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Rental yields are going down.
There is no denying this, it’s official. The latest Index of Private Housing Rental Prices from the Office of National Statistics reports that rents went up by 1.1 per cent in England, 1.5 per cent in Wales and 1.2 per cent in Scotland in the 12 months to June 2021. And, as the National Residential Landlords Association was quick to point out, that is less than the rate of inflation. In other words, rents went down in real terms.
Meanwhile house prices have shot up to unprecedented levels. Anybody thinking of buying a buy-to-let property now, will have to be satisfied with rental yields well down on a few years ago.
With the average price of a house now, according to Nationwide, £245,432 and the average private sector rent, according to ONS, £201 a week, an average landlord, buying and averagely priced house, let at an average rent, would be looking at a gross return of less than 1 per cent. And this is assuming the property is let every week of the year and there are no tenant issues.
The actual return will be less, because landlords have expenses to meet such as insurance, repairs and maintenance, agents’ fees, licence fees and more.
On the up side, there will be capital appreciation, perhaps. The amount is not within any one landlord’s control and there are plenty of property market observers who are already saying the current house price ‘bubble’ cannot go on at the same rate.
So far as house price rises are concerned, now could be as good as it gets for a while, says investment advice firm Hargreaves Lansdown. ‘We’re not expecting precipitous falls, but rises are unlikely to be as steep in the coming months’, says personal finance analyst Sarah Coles.
All this is against a background of increasing supervision of the rental market, more rules, regulations and licensing, plus likely law changes. Over the last eighteen months it has been painfully difficult, if not impossible, to persuade or require unwanted tenants to move on. Action has been limited to those who have proved themselves the most disruptive or the least likely to pay the rent to which they have agreed.
While local authorities have become more and more interested in licensing more and more rental properties, there are moves to remove the option of section 21 ‘no fault’ evictions.
No wonder the Mayor of London thinks now is a good time to start buying property from landlords looking to leave the market. ‘With more and more small landlords selling or planning to sell their properties due to changes in tax laws, the Mayor believes it would be far better for these homes to be sold back to the council than to larger private landlords’, according to his office.
Certainly, with property prices so high, and prospects so uncertain, it is tempting for landlords to think about selling out.
The question is, what alternative investments are available. For those wedded to the property market, (and given the experience of the last 30 years, who would not be?), there are a number of possible alternatives. Some require specialist knowledge, such as the commercial property market, but not all. Buying shares in property companies is one option, although obviously not without its risks. Then there is the holiday let market.
With the COVID-19 pandemic making foreign travel problematical, to say the least, the UK holiday let market is booming. Certainly it has had a very difficult eighteen months or so, but anecdotal evidence suggests that this will soon be forgotten. With ‘staycations’ now the vogue, holiday lets in places such as Devon and Cornwall are now charging rents at double the rate of a year ago. And they are fully booked for months ahead.
It is a sector that has no problems with possession, or with rent arrears. What more could landlords ask?
Perhaps it is time for landlords to consider taking their own break.