YIELD AND TENANT DEMAND – TWO FUNDAMENTAL ELEMENTS IN ANY SUCCESSFUL PORTFOLIO

I’d like to drill down into some of the details which have emerged from Q1 2022 for landlords around yield and tenant demand – two fundamental elements in any successful portfolio.

Yield is an interesting one. It remains a balancing act for landlords who are looking to maximise the return of their investments whilst also factoring in rising living costs for their tenants who, like many homeowners, are feeling the pinch in the current economic climate. Yields will obviously differ when it comes to different property types, hence the current demand for holiday lets, short-term lets and HMOs. However, despite their growing popularity, the vast bulk of the BTL market continues to be dominated by the more ‘standard’ longer-term lets, a factor we have to consider when looking at general trends in rental yield.

THE CURRENT STATE OF THE BUY TO LET MARKET

When evaluating the current BTL market and the additional pressure being placed on people’s outgoings as the cost of living crisis sweeps the UK, there is only one place to start, rent. According to the latest market analysis from HomeLet, the average rent in the UK reached another record high of £1,078 in March, up 0.8% on the previous month. The data showed that when London is excluded, average UK rents stood at £910 – a rise of 0.9% against last month– with all regions across the UK witnessing an uplift in annual variance.

Average rents in the capital are reported to have risen again to an average of £1,770 pcm – an increase of 0.7% on last month’s figures. However, the largest monthly variance was seen in the South West which was up 1.8% to an average of £1,017 pcm. Scotland saw the largest annual variance at 12.9%, pushing the average rent in Scotland up to £770.

MATURITIES AND THE BTL REMORTGAGE MARKET

Coming off the back of a period where the purchase market – from a residential and buy-to-let perspective – made up a vast percentage of intermediary business, advisers are having to refocus somewhat as activity levels are shifting more towards the remortgage market as vast numbers of product terms are expiring across the industry.

This is especially apparent in the BTL sector which is being driven by considerable numbers of five-year fixed rate deals maturing over the course of the year and the ball really is in the court of proactive advisers to make the most of these remortgage opportunities in what remains a highly competitive lending space and an uncertain interest rate environment.

This is evident in a recent webinar poll from CHL Mortgages which outlined that 70% of portfolio landlords expect to remortgage or consolidate loans over the next 12 months.

A D-RATED OPPORTUNITY?

The allure of incentivised lending for properties with higher Energy Performance Certificate (EPC) ratings is certainly escalating. Alongside growing residential awareness, interest and action is also increasing within the landlord community, especially on the back of upcoming legislative changes. This has been said many times but – in light of some upcoming findings – it certainly does no harm to reiterate that, from 2025, all newly rented properties will be required to have an EPC rating of C or above. Currently, properties only require an EPC rating of E or above. Existing tenancies will have until 2028 to comply with the new rule changes.

So what about those BTL properties with a rating of D and below?

BRIDGING THE RENTAL STOCK SUPPLY GAP

According to government figures, the supply of private rented housing in England has fallen by almost 260,000 over the past five years. A new report by Capital Economics warns that, without further action, the deficit could begin to snowball. The report, commissioned by the National Residential Landlords Association, observes that Government targets would amount to the need for 340,000 new homes a year across the UK by the middle of the decade.

Given that renting privately is the first tenure for nearly all young people, demand is only set to increase as the 15–24 age-bracket is forecast to grow by 866,000 (11%) between now and 2030. Modelling by Capital Economics suggests that without changes in tax or other policies, the private rented sector stock will decrease by a further 540,000 properties over the next ten years.

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