Demand for rented properties is predicted by LSL (www.lslps.co.uk/news) to continue to be strong despite the continued economic difficulty in the UK. They reported the average unadjusted rental yield to be 5.2% which at a time of significantly poor performance across other investment classes and historically low interest rates explains why landlords are flocking to the sector. Things are not as simple as they seem however and landlords should remain cautious.
Annual Returns Don’t Match Up To Yields
With the boom in demand for property in London driven by Banking, overseas investors, migrant workers and the upcoming Olympics it’s easy to forget that in some parts of the country property prices are adjusting downwards. With LSL reporting the average annual return at just 1.6% as capital losses have taken a chunk out of most landlords yields (a rarely reported but important issue facing landlords at present) it is certain that in some regions landlords are sustaining losses despite the current boom in rents and demand.
Eyes Turn To The North
Due to the long term nature of investing in property most professional landlords are well prepared to take a relaxed view when it comes to short term fluctuations. That’s not to say one should be oblivious to opportunity – with house prices in the South East looking fairly stretched (in some areas 10x annual salaries) many savvy investors are looking to the North where housing is more affordable.
This affordability is bolstered by an improved ability to generate cash from those properties – with yields at 8.9% in some areas and mortgage rates becoming increasingly competitive in the Buy to Let sector landlords can definitely grow their portfolios more swiftly in the North of England. There are risks of course, as the economy in the North is more vulnerable to any second downturn in the economy as we saw the first time around as the values of apartments in several Northern Cities plummeted during the economic crisis.
As Lending Competition Heats Up Professional Landlords Must Not Be Frozen Out
A disappointing trend this year has seen many professional landlords having to spread their portfolio across a number of lenders and sometimes on less than ideal products because lenders have taken the view that only two or three buy to let mortgages can be held for each landlord. As buy to let rates continue to improve due to lender competition and money market conditions it will become increasingly difficult for lenders to do enough business soley with small retail landlords. They will need to consider returning to the professional buy to let mortgage market and attracting larger landlords.
The new supply [from increased lending] will not be enough to meet demand from tenants.
David Newnes – LSL
So with landlords not currently meeting the demand for housing and lenders finding competition really hotting up in the market let’s hope this signals a reversal of the tougher criteria professional landlords have seen.