Landlords boost returns by following careful purchasing strategy

Countrywide Residential Lettings

Wednesday, March 25, 2015

Tenants and owner occupiers look for different things from their home allowing landlords to tailor what they buy to meet tenant requirements

Yields are increasingly driven by the purchasing decisions of landlords

Rental growth decreases with inflation as the average rent for a new tenant increases 1.7%, falling below the 1.9% uplift seen by tenants renewing their contract for the first time

Countrywide plc, the UK’s largest letting agent, can reveal that the type of properties bought by landlord’s mean that many are able to boost their returns over and above average citied figures.

Most yields are implied, the product of dividing the average rent in an area by the average house price. In reality, however, landlords do not buy the average property. This is increasingly the case particularly in more expensive areas.

Dividing the average rent by the average house price gives an implied yield of 5.3% in the UK. There is, however, a significant difference between the type and value of properties bought by landlords and owner occupiers. Taking this disparity into account by looking at what each individual landlord paid for their property means the average yield jumps to 6.2%. This means a landlord can expect to make an additional £2,500 a year. [See Appendix A]

With tenants living in a property for a shorter period compared to most owner occupiers, what the two groups are willing to pay for is often very different. In turn this difference has a knock on effect on what landlords and those buying a property to live in themselves will look and pay a premium for. For example, in London just 2 in 9 rental properties has access to a garden compared to 6 in 9 homes sold for owner occupation.

Across the South of England in particular, where yields are lowest, landlords are becoming increasingly careful about the type of property they buy to boost their return. While dividing the average rent by the average house price implies an average yield of 4.2% in London, in reality the average landlord is achieving a yield in the region of 5.3%. This is a product of the type of property being let.

For the first time in two years, sitting and renewing tenants saw their rent rise at a faster rate than tenants moving into a property for the first time. A tenant moving into a new property in February 2015 paid on average 1.7% more than in the same month last year. In comparison, tenants who chose to remain in their home and renew their contract saw their rent increase by 1.9%. With newly agreed lets a solid leading indicator of renewed tenancies, it suggests that we might expect to see rents growing at a slower rate over the next couple of months. [See Appendix B]

Table A – Top locations for yield by Local Authority

Local Authority

Yield

Burnley

10.3%

Oldham

10.2%

Knowsley

8.7%

Blackpool

8.7%

Thanet

8.5%

Rochdale

8.4%

Wigan

8.3%

Ipswich

8.2%

Blackburn with Darwen

8.2%

Hyndburn

8.1%

 

Table B – Top locations for yield by postcode

Postcode

Name

Yield

BB11

Burnley

13.4%

SR5

Carley Hill, Sunderland

12.7%

NE32

Jarrow, Tyne and Wear

12.7%

L20

Bootle, Liverpool

12.0%

L28

Stockbridge, Liverpool

12.0%

FY1

Blackpool

12.0%

CV4

Tile Hill, Coventry

11.8%

L14

Broadgreen, Liverpool

11.6%

HU3

Hull

11.3%

M38

Little Hulton, Manchester

11.2%

Commenting Group Commercial Director Nick Dunning said:

“Less experienced landlords should understand that buying a house to let out is very different to buying one to live in. While rising house prices over the last 18 months have squeezed yields, many landlords are still able to achieve a return well in excess of the quoted average.

“The key to securing the highest possible yield is to minimise the purchase price in a way that has only a small impact on the achievable rent. What an owner occupier is willing to pay a premium for isn’t always reflected in the additional rent that can be achieved. This means that the best yields are often achieved on flats rather than houses, properties built in the 1960s rather than by the Victorians and those with small or no gardens.”

-Ends-

Appendix to the press release

Appendix A

The difference between actual and implied yields.png

 

Appendix B

 

The three components of rental growth.png

 

 

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