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Buy-to-let yields: the London investor’s story – Brian Hall

by: Brian Hall
  • 13/08/2013
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Buy-to-let yields: the London investor’s story – Brian Hall
The buy-to-let market is very different in each part of the country and profitability varies across the country.

With this in mind, I decided to model London versus the UK initially and focus on a geared investor, with an interest-only loan over five years.

I secured regional property price data from the Nationwide. Obviously there were huge differences from one region to another and between these and London

With respect to rental yields, I found that LSL were reporting these were 5.0% in the capital and 5.3% overall, although they ranged from 4.5% to 7.0% in the regions. Their UK figures were pretty close to the 5.14% I had been using from ARLA.

So what did I find out when I compared London with the UK overall? The results are best displayed in the form of the percentage returns graph below:

brian-hall-graph

It is clear that the London market rises and falls earlier than the UK overall. But I was surprised that its behaviour and the percentage returns were broadly similar.

Obviously prices are higher in London – £278,760 for an average first-time buyer property versus £142,930 overall – which makes the numbers more impressive, but in terms of a percentage return on investment there really wasn’t much in it.

Recently, London was doing better, because house prices were rising while they were falling elsewhere, but the rest of the UK appears to be catching up.

It would be interesting to factor in affordability. I imagine that the ratio of income to rents in the capital is higher and the risks of a rental yield correction are greater.

What was really apparent was the boom and bust potential of geared investing, irrespective of the region, and the speed with which things can turn. I included ARLA’s five year returns in the graph to highlight how this can be overlooked.

In fact the model refused to calculate the returns between 1992 and 1996 because my geared investors were in negative equity and it couldn’t calculate a compound interest rate with a negative future value. This is a rather sobering thought.

Over other periods, for example when property prices tripled over 10 years, the returns were truly enormous, as my geared investor received all the capital gain on the entire property in relation to their modest initial deposit.

Brian Hall is founder of The Model Works

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