Yields on larger rental blocks reach new high

Gross yields on multi-unit freehold blocks have risen to 9.3% in Q4 2014, the highest on record.

Average yields on non-standard properties have risen even further above more simple BTL investments, according to the latest results of the Mortgages for Business Complex Buy to Let Index.

Multi-unit freehold blocks (or MUFBs) have overtaken houses in multiple occupation (HMOs) and now provide landlords with the highest gross yield at 9.3% in Q4 2014. This compares to 8.6% in the third quarter and is the highest yield on record for this property type.

Houses in multiple occupation (HMOs) have also seen rental yields rise, to 9% in the fourth quarter of 2014, from 8.9% in Q3. This is slightly lower than the yields recorded earlier in the year where HMO yields stood at 9.6% in Q1. However, compared to vanilla and semi-commercial property, houses in multiple occupations still provide one third more than standard buy to let investment.

The only exception to this trend is semi-commercial property which saw yields fall to 6.4% from a high of 9.7% in the third quarter.

Gross yields on vanilla buy to let properties have returned towards the levels seen in early 2014. For a standard BTL property the equivalent figure is now 6.3%, up from 5.9% in the third quarter.

David Whittaker, managing director of Mortgages for Business, said:

“Rental yields for HMOs and MUFBs are typically higher than those for vanilla buy to let. For a multitude of reasons, not least stagnant wage growth for half a decade, many tenants simply can’t afford an enormous flat with a spare bedroom. As such, the attraction for many of renting a room rather than whole property will ensure that there is a steady yield-boosting demand for HMOs over 2015.”

Across all types of buy to let property landlords have seen loan to value ratios (LTV) fall. The average LTV on a vanilla buy to let mortgage in Q4 was 63%, considerably down from 68% in the previous quarter. Loan to value ratios for HMOs have fallen the most, from 71% in Q3 to 64% in Q4, while both multi-unit freehold blocks and semi-commercial properties have fallen by four percentage points each to 64% average loan to value in the fourth quarter.

David Whittaker concluded:

“While property prices have slowed a little in recent months, landlords have on the whole seen enormous price growth compared to the indecisive direction of property prices a few years ago. Looking ahead, this might spur some landlords to expand their existing portfolios further and diversify as a result of the high yields on non-standard properties.”

The Complex Buy to Let Index has been tracking BTL transactions since 2011. All previous indices can be found here.