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Strong buy-to-let returns feed 2010 optimism

Monday 18th January 2010

Landlords saw a 7.6 per cent annual return on their investments by the end of December 2009 according to an index from LSL Property Services, the owner of Your Move and Reeds Rains.

The value of their properties rose three per cent over the year while rental income after void periods added a further 4.6 per cent. This means in 2009, a typical landlord made a return of GBP 12,740. This was a combination of modest capital gains of GBP 4,831 on each property and GBP 7,909 in rental income.

In 2008, a typical landlord would have lost 8.8 per cent even after allowing for rental income. They lost GBP 23,000 in capital as the property fell in value, and earned GBP 7,900 in rent for the full year, leading to a total loss of GBP 15,100.

David Brown, commercial director of LSL Property Services, said: “Despite the worst recession in living memory, and despite house prices continuing to fall for the first few months of 2009, investment returns in buy-to-let were very respectable. The GBP 12,700 the average landlord made on a rented property during the year recouped most of the losses in the housing crash of 2008. Brave landlords who added to their portfolios will be celebrating an excellent year.”

The trend in prices continues to be favourable. Landlords’ properties rose in value by 0.4 per cent in December.

By contrast, the average UK rent fell slightly in December, down 0.4 per cent to GBP 661 per month. Rents have corrected slightly since September giving up a third of the sharp rent rises in the summer, said LSL.

However this was largely driven by falling rents in the large London and South East markets, the only two markets to have seen three consecutive months of rent declines since September. Rents ended 2009 0.2 per cent higher than the previous year.
Yields ended the year at 4.8 per cent. They fell from a peak of 5.1% in March as the recovery in house prices outstripped growth in rents. They remain well above the 4.2 per cent trough at the peak of the housing market at the end of 2007, when interest rates were far higher than today to boot.

Arrears performed very well in 2009, despite the recession. On average 11.7 per cent of rent was unpaid by the date it was due, down from 14.5 per cent in 2008. By the 31st of December 2009, 12.5 per cent of rent was unpaid, far less than last year’s Christmas peak when 15.9 per cent of rent was late. Serious arrears held steady, with 1.1 per cent of rent still unpaid three months after it was due. At the end of 2009, GBP 282m of rent was unpaid by the date it was due, down from GBP 346m at the end of 2008.

David Brown continued: “Arrears were the big surprise of 2009. Contrary to expectations tenants would fall behind with their rent as the recession and unemployment bit, arrears have been lower. This is first because tens of thousands of delayed first time buyers, whose finances tend to be stronger, have stayed in rented homes and second because landlords, with an eye on their cash flow, have been paying close attention to their rents, spotting problems early and keeping on top of their rent collection.”

2010 is set for stronger returns than 2009. If house prices continue to rise at the current modest rate of 0.4% per month, equivalent to 4.9% for the full year, a typical landlord will make a total return of GBP 16,000 in 2010, equivalent to 9.8 per cent.

David Brown said: “2010 is likely to be an interesting year for the buy-to-let market. The proposed introduction of regulation should help filter out unscrupulous mortgage advisers, which will be positive for the sector, particularly for inexperienced landlords. The downturn has already pushed many of the short-term speculators out of the market too. Buy-to-let is an essential part of our housing market – we need well capitalised, experienced, professional landlords. With returns rising, they can once again look forward to investing more in the sector to meet our housing needs.”

Chris Norris, policy manager, NLA, said:
"A 7.6 per cent annual return on investments is going to make many landlords smile as we go into 2010.
"Although rental yields may have dipped slightly during 2009, according to LSL, rent arrears were lower than the previous year and property prices are gradually climbing.
"Whichever set of figures are investigated, it's now clear that the private-rented sector is recovering well from a period of instability. What we need to see is the opening up of credit so that those landlords wishing to expand portfolios are able to do so."

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