Rental yields have always been one of the key factors for any property investor to consider, and in the current shifting market yields are even more crucial.
While the UK housing market continues to hold its own in the face of headwinds linked to rising mortgage costs, limited buyer affordability and external market wobbles, it is a time when many property investors and landlords will be considering the best course of action.
Much research indicates that the majority are still holding onto or even increasing their property portfolios, as in many parts of the country the sector remains particularly strong. This is being backed up by the huge rental demand that is still seeing landlords inundated with enquiries for each listing.
As a result, rental yields for many property investors have held firm and continued to increase in many cases, pushing up the profitability of investments. This is particularly comforting during times of house price uncertainty as the market begins to settle back to a more stable level of house price growth.
Higher yields tempting landlords
According to comments from Michael Cook of Leaders Romans Group, the rebalancing of the market involving slowing sales prices versus an even greater demand for rental property could drive up yields further, making it a more enticing field for landlords.
He points out that during a recession, more people tend to rent than buy – particularly as rising mortgage costs may put off some first-time buyers and keep them renting for longer. The rental market will therefore need to plug this gap.
He says: “A lack of quality rental stock means improved yields due to increasing rental prices and reducing sales prices. We, therefore, expect to see a reduction in the number of landlords selling, which will help supply.
“The buying landscape will still force many potential tenants into the already-congested rental space, with supply unlikely to catch up to the demand quickly enough.”
The fact that fewer landlords might sell up to benefit from the greater yields will have a positive effect on the level of rental stock available, which is good news for tenants.
Cook adds: “In the meantime, landlords should also be seeking value-add approaches to maximise their investment performance such as setting up as a limited company, complete with technical, fund and share structure management services via a dedicated provider.”
“In the middle of difficulty lies opportunity”
Cook uses Albert Einstein’s famous quote to highlight the fact that recessions and periods of economic unease can provide plenty of opportunities to investors looking in the right places.
He notes: “How many people with hindsight now think they should have purchased during the stamp duty holiday in 2021-22, or are landlords who wish they had added to their portfolio in 2008?”
Delaying decision-making can be detrimental to the final outcome. Housing markets are always changing, albeit at a less drastic pace than other more volatile asset classes such as stocks and shares. But this means that adopting a ‘wait-and-see’ strategy isn’t always advisable.
While house price growth did begin to taper off towards the end of last year, most forecasts do not predict a crash, but rather a drop off followed relatively quickly by a return to growth. Mortgage rates are already settling, with most lenders now reducing their rates from the highs of recent months.
Cook points out: “With base rates now at an unexpected high of 3.5% and likely to rise more to combat inflation, the latest forecasts in 2023 suggest there will only be a partial reversal in rises seen over the past two years. It is likely to be a reversal nonetheless.
“There are signs that mortgage rates and availability issues are beginning to settle, following an extremely turbulent couple of months in the wake of the now infamous mini-budget.
“It is equally true that property sales won’t collapse while rental properties remain in short supply, and it is worth noting that in some parts of the country, it is still cheaper to buy than rent.”
