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Falling Property Prices Boosts Buy-To-Let Yields

October 11, 2012 | Professionals  

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Mortgages for Business’ latest buy-to-let index has shown that gross yields have increased on most types of property in the third quarter of this year. In fact, it was only semi-commercial property, such as flats above shops, that did not see a rise in gross yields.

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Mortgages for Business, a buy-to-let mortgage specialist, believe this rise in rental yields is down to a combination of high tenant demand coupled with falling property prices.

David Whittaker, managing director of Mortgages for Business, said, “The owner-occupier market is sinking deeper into the mire and is dragging property prices down with it.

“It’s great news for buy-to-let investors, who are able to snap up cheaper property, usually at a higher loan to value ratio because lenders are understandably willing to advance more when property prices are lower.”

Mr Whittaker added, “It’s a fairly simple equation: suppressed property prices, plus strong demand for rented accommodation, equals higher yields for landlords.

“Investors are being canny and targeting areas where house prices are particularly squeezed. Anywhere outside the south-east is a particularly rich seam at the moment.”

‘Vanilla’ buy-to-let properties, classed as houses and flats, rose by 0.6% to 6.7% from the previous quarter, according to the research. This coincided with the 3% fall in the property value of vanilla investments from Q2 to Q3 to £210,197. This helped to bump up the average LTV from 64% to 68%, as lenders were more inclined to grant higher LTV deals as a result of lower property prices.

Houses in Multiple Occupation (HMOs) fared even better, with rental yields increasing from 9.2% in Q2 to 11.1% in Q3. However, the fall in property prices was far steeper than for ‘vanilla’ properties, with the average property value in HMO deals plummeting 41% compared to the previous quarter.

Similarly, gross yields on Multi-Unit Freehold Block property increased from 7.5% to 8.8% between Q2 and Q3, as the average property value in deals in this sector dropped from £442,223 to £297,938, a fall of 33%.

The private rented sector has grown by 47.6 per cent in the last five years, and it is expected to continue growing into the future.

James Davis, CEO of online lettings agent Upad, said, “As a result of growing tenant demand, there is strong motivation for landlords to increase their portfolios and take advantage of the market.”

 

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