This article assesses the current buy-to-let market, looking at average rental yields across the country before examining the potential in key UK cities and concluding with an analysis of the pros and cons of this type of investment.
The buy-to-let market
Buy-to-let properties are still regarded as a sound investment, providing that the basic principles of buying the right property for the right price and in the right location are followed. The right place at present appears to be in the North, where landlords are achieving up to 10% yields in some major cities.
Investors tend to consider buy-to-let for two reasons: capital growth on their investment and regular income. While it is possible to achieve both aims, it may be important for an investor to identify their priority at the outset as some properties providing an attractive rent may not see much appreciation. Perhaps the biggest consideration for buy-to- let investors is rental yield: the return achievable via annual rental income expressed as a percentage of the property value.
Average rental yields
While the average rental yield across the UK is 3.5%, in many rental hotspots this can be considerably improved upon. Northern cities are currently seeing the highest yields (Money Magpie, 2021), replacing London’s traditional position as the top spot for buy-to-let investors. The capital suffered due to its combination of high prices and the number of overseas buyers inflating prices then selling due to Covid-19; this resulted in the supply of rental property rising and demand falling earlier in the year.
While the London market is showing signs of recovery with the return of office workers and overseas buyers, attention has turned to cities such as Manchester, Liverpool, Birmingham and Leeds which have all benefited from regeneration projects and have excellent transport links. Such cities are experiencing strong demand for rented accommodation and city centre improvement schemes mean that house prices could continue to rise.
Added to this, the advent of HS2 means that more areas along the route are becoming attractive to commuters wanting to live outside the major cities; the trend for working from home also means that people are looking further afield for a home to rent.
Rising property prices
Escalating prices are the main reason for investing in buy-to-let, despite the increasing regulations imposed on landlords, according to director of London real estate agents Benham and Reeves, Marc von Grundherr. He said:
“I’m a landlord and if you look at the last 40 or 50 years of house prices, there’s only ever been two downward corrections. Overall, prices rise by 50% every ten years and if you add typical rental yields of 4% per annum, this means that landlords are ‘banking’ a gross profit of 9% each year. That seems like a pretty great return to me, especially compared to the volatility of other asset classes such as equities, gold, start-up investing and so on.”
According to the Shawbrook Bank’s `The Changing Face of Buy-to-Let report August 2021′, 28% of landlords bought an investment property during the Stamp Duty tax break, with professional landlords proving the most likely to take advantage of the initiative. The report also found that confidence in the buy-to-let sector is strong, with a third of landlords looking to buy in the next year and many of these are looking in rural areas and the north east.
Widening the net
The rise in working from home means that the commute is no longer the deciding factor in choosing a location, and more people are wanting to live further from town and city centres with access to green space. Also high on renters’ priority lists are properties with gardens and spacious accommodation which can provide a home office, preferably in a residential area with off-street parking.
Landlords are proving swift in reacting to these changing requirements, buying in areas where they can find the best yield, and as a majority of tenants express willingness to pay more if improvements are made, many are carrying out upgrades to add value to their buy-to-let properties and obtain a better return.
With the Covid-19 recovery under way, investors and mortgage brokers are confident about the buy-to-let market based on the demand for housing, low housing stock levels and the fact that for many, getting a residential mortgage remains difficult. Seeking advice from a specialist buy-to-let mortgage broker is advisable. Demand from buyers and tenants is strong, underlining the importance of the private rental sector.
Key cities for buy-to-let
While rental yields per area vary – and are topped by the Northwest at 4.7% and Yorkshire at 4.6% – far better returns of up to 10% can be identified by drilling down into these regions to specific cities. We examine the current top five cities delivering impressive rental yields:
This is the top city for rental yield according to One Touch Property Investment 2021. Liverpool has seen high levels of job creation and benefits from a combination of relatively low house prices and high rental demand from a young demographic. House prices in the L7 postcode area average £95,000 and a 10.30% yield is possible.
According to Rightmove, the average rent in Liverpool increased from £659 in 2016 to £843 in 2021 and asking rents have increased by 28% in the last five years. Property website Zoopla states that the city offers a 10% return on investment in 2021. The average house price across Liverpool is £186,527, the average rental yield is 5.30% and the city has experienced price growth of 8.45% over the last five years.
