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Rental yields fall

Private landlords saw average rental returns fall in the second quarter, the latest buy-to-let data shows.

JUNGLEdrum

buy to let stress imageAverage rental yields on buy-to-let properties fell in the second quarter of this year, the latest buy-to-let index compiled by Mortgages for Business shows.

Returns on residential rental properties fell from 6.4 per cent to 5.8 per cent between the first and second quarters of 2015, led by declines in the Houses in Multiple Occupation (HMOs) sector which saw yields drop 1.3 per cent to 9.3 per cent.

The figures also reveal that the average loan-to-value (LTV) ratio in the second quarter of 2015 for standard buy-to-let and multi-unit freehold blocks remained unchanged at 66 per cent and 67 percent in relation to the first quarter of this year.

David Whittaker imageDavid Whittaker (left), Managing Director of Mortgages for Business, said, “While rental yields are still robust they seem to have lost the momentum they were gathering between the end of last year and the start of this one.”

But Whittaker pointed out that multi-unit freehold blocks seem to have avoided the yield downturn, demonstrating once again that complex property types produce higher yields “because they offer tenants more features and facilities”.

He added, “While many landlords had hoped that the improving economic climate may have pushed loan-to-value ratios even higher, the figures appear to have stalled. Property values dipped in the second quarter, but so did average loan amounts, suggesting lenders are waiting for more signs of economic improvement before they lend any more relative to the value of a property.”

Some analysts believe that the Chancellor’s decision to cut mortgage interest relief on buy-to-let homes last week in an effort to create a “level playing field” between prospective landlords and those buying their homes to live in, along with the decision to abolish the Wear and Tear allowance, may discourage new landlords from entering the sector, while others may now decide to sell up creating more much needed stock for estate agents.

Conversely, there are some experts who expect some landlords to increase rents to compensate for the loss in profit.

grainne_gilmour_knight_franGráinne Gilmore (right), Head of UK Residential Research at Knight Frank, said, “This is a significant change in tax status for those with a rental portfolio, although the measured rate of introduction between 2017 and 2020 will help landlords plan their approach.

“If the relatively low yield environment seen today, especially in the South of England, is still evident when these changes start to come into force, there could be upward pressure on rents.”

July 16, 2015

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