction work.”
Montlake explained this had helped to reduce the number of amateur landlords buying further property, while professional landlords, by releasing equity from within their portfolios, still had funds to make their business work.
Subdued transaction levels
The number of mortgages for buy-to-let purchases fell by 41% year-on-year in the last half of 2016, as the market cooled following the wave of tax and regulatory changes directed at the market.
CML data revealed 38,300 BTL purchase transactions took place from July to December compared to 65,100 for H2 2015, making the period stand out as the lowest six-monthly transaction numbers since the first half of 2013.
Overall, buy-to-let purchases last year were 13% lower than in 2015, at 102,100. Transactions remain significantly lower than the levels seen during the pre-housing downturn peak of 2007 when 183,280 were recorded.
Phil Rickards, head of BM Solutions, said: “In the second half of 2016 the market slowed as tax changes and Stamp Duty rules inevitably left an imprint on the market.
“However, demand for rental properties remains high and returns have remained strong in the past six months despite the challenges that have faced the market during that time.”