Landlords haven’t had an easy ride recently. Over the years, taxation and regulatory changes have reduced the profitability of buy-to-let, whittling down the number of landlords with a positive monthly cash flow. Mortgaged investors needing to refinance over the last 18 months have faced considerably higher costs as interest rates have risen, with some investors paying double or triple what had been normal during the past decade. However, those who have stuck it out, have been rewarded by record-breaking rental growth.
Over the last 12 months, average gross yields on new buy-to-let purchases across England & Wales have risen to a new high of 6.9%. This is up from 6.1% in 2019 when house prices and rents were rising at a similar pace.
In absolute terms, this means a typical investor who purchases a £200,000 buy-to-let today will likely receive an extra £1,440 a year in rental income compared to five years ago. However, of course, the reality is that most investors using a mortgage to fund that purchase will not necessarily see that income uplift translate into profit.
Yields have risen in every region across England and Wales. Wales has become the second highest-yielding region in the country, after recording the biggest increase since 2019 from 7.3% to 8.5%.
Meanwhile, London, the lowest-yielding region, saw the second biggest uplift. The average yield achieved on a new buy-to-let in the capital increased from 4.7% in 2019 to 5.7% in 2023, which puts the average return here above those achieved in the other Southern regions pre-Covid. However, the North East remains the front-runner, offering average gross yields of 9.3%.
Rents rising faster than house prices are the main reason why yields have risen. However, there’s also been a shift towards investors actively targeting the top-performing properties and areas. Last year, 13% of new buy-to-let investors achieved a +10% gross yield on their purchase, more than double the 6% who achieved those returns in 2016. For many investors, this has meant purchasing a buy-to-let further away from home, often in the North of England.
Existing landlords have stood to gain from rising yields too. For example, the typical investor who bought back in 2015 and earned a gross yield of 5.1% that year, would now achieve an 8.4% return on their initial investment – as long as their rents rose in line with the market rate. And they’ve likely benefitted from some capital growth along the way too. For many, this equity cushion combined with higher rental incomes has helped reduce the burden of higher mortgage payments for older landlords who have needed to refinance recently. This partly explains why many long-term landlords have been able to stick it out and remain in profit.
Looking ahead, there are several reasons why we think more investors might enter the market this year. Lower mortgage rates combined with the prospect of higher yields start to improve the sums for new investors. Additionally, when the Bank of England begin to cut rates, commercial Banks will likely be hot on their heels to slash savings rates. Meanwhile rents are showing few signs of falling. This will make buy-to-let yields look progressively more attractive relative to leaving cash in the bank.
There’s also the prospect of capital growth to consider. While we don’t expect house prices to pick up much this year, values look unlikely to fall further. And we forecast that price growth will pick up a bit more pace in both 2025 and 2026, led by London.
Overall, our expectation of continued strong rental growth and a bit of a boost from rising property values might be enough to entice a few more investors back into a market they’ve been most absent from since 2017.