Buy-to-let investors can expect 6.7% rental yields in key areas: the average rental yield is 5.3%. The average house price is £242,311 and house prices have grown by 15.76% over the last five years. With the highest student population in Europe, Manchester is the biggest rental market in the UK (CityRise, 2021) and is the best UK city for buy-to-let according to Aldermore’s Buy to Let City Tracker.
Manchester has benefited from regeneration programmes, it has competitively priced office space and a strong economy with high levels of employment. Land Registry figures show that Manchester has experienced the highest property growth in the UK in the last 20 years. In terms of capital growth, Manchester tops the table followed by Leeds, Cambridge and London (One Touch Property Investment, 2021). The city is forecast to see the highest property sales price and rental growth in the next four years.
The city can offer yields of up to 6% (CityRise, 2021). Birmingham has a thriving economy and a growing population, indicating a strong demand for rental property going forward. The average house price is £202,162 and the average rental yield is 5.4%. The city has experienced a 14.2% level of price growth in the past five years and over the last decade rents have risen by 30%.
The UK’s fastest growing city is benefiting from various regeneration schemes and enjoys high employment figures. Property prices are expected to rise and the current average house price is £268,037: prices have seen a 9.4% increase over the last five years. While the average rental yield is 5.1%, up to 7% is achievable.
Leeds is expanding quickly as a tech hub and over the past five years the number of Londoners moving there for jobs and culture has risen by 58%. The city is tipped by One Touch Property Investment as being one of the strongest performers in the country in terms of economic development and improved road structure.
House prices here are below the UK average at £214,435. While the average buy to let rental yield is 4.66%, the top yields approach 9%. The city has seen house price growth of 16.92% over five years. There is a large student population ensuring a healthy demand for rental accommodation.
Location is key when considering a buy-to-let property
To ensure a supply of tenants, landlords should consider nearby local employment levels, transport links, schools and social amenities. It may be advantageous to research local authority planning websites to establish where new development or regeneration schemes are planned as these factors could signal house price rises.
Depending on available funds, it may be strategic to consider areas which are improving rather than less desirable districts which may be cheaper, but will achieve a lower rental income. Landlords contemplating managing a buy-to-let property themselves may want to factor in travelling time from their own home which will eat into profits.
Pros and cons of investing in buy to let property
- Regular income
- Potential for capital appreciation over the medium to long term
- Ideally, the monthly rental income will cover the buy-to-let mortgage payments and maintenance costs along with some profit
- Increasing landlord regulation, for instance the requirement to carry out annual gas safety certificates and five year electrical safety certificates. While currently all buy-to-let properties must achieve a minimum E rating on their Energy Performance Certificates, by 2025 this rises to a C rating for new tenancies, and for all tenancies by 2028, which means that many landlords will have to carry out insulation and improvement works
- Rental voids when the property is empty
- Buy-to-let mortgages are more expensive than conventional residential mortgages, often requiring a 25% deposit
- Property is an illiquid asset as capital is tied up; it may be difficult to sell quickly depending on the market should the investment be needed elsewhere
- Tenants may damage the property or not pay the rent
- House prices may fall
- It is no longer possible to claim mortgage interest relief, or relief on wear and tear expenses in the property
- Pay tax – if you act as an individual, you may be placed into a higher tax band
- Dealing with the administration of properties can be time-consuming
- On-going costs: maintenance including repairs and repainting expenses, letting fees and insurance
- Some properties may be liable for service charges or ground rents
CityRise. 2021. Best cities to invest for high rental yield 2021. [Online]. Available from: https://www.cityrise.co.uk/best-cities-to-invest-for-high-rental-yields-2021/ (Accessed 6th September 2021)
One Touch Property Investment. 2021. Best place to invest in UK property in 2021. [Online]. Available from: https://www.onetouchinvestment.co.uk/best-places-to-invest-in-uk-property-in-2021-where-to-buy-uk-property (Accessed 6th September 2021)
Money Magpie. 2021. The big buy to let hotspots in Britain. [Online]. Available from:https://www.moneymagpie.com/manage-your-money/the-big-buy-to-let-hotspots-in-britain-3 (Accessed 6th September 2021)
Property Insider. 2021. Ten best places to invest in UK property in 2021. [Online]. Available from: https://propertyinsider.info/ten-best-places-to-invest-in-uk-property-in-2021/ (Accessed 6th September 2021)
Shawbrook Bank. 2021. The changing face of buy-to-let, August 2021. [Online]. Available from: https://shawbrook.co.uk/media (Accessed 19th November 2021)