Buy-to-let yields - an assessment

I was interested to read a recent bit of research by Savills on buy-to-let yields across the UK.

The report in the FT indicates that rising rents are having a beneficial effect on residential investment yields.

A residential investment yield simply measures the relationship between capital values and rents. Its a key metric for any landlord in assessing an investment.

The report shows unsurprisingly that rental yields in London and the south are the lowest with gross yields being 5.29% for Greater London & as low as 4.37% in Bath. The highest residential investment yields can be found in Liverpool and Manchester which record 6.89% and 6.43% respectively.


What do residential yields show us?

The interesting aspect of a residential investment yield is that in much the same way as dividend yields can indicate the market perceived view on the potential for capital growth and risk. A low residential investment yield is not therefore bad. For instance, take Bath for example. At just over 4% a landlord is unlikely to be buying such a property for income. However, what the figure implies is that there is strong demand for these properties & it is confident about future continued capital growth. Comparing Bath to Manchester and Liverpool, the market suggests that it is less confident about house prices in these two cities. Knowing the demographics of the two areas I would say that this is a fair assessment. We have witnessed recently in the decline in houses prices that prime towns and cities such as Bath and parts of London suffered less from house prices falls and recovered more strongly than other parts of the UK earning them the reputation of 'Teflon Towns'.

Lies Damm Lies and Statistics

The difficulty with statistics such as those produced by Savills is that they do little to measure the real yield that landlords are achieving on their investments. This is because they measure average capital values of property in an area and then use the average rent achieved. However, property investors will generally target certain types of property such as 1 & 2 bed apartments. The general rule for yields is that these increase the smaller a property is. Yields for a single room or HMO will be highest, whilst those for a large detached property are lowest.

As investors will generally target higher yields then the actual yields being achieved by landlords I would suggest are somewhat higher than those suggested by the Savills figures.

Target yields

Personally, I am not confident of house price growth in the UK over the next 5 years or so. I do think that landlords need to reorientate them to an income led investment approach where capital appreciation is an added bonus not necessary a 'given' as it has been for the last 20 years. I'm therefore setting a target yield of around 8%. To me that gives a reasonable cushion on finance costs when interest rates rise and also a fair compensation for the added hassle of having to manage a property rather than investing in a more passive form of investment.

Do you have a target yield? I'd be interested to know what yours is & whether landlords are still going for capital growth, income or both when making investments.


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