Buy-to-let returns attain document excessive as a result of rising rents

Higher costs and stricter regulations have led to a gloomy atmosphere among buy-to-let landlords. 

However, new figures show that despite this, the typical property investor is still enjoying bumper rental returns.

The average gross rental yield on a newly-purchased buy-to-let in England and Wales has reached 7.2 per cent, according to estate agent, Hamptons – a record high. 

The figure has surged from 6.7 per cent last year and 6.2 per cent in 2022.

The gross rental yield is the percentage of return an investor can expect to make back on the purchase price each year, before tax and other costs are taken into account.

For example, if a landlord made £10,000 in rent per year on a £200,000 property, the yield would be 5 per cent. 

The rise in yields has come on the back of rental prices spiking since 2020 and house prices effectively flatlining since 2022.

The average UK rental property costs £1,331 per month, according to the latest figures from tenant referencing company HomeLet.

Although house prices did rise sharply during the pandemic, they have remained flat since the summer of 2022, according to Land Registry figures.

However, rents have continued to increase during that time. Average rents have risen 40 per cent since June 2020, according to HomeLet – after going up by only 4.4 per cent between June 2016 and 2020. 

This has made it easier for landlords to buy properties with higher yields.

Aneisha Beveridge, head of research at Hamptons said: ‘Gross yields on new buy-to-let purchases have picked up a fair bit over the last few years, reaching a record high in 2024.

‘This is predominantly because rents have been rising faster than house prices, but we’ve also seen investors become more yield-focused, actively targeting the highest-yielding properties.

‘We think that rents are likely to continue outpacing house price growth over the next few years too, albeit slightly less of a gap than we’ve seen over the last few years.’

For mortgaged landlords, though, higher interest rates will be eating into their returns.

Both the average two-year and five-year fixed rate buy-to-let mortgage are currently hovering around 5.25 per cent, according to Moneyfacts.

It means a typical landlord requiring a £200,000 interest-only mortgage on a five-year fix will need to pay £875 a month in mortgage costs if buying or remortgaging at the moment, excluding fees.

Prior to interest rates rising in 2022, landlords were enjoying average rates of around 2.5 per cent. On a £200,000 interest only mortgage that equates to £417 a month.

‘Higher costs and mortgage rates do obviously offset a fair chunk of this growth,’ said Aneisha Beveridge of Hamptons.

‘Even so, falling mortgage rates meant that a typical higher-rate taxpaying investor who purchases a buy-to-let in Great Britain today with a 25 per cent deposit should typically turn a profit in the first year which is certainly a step in the right direction.’

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Although landlords are still likely to make money, higher rates and more regulations are still putting some of them off.  

The proportion of homes being bought by landlords has fallen to a 14-year low, according to separate research by Hamptons.

It reported that only one in ten homes sold during the first half of this year went to a buy-to-let investor – the lowest share since its records began in 2010.

But Beveridge feels that the tide is about to turn and investors will start seeing the positives again.

‘Our view is that we might start to see investment in buy-to-let pick up a little over the year ahead, albeit from a very low base,’ added Beveridge.

‘Bank of England rate cuts will mean banks will swiftly reduce savings rates, which might start to make buy-to-let look more appealing as an asset class than it was.

‘But there’s still uncertainty about the tax and regulatory backdrop which will mean investors remain cautious.

‘Any growth in the sector is likely to be led by experienced landlords, rather than new entrants.’

Where have yields increased the most? 

All areas of the UK have seen buy-to-let yields jump dramatically.

The North West has seen the biggest jump in average yields over the past two years, moving from 7.1 per cent to 8.4 per cent.

This would mean a typical landlord investing in a £200,000 property will now be getting £16,800 of rental income per year compared to £14,200 two years earlier.

Wales has also seen a significant jump in rental yields, according to Hamptons. Landlords were securing an average yield of 7.5 per cent in 2022. This year they are securing 8.9 per cent. 

One area that is starting to look a little more attractive for buy-to-let is London.

The capital saw gross average yields fall to a low of 4.5 per cent in 2017 following years of high house price growth.

However, with property prices in London having stagnated, rental yields have been improving.

The average London buy-to-let investor is now securing average rental yields of 5.7 per cent. 

Allison Thompson, national lettings managing director at property firm, Leaders Romans Group, believes buy-to-let is still an attractive investment.

Thompson says: ‘Provided you conduct solid research into the local market, buy well and ensure the property is let and managed professionally, you can still generate a rental income yield that’s in excess of the returns you could get from other financial investments.

‘Rents are currently rising at a rate over inflation, which should help make buy-to-let more financially viable, and prices are maintaining a steady upward trajectory, meaning your equity should increase over time as well. 

‘Of course, markets and trends naturally cycle and fluctuate, so to see the best returns, you need to be prepared to invest for the medium to long term – around 15 years or more.’