Since the Covid-19 breakout in 2020, buyer habits changed drastically across the property market. As working and living norms shifted, many home seekers migrated to rural towns outside of large and busy cities as the need to commute to the office was no more. Not only that, but the search criteria amongst movers also started to focus on larger, detached homes rather than semi-detached, terraced, or flats. But as the demand for these property types quickly emerged and prices started to spike, rental yields across the UK started to suffer. Despite rent prices also increasing during and since the pandemic, they haven’t quite kept up with asking prices, and that gap has led to a record low for buy-to-let yields, leaving many investors anxious.
How have property prices changed?
Mortgage lender Halifax has recently reported the steepest monthly increase in the average house price in the UK. In June, that number hit £294,845, which is a 1.8% rise from the previous month and the largest monthly jump in 15 years. Year on year to June, prices have gone up by 13%, which is the highest annual increase since 2004.
On a regional level, homes in Northern Ireland have seen the largest annual increase of over 15%, followed by just over 14.3% in Wales and 14.2% in Southwest England. The average house price in Scotland has also made history, having surpassed £200,00 for the first time.
Managing Director at Halifax, Russell Galley, explains that one of the reasons for soaring property prices is the cost-of-living crisis, which has a stronger impact on those on lower incomes. Those on higher incomes are more active in the property market, having been more likely to save during the pandemic, and now having the ability to dedicate those funds to moving homes. Galley adds that “Demand is still strong, though activity levels have slowed to be in line with pre-Covid averages, while the stock of available properties for sale remains extremely low”, putting some of the blame on the UK’s low rate of home supply.
How have rents changed?
Rent prices across the country have also seen some significant growth in the last year. HomeLet has reported that, for June 2022, the average rental price was £1,103 per month. That’s an increase of over 1% since May and 10.5% since this time last year. London’s rent prices have seen the largest boost, with nearly 15% up since 2021. The rest of the UK has increased by just under 9% year on year. But while rents have risen at their fastest rate in five years, the demand amongst tenants doesn’t quite meet that of home buyers.
HomeLet explains some of the main issues around rising rents and their halo effect: “There is a shortage of housing in this country, and this is a phenomenon that is only getting worse as many landlords are deciding that they would prefer to leave the market altogether. If we continue to see a decline in the number of landlords, tenants are likely to pay the price, as a shortage of supply will see an increase in demand, making further price rises inevitable.” – Rob Wishart, Head of Business Intelligence at HomeLet
Soaring prices have led to nearly 80% of renters revealing that their primary concern is how they’ll pay their rent, and landlords admitted that their tenants’ ability to pay is their main concern. As a result of this – combined with reduced profitability prospects – a general apprehension around landlords selling up has emerged.
How have rental yields been affected?
Landlords have been affected by soaring inflation and rising interest rates like everyone else. Mortgages and taxes have been amplified, and regular expenses such as sourcing tradespeople to fix a boiler or replacing furniture have also shot up. To try and make up for the added costs, those extras have been passed onto tenants and their monthly rents, but margins remain tight as affordability amongst renters is also pushed to its limit.
In terms of suitable profitability from property, around 5-7% rental yield is normally a good standard to aim for. Around 3-5% is the average but margins could be tight, and 0-3% offers a high likelihood of unprofitability. The current gross rental yield in the UK is 4.38%, which sits in the middle of the ‘average’ band. However, for the UK buy-to-let market, this is a new low, and worries of landlords selling up due to tight margins are trickling into industry predictions for 2023. The average net profit for a new buy-to-let property is expected to drop by 15%, and experts predict that “next year, the margin between rental income and mortgage costs will become the most squeezed it has been since the financial crisis,” leaving very little room to make a substantial profit from buy-to-let property.
Is it still worth being a landlord?
While rental yields have dropped to new lows, it’s still possible to find lucrative property. Potential returns will vary based on factors like location (this can get quite granular, with different postcodes in the same town offering vastly different return prospects), as well as property type and size. But with profit margins falling below the country’s historic standard, investors will need to be quite savvy with the property and investment type they choose.
The below map shows the top regions in 2022 for average rental yield.
All the above have a combined average yield of just over 9%, which are very strong results. It’s also unsurprising to see most of the top contenders being in the northern part of the country, which gained population during lockdown as many office-based workers moved away from busy and expensive southern cities.
The average asking price in these areas ranges between £54,526 and £286,470, with the average rent per calendar month (PCM) ranges between £483 and £2,328.
How to invest reliably in property in 2022
Regardless of the inflation rate, being a landlord is always an expensive way to enter the property investment ladder. It’s not just the weighty upfront costs and ongoing expenses you should be mindful of, but also understand the capital gain potential as much as your rental yield. Rental yield is the annual return that is generated through rental income, while capital gain the value increase of the property over time, so both of these will need to produce a profit that works for you.
At the very least, it can be daunting and time-consuming to go through the buying process, manage physical property, and manage tenants, so a more suitable option could be the hand-off approach of indirect property investing. At Propiteer Capital, we offer a Residential Rentals bond, through which you can enjoy reliable, fixed returns of up to 5.5% pa without the worry of soaring inflation, rising interest rates, or finding the right property. Our bond comes with the following convenient benefits:
· Renting of completed buy-to-let apartments
· Popular locations in transient cities
· Purpose-built, quality living units
· Acquisition based on rental income
· Recession-resilient asset class
Particularly for risk-averse investors and during an uncertain time for the rental property market, steady returns could be a suitable option, with clarity on the profit you can expect at the end of the bond term.
To find out more about Propiteer Capital and our bonds, visit our website or browse our portfolio to see some of the great projects we have worked on and have ongoing that you could get involved in. You can also find updates on new and exciting developments on our LinkedIn page.
Rates are accurate at the date of publishing. For our latest rates, please visit our homepage.
Recommended Read: Inflation and Its Effects on Savers’ Buying Power