How Times Have Changed
Rental yields are likely to make up a greater proportion of total returns for landlords in 2015.
|Click to download as PDF|
Returns from buy to let investments fall into one of two categories. Income from rent paid to the landlord by tenants and capital appreciation from growing house prices, adding these two together gives the total return for any given year. While these figures are gross, so don’t account for a landlord’s costs, they provide a useful way to understand how landlords’ returns are made up and how they will likely change in future years.
2014 saw average total returns increase to 12 per cent, from 9.3 per cent in 2013. The increase was driven by accelerating house price inflation, prices in 2014 grew by 6.7 per cent across England and Wales versus 4.3 per cent in 2013. Gross yields on the other hand fell slightly as house price growth outpaced rental growth. Average gross yields in 2014 were 5.3 per cent versus 5.7 per cent in 2013.
|Click to enlarge.|
Given total returns were driven by price growth in 2014, the areas with the most price growth saw the highest total returns. Despite yields in London being lower than any other region, a 4.7 per cent, total returns in 2014 were the highest of any region reaching nearly 20 per cent. Total returns were lowest in the North West, at 8.5 per cent, the area with the second highest yields.
Hamptons International forecasts house price growth to slow in 2015, so total returns will likely fall. House price growth and rental growth is forecast to be roughly equivalent, which means yields should remain stable over the next two years. Total returns in 2015 are forecast to average 9.3 per cent, down from 12 per cent in 2014.
|Click to enlarge.|
With lower house price inflation forecast, income generated from the tenancies, will make up a much greater proportion of total returns in 2015 and 2016, shifting from less than half of the total return to nearly two thirds. This means managing income by keeping voids and arrears low will be particularly important areas of focus for landlords over the next two years. But with wage growth picking up against the backdrop of a growing economy, the risk of arrears is falling and the overall outlook is strong for incomes.