The quest for yield amongst landlord participants in the private rental sector is perhaps as strong as it has ever been.
There are many reasons for this of course, not least the downward pressures that have been placed on landlords’ ability to generate a profit from their properties, particularly during a global pandemic, but also when you factor in the now-completed tapered cut to mortgage interest tax relief, the increased regulatory and legal requirements which cost money, and of course, the monetary commitment that is needed to purchase a buy-to-let property in the first place.
Landlords, of course, have sought out vehicles such as limited companies in order to shield themselves against some of those hits to profit, but there’s no doubting that while, in the past, landlords might have been able to stomach properties ‘washing their face’ now there is a real need to secure a stronger yield, particularly for new portfolio additions.
Easier said than done, you might say, given how the pandemic has impacted on tenants’ jobs and income, and the need for landlords to be flexible in order to keep tenants safely housed and for them to be able to afford if not all, then at least some, of their monthly rent.
It is positive to see the country coming out of this third lockdown, and judging by initial appearances, tenant demand is strong, property supply is what it is, and therefore – according to our latest Rental Barometer index – yield appears to be going in the right direction for most regions of England and Wales.
That however has not always been the case over the last 12 months. Indeed, our Barometer carries out a year-on-year comparison for the quarter. Our latest figures for Q1 2021 compared to Q1 2020 might not look like good news for landlords – given that every region has seen a drop in yield – but this is a long way from telling the true story of the current situation. It is a far more positive picture right now.
The reason is that, in a very real sense, we’re not comparing apples with apples when it comes to Q1 2021/20 comparisons because, let’s be frank, last year was a very different time.
Indeed, when we come to produce our next set of Rental Barometer results, I suspect they will look even odder because Q2 2020 was slap-bang in the middle of the first lockdown. Uncertainty was at its highest level, the housing market was ostensibly closed for much of the three months, and we were all wondering just how things might pan out.
However, come right up to date, and you’ll see that landlords can expect, and are already achieving very strong rental yield, particularly in the Northern regions of England, but it is also going in the right direction in nearly all other parts of the country.
With a quarterly comparison, all but one region – the East Midlands – saw a rental yield increase, with some regions up by a significant margin. Yorkshire & Humberside was up 2.5% on the last quarter of 2020, while the North East and the North West rose by 1.2%. Other regions also saw rises, albeit slimmer, with the South West up by 0.5%, East Anglia up by 0.3%, and the West Midlands up by 0.1%. Greater London stayed stable at the same level.
It means yield for the North East was up to 9.1%, Yorkshire & Humberside up to 8.2% and the North West up to 7.8% – again, showing the growing demand from tenants in those northern regions, and offering landlords an opportunity in terms of adding to portfolios in order to generate such returns.
Wales remains something of an outlier because, over the course of the last 12 months, we were not able to generate data to create a meaningful rental yield figure. However, in Q1 2021 it did generate yield of 5.8% and we fully anticipate that as we move through 2021 this figure will rise.
Overall, it’s these kinds of rental yield figures that should give landlords confidence about their portfolio, its ability to generate the income they need, and potentially their interest in adding properties which should also be able to do far more than just ‘wash their face’.
Of course, property investment remains a long-term ‘game’ but a strengthening sector, yield levels being (at the very least) maintained but more than likely to be rising, strong tenant demand, and supply not what it should be, all count towards making this a continuing attraction, not just for existing landlords but new ones as well.
The further good news is in the strength of the buy-to-let mortgage market which is both increasingly competitive and flexible, and advisers who are able to cultivate strong relationships with landlords are likely to be rewarded with good business levels and the ability to offer those clients extremely attractive products, criteria and rates.
Bob Young is chief executive officer at Fleet Mortgages