What properties and regions are delivering the best yields?

The latest research from two lenders suggests that yields are rising for most landlords, but what type of properties are delivering the best yields, and in which regions?

Our view and experience to date is that, although more people than expected have bought a home during the pandemic, demand from tenants for rental properties has continued at a pace too. This demand has helped boost returns, as we are finding tenants are willing to pay more for the same things that are proving popular with homeowners, including:

1. Suburban living
2. A garden or balcony
3. Private, rather than communal outdoor spaces
4. Extra indoor space, especially a quiet place for a home office
5. A minimum of two bedrooms

However, it’s important to be cautious about reading too much into the idea that tenants are leaving cities. In our experience, there are still plenty of people who are keen to enjoy city life and, with more rental properties being available for long-term lets due to the lack of demand for Airbnb-style lettings during the pandemic, tenants now have more choice and many have been able to secure a great three-year rental deal.

There is no doubt that over time, tenants have become as discerning as homeowners – and why not? Tenants are spending an average of around four years in their current home and 8.1 years in total renting privately, so it’s certainly no longer considered ‘temporary’ living, it’s a home they want to enjoy living in.

Tenant demand continues to grow in most areas across the UK

According to the latest tenant demand report from The Mortgage Works (part of Nationwide), a much higher percentage of landlords are reporting tenant demand is growing, rather than falling. Some of the greatest demand for rental properties is being seen in the South West, Wales and West Midlands, followed closely by the East Midlands and Yorkshire and Humber.

In the main, rents are rising, particularly in the East and North West

The Mortgage Works rental income analysis shows that 22% of landlords increased their rents in 2020 while around 15% planned to increase rents during the first half of 2021. This does vary by region, with landlords in the East Midlands and North West most likely to raise rents, while those in London are more likely to reduce them.

Which rental types are driving the best yields?

Again, according to The Mortgage Works analysis, although detached houses are popular with tenants, they sit at the bottom of the rental yield chart, delivering around a 5% return. However, we find they tend to grow in value best, balancing profits for landlords over time. Most other property types generate around a 6% yield, with HMOs performing best at 7%.

On a regional basis, the figures vary in a similar way, with historically high capital growth in London meaning yields are at the lower end of the scale, around 5%, while the North, Midlands and Wales achieve anything from 6 to 6.5% returns. Regions in the South and East of England currently sit somewhere in the middle, at 4-4.5%.

Interestingly, the analysis also shows: “Landlords with BTL mortgage borrowing continue to generate a significantly higher gross rental income than those who own their portfolio outright.” And, of course, being able to leverage property through borrowing a relatively large proportion of the purchase funding is one of the reasons it can deliver such a great return.

Yields hit a 3-year high

The Mortgage Works isn’t the only lender to report robust results for landlords’ returns over the last few years. According to Paragon Bank: “during the first quarter of 2021 average rental yields have increased to 6.0%, the highest recorded in three years.” That’s up from 5.8% in Q4 2020.

As a result, landlords are still keen to invest, with 19% intending to grow their portfolio in 2021, especially experienced portfolio landlords with 11 or more rental properties. And despite some news reports suggesting that many landlords are selling up – partly due to a rise in rent arrears and not being able to evict non-paying rents – research shows that only 17% of landlords are actually looking to sell, a fall from findings earlier in 2020.

It’s clear that both the rental and home-moving market have performed extremely well during the pandemic, with yields and prices rising, which has boosted existing landlord returns. And as the country opens up more during the summer, we expect to see an increase in tenant demand, from people moving to new areas due to a growth in home working and also from those that have chosen to put off moving until the pandemic is more under control.

So, whether you are about to re-let your property, are keen to invest in your first rental, or are looking for an additional buy to let, come and talk to us. Our experts can explain the latest needs and wants of tenants in your local area and help you maximise your rental income and investment returns.