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What Makes Buy to Let a Good Investment?

What Makes Buy to Let a Good Investment?

What makes property investment a good investment? What does the future look like for buy to let landlords in terms of capital investment, rent rates and tenant demand? Consultant Mortgage Broker, James Powell, examines the data and highlights the essential points for landlords.

Capital Investment

In 2005, the average UK house price was around £150,000. The latest figures published by UK Finance indicate that as of June 2021, the average UK house price is £265,000. Over the last decade, the value of UK property has increased year on year, some faster than others but consistently up.

What this shows is that generally, property values are insulated from the broader economic environment. So, in terms of investment, property is a pretty solid bet when it comes to returns (i.e. capital investment). Even at the start of COVID, when the whole property market shut down for a month and a half, property prices held firm and have risen consistently since. While it’s undeniable that some of that was due to intense demand following the stamp duty (SDLT) holiday announcement, they were already increasing before July 7th, when the Chancellor cut SDLT for residential property. 

What about going forward? Well, the experts at Savills predict prices will continue rising over at least the next five years. On average, the UK house price will increase by another 21.5% by 2025. Of course, 2021 has seen incredible inflation of house prices (8% so far), and this will slow over the next four years to an average of 2.75% a year.

If you’re interested in regional hotspots, the North-West and Yorkshire and The Humber lead the way with a staggering estimated 28% increase by 2025.

Region 

2021

2022

2023

2024

2025

Five-year to 2025

North West​

10.5%​

4.5%​

4.0%​

3.5%​

3.0%​

28%​

Yorkshire & The Humber​

10.5%​

4.5%​

4.0%​

3.5%​

3.0%​

28%​

Wales​

10.0%​

4.0%​

4.0%​

3.5%​

3.0%​

26.8%​

Scotland​

9.5%​

4.0%​

3.5%​

3.0%​

2.5%​

24.4%​

North East​

8.0%​

4.0%​

3.5%​

3.5%​

3.5%​

23.9%​

East Midlands​

9.0%​

4.0%​

3.5%​

3.0%​

2.5%​

23.9%​

West Midland​

9.0%​

4.0%​

3.5%​

3.0%​

2.5%​

19.1%​

South West​

8.5%​

3.5%​

3.0%​

2.5%​

2.0%​

19.1%​

South East​

9.0%​

3.0%​

2.5%​

2.0%​

1.5%​

18%​

London​

7.0%​

2.0%​

1.5%​

1.0%​

0.5%​

12.4%​

UK

9.0%

3.5%

3.0%

2.5%

2.0%

21.5%

Savills Research, Oxford Economics.

Ultimately, until a government solves the age-old issue of the lack of affordable housing, demand will remain high and keep property values buoyant.

Rental Income

While capital investment is the long-term game of BTL investment, monthly rental income is an equally important factor. Many landlords use rental income to top up PAYE or self-employed earnings, and as an ageing population, as a pension supplement too. 

According to the Office for National Statistics (ONS), rental prices increased c10% from January 2015 – 2021. While all UK nations have experienced increases, England and Northern Ireland have certainly benefitted from steeper increases. Only a handful of BTL lenders currently accept properties in Northern Ireland; however, we are seeing more enter this market (probably due to the buoyant rental market).

Landlord views reflect these statistics. The Mortgage Works research from Q2 shows that 26% of landlords increased rents in the 12 months to June 2021. A further 29% plan to raise rents before the end of the year.

The good news is that experts predict that rent prices will continue to increase. While growth for 2021 has been a little slow, the next four years will accelerate with total growth by 2025, an estimated 17%.

COVID had a drastic impact on London, with many renters moving out of the city. With a drop in demand came a decline in rent rates, which has been slower to recover than other areas of the UK. Fortunately, as life returns to normal, the experts forecast that rental growth will accelerate from 2022. By 2025, rental prices in London should increase by 19.3% - excellent news for inner-city landlords!

Tenant Demand

Of course, rental rates will only increase if demand for rental homes also rises. The Mortgage Works tenant demand report from Q2 2021 shows another increase in the number of landlords expressing that they’ve experienced a rise in demand over the three months. This sentiment extends to all regions of the UK (bar Central and Outer London). Again, places like Yorkshire and The Humber, the North-East and Wales lead the charge here. With house prices also set to rise steadily in these regions, they’re probably good choices for buy to let investment.

To summarise, the future is bright for buy to let landlords. In terms of BTL being a good investment, all the data points towards strong capital and rent rates returns. If you want to look closer at any of the data (particularly regional), then do get in touch with me, and I’ll be able to help. 

If you want to discuss your property investment plans and the finance options available to you, give me a call on 01732 471651 or email me at jamesp@mortgagesforbusiness.co.uk.

 

Source: ONS, Savills Research for Oxford Economics, The Mortgage Works.

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE