Growth vs. yields – the bigger picture behind buy-to-let investment

By Ben Gosling of Commercial Trust

By Ben Gosling of Commercial Trust

While London might be widely considered the apex of property investment locations, some experts have recently advised investors to steer clear of it. This is almost certainly to do with the rental yields in the capital, which – due to the towering property prices there – are outshone elsewhere in the country 1, and therefore fail to justify the entry cost on their own.

This caveat is probably an unfair one. Buy-to-let has become a yield-focused investment in recent times; thanks to rock-bottom interest rates, many new investors have been enticed to the sector by the prospect of income in the short term and have given little thought to future gains.

However, real returns in London at the beginning of the year stood at 14.6%, compared to just 8.9% in other regions, thanks to those same accelerating property prices.

People invest in buy-to-let for different reasons, and there is every reason for someone to favour income over long-term capital gains if doing so fits their specific investment strategy. Most landlords hope to achieve a mixture of the two, however, and therefore investing purely on the strength of gross rental yields may be unwise.

The market elsewhere

The same reports that describe the lofty returns to be found in London paint an unappealing picture of the market elsewhere.

Take the East of England. So far in 2014, the East has been the worst-performing region in terms of year-on-year rental growth for three out of the four months reported; it has seen month-on-month falls in rental income for three out of four months; and yields each month have been around half a percentage point lower than in the same month in 2013.

Yet in those same months, the Eastern region has consistently been one of the best performers in terms of house price growth 2. Unable to buy in London, and faced with spiralling rental costs, more and more professionals are relocating to areas outside the capital where they either rent or buy; in more expensive areas outside the commuter belt, such as Brighton, Hampshire and Surrey, they are more likely to rent, while in cheaper areas, such as Cambridgeshire and Essex, they are more likely to buy. These individuals have a marked effect on both the rental and purchase markets throughout the South.

Because rental values fall in one region does not necessarily mean that house prices will adjust to compensate; however, this disparity does highlight the fact that there is a bigger picture beyond the black-and-white world of rental yields that landlords need to consider.

You can find a good deal anywhere

Ultimately, national, regional and even sub-regional figures show only a summary of the housing and rental markets in a particular area. They are useful tools for comparison and analysis, but on very local levels, patterns are far more mutable.

Investing for yields will help to ensure you have a steady flow of disposable income that you can spend, save, or reinvest in your business. But without the capital returns to back it up, you have little to safeguard your exit should local demand dry up. With the right information and enough planning and research, you can find a good deal anywhere in the country – irrespective of what the latest statistical releases might tell you.


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