Where Do Landlords Earn the Highest Rental Yields?

Covering rental income changes, tenant demand, and regional hotspots, The Mortgage Works Buy to Let Barometer report provides landlords with an insight into what’s to come for the private rental sector.

Earlier this month, The Mortgage Works (TMW) published its quarterly Buy to Let Barometer. It’s important to remember that this data reflects landlord intentions and profitability levels of Q4 2022. The report details rental income trends, tenant demand updates, and landlord confidence levels by region. The Barometer provides landlords with valuable insight into where the market could go in the coming months and what other investors plan for their portfolios.

Average Buy to Let Portfolios

The TMW Barometer looks at landlord portfolios, intentions, and overall confidence in the market. The report found that the typical landlord has 7.5 properties within their portfolio, generating an average rental yield of 5.7%. Both findings saw an average decrease from Q3 2022, at 0.5 and 0.1%, respectively. In contrast, the percentage of landlords with at least one buy to let mortgage increased by 4%, to 65%. Despite interest rate rises toward the end of the year, these slight shifts in figures reflect landlord resilience and stability within the market.

Do Landlords Plan to Buy in 2023?

Looking more closely at purchase and sales intentions, it’s clear that confidence in the sector is still low, with landlords more than three times more likely to sell a property than buy in the next 12 months. The report also found that just 9% intend to buy, which is a 3% decrease from the previous quarter.

Conversely, this is a stark difference from the recent Landbay landlord survey, where 42% said they intended to purchase property this year. This difference demonstrates just how quickly things can change in the market, especially as interest rates continue to settle.

Landlord Confidence in Capital Gains and Rental Yields

When asked how upbeat they felt about the prospects for capital gains and rental yields, on both accounts’ landlords showed a significant drop in confidence. 48% had high expectations for capital gains in 2021, which dropped to 22% in 2022. This decrease is likely driven by expectations that property prices will soften during 2023. However, experts anticipate the downturn to be short-lived, with full property value recovery over the next five years.

56% of landlords surveyed were upbeat about rental yields in 2021, but just 37% for 2022. Since rents are still rising and are predicted to continue due to increased demand for rental property, landlords can expect improved yields throughout 2023.

Average Buy to Let Rental Income

The report highlighted that Q4 saw an average gross rental income of £62,000. This is a decrease of £2,000 from the previous quarter, but still up by £3,000 from the same period last year.

With rising rates, many landlords increased rents in order to cover the rise in their mortgage costs. TMW found that 58% had increased their rents in the last 12 months, and a further 46% plan to increase their rents in the next six months.

Average Buy to Let Rental Yields

The report also highlighted the highest average rental yields by property type, with HMOs taking the top spot (6.4%), shortly followed by blocks of flats (6.2%) and detached houses (5.8%).

From a regional perspective, Central London maintains the highest average gross rental income of £90,000, which remains higher than all other regions despite the £4,000 decrease from Q3 2022. What’s positive to see is that six of the eleven standard England and Wales regions also achieved gross rental incomes higher than the average of £62,000, showing a positive distribution of market activity across the UK. Regions included Yorkshire & Humber, the South West, South East and East of England. Regionally, the highest average rental yields were found in Wales at 6.4%, the North West and the East of England joint at 5.7%, and the South West at 5.6%, compared to the UK average of 5.7%.

Tenant Demand Report

The report also has a means of measuring Tenant Demand. TMW use a calculation of:

% of landlords reporting tenant demand growing significantly or slightly
MINUS
% of landlords reporting tenant demand decreasing significantly or slightly

For Q4, the Tenant Demand Index (TDI) came in at +62, just slightly down from last quarter’s +63. Perhaps unsurprisingly, the most substantial increases in TDI scores were from landlords with properties in Central London. These landlords have seen an increase of 17 points from the previous quarter to +75, closely followed by the North East to +72. We suspect tenant demand returning to city areas following the end of the pandemic is driving these results.

Regional Snapshot Report

The report considers several metrics to measure landlord success and sector dynamics when looking at regional data.

The UK averages, compared to the regional breakdowns, provide landlords with a summary of key UK areas to consider for their next investment. As such, it’s important to review both sets of data separately in order to get the complete picture.

Looking at profitability, the report found that, on average, across the UK, 54% of landlords found their lettings supplemented their day jobs, and a further 27% found they made a profitable full-time living from their investments.

In terms of difficulties faced, on average 32% of landlords had tenants in rental arrears over the past 12 months, and a further 24% faced void periods in the last quarter. The number of properties within an average portfolio was 7.5 at the time of the report, and, on a positive note, 65% of landlords reported an increase in tenant demand.

Reviewing the same metrics on a regional basis should give landlords a good indication of where the investment hotspots are. Wales and the North West saw the highest percentage of landlords whose lettings supplemented their day jobs, at 60%. The North West also had the highest percentage of landlords making a profitable full-time living, at 31%.

The North East and North West had the highest percentage of landlords dealing with rental arrears, at 49% and 44%, respectively, a significant increase from the UK average of 32%. Similarly, the East and West Midlands had the highest number of landlords facing void periods in the past quarter, at 31%.

Yorkshire and The Humber saw the highest number of properties in the average portfolio, at 12.9, nearly double that of the UK average. This is closely followed by the East Midlands at 12.7. Unsurprisingly, Central London saw the highest number of landlords reporting an increase in tenant demand, at 79%.

In summary, the report reflects the widespread uncertainty felt by landlords. While there are certainly positives, including the resurgence in rents and demand for city properties, ongoing legislation uncertainty, mortgage rate disruption, and the cost-of-living crisis are significantly impacting sector confidence.

The fact remains that the UK desperately needs good quality rental homes to provide affordable housing for millions of people. Consequently, demand will remain high, keeping rents at a good level. We also can’t ignore the disparity between the TMW and Landbay reports regarding purchase intentions. The outlook found in the Landbay survey was considerably more optimistic, suggesting that the true sentiment lies somewhere between these two reports. Furthermore, every landlord experience is unique, and we’re speaking to plenty of landlords keen to expand their buy to let portfolios.

If you’d like to discuss your next property investment plans, please get in touch with our expert brokers. Their understanding of the market makes them best placed to support you with your property finance needs. Get in touch by calling us on 0345 345 6788, or by submitting an enquiry here.

1st March 2023