Profits on Buy-to-Let -“ Does it exist?
Tuesday, 16 April, 2013
Approximately 1 in 5 UK households will be renting by 2016 which will require 1.1 million rental homes to become available. Given this, there is a need for new buy-to-let landlord to enter the UK housing market in order to meet this demand.
There are around 4.8 million privately rented homes in the UK, up from around 2.3 million in 2002. Around 27% of all homes in London are privately rented -“ 900, 000 of which overtook social renting in 2010.
According to a leading property investment specialist (Invest Connect), many new landlord are being discourages from entering the buy-to-let market due to the expectation of low profit returns and a shortage in availability of buy-to-let mortgages.
Currently however, lower capital values and rising rents are providing landlords with a handsome return on cash -“ even more so than the banks. Therefore, in real terms, can investments in buy-to-let properties provide a profit if you were to act now?
The Business Development Director at Invest Connect notes that investors must take a long term view when evaluating value. He explains that a property bought in 2003 would typically show a decent increase in capital value by now -“ however a property bought in 2007, if outside of the London area, would not yet be showing any return. He goes on to reiterate that property value has doubled every seven to ten years for the past 50 years. Property values increased by 50% during the period 2002-2012 even with the property crash of 2007 which suggests that over the next decade, property values will again double. Capital growth of course is not the only aspect to seeing a return on investment -“ profit can also be seen through rental returns, by refurbishing or adding value to a certain property and by many other avenues.
Rightmove have noted that around 66% of their tenants are expecting a rent increase over the next year. Rent has actually increased by 5.2% over the past year on average -“ while Savills expect that over the next five years rent will grow by 20%.
Yields have a large range across the UK with a value of 7.8% for the top 10% of properties to 4.4% for the bottom 10%. At a micro level, London shows the greatest range in yields, with the best performing 25% of locations reaching a yield of around 7% – while the bottom 25% yield only 3.9%.
The highest value rent locations are all in the South East of England – these locations are Elmbridge, Oxford, Brighton, Hove, Woking and Reading. At the other extreme, the lowest value rent locations are Bradford, Kirklees, Warrington, Sheffield and Coventry -“ all in the North and the Midlands.