Growth in the property market has significantly altered the UK Buy to Let landscape in the last 12 months. While the number of people renting continues to increase across the country, rising house prices mean rental yields have been squeezed in many areas.
For some landlords, higher prices have meant they have been priced out of many locations in London and South East England altogether, while others have chosen to accept a smaller yield in return for higher capital gains on their investment.
Still affordable homes and high rental demand
Even with rising prices, there are still many locations areas where property is affordable and demand for rental homes is high. In addition, many would-be landlords can now benefit from the growing number of great Buy to Let mortgage deals.
So, if you have a cash deposit of 25-40% LTV, where should you invest?
London yields have been hit by rising prices
London boroughs have been worst affected by the slowdown in rental yields. According to HSBC’s Buy to Let report (released on 28 May 2015) some of the most popular areas in London have seen rental yields fall by as much as 18% (e.g. Newham).
At the same time, many popular commuter locations have seen prices rise as people move out of the capital in search of better value of money. This changing picture means that new landlords will have to do their homework to make sure they find the right rental location.
Manchester is number one
Manchester is the UK’s number 1 Buy to Let location according to HSBC’s 2015 report. Currently landlords can expect a rental yield of 7.98% here, the best in the country.
While this figure means that national yields have slowed (which is to be expected in a rising market), Manchester still offers great opportunities because the market here has only seen modest rises over the last 12 months.
Average house prices are £108,870, only 4% higher than the previous year. At the same time there is high demand for rental property in the city, due to its high population of students, its growing job market and its well established regional, national and international transport links.
Hull has many opportunities
Second in the HSBC Buy to Let report is Kingston Upon Hull, where rental yields are 7.81%, an increase of 4.5% in the past twelve months. One of Hull’s biggest attractions is its low prices – the average home costs just £69,135.
However, a closer look at the market suggests that this area is best suited to long-term investors, as average prices have declined in all sectors over the last 12 months. Those who focus on rental yield rather than capital gain will be well placed to reap the benefits of this location’s affordability.
Buy to Let growth in Blackpool
Third on the list, Blackpool is reported as offering a rental yield of 7.35% in 2015. This is an area that offers landlords below average house prices (currently £79,654) in an attractive seaside location popular with families.
However, like Hull, Blackpool is a Buy to Let market that is most suitable for long term investors, as average prices in the area have declined slightly (-4%) over the last year.
The best investment opportunities are apartments, which have increased in value by 2% since June 2014, and five-bedroom properties, whose prices have increased by 8%.
Forest Heath shows the benefits of local knowledge
The area of Forest Heath in Suffolk has seen a 38.7% increase in rental yields in the past 12 months, propelling it to fourth on HSBC’s Buy to Let list. Today, landlords can expect an annual rental yield of 7.26%.
The dramatic rise in demand in this location shows how in-depth knowledge of a local market can help landlords to make the most of their investment. In this case, the phased expansion of US forces at RAF Mildenhall has caused a significant spike in demand for rental homes, from which well-informed landlords have benefited significantly.
Market recovery makes regional cities attractive
Just as in residential sales, the Buy to Let market is witnessing the rise in popularity of the UK’s regional cities. Next on HSBC’s hot list are Coventry (rental yield 7.2%), Southampton (7.13%), Nottingham (7.04%), Liverpool (6.56%), Cardiff (6.38%) and Portsmouth (6.36%).
All of these locations offer residents easy access to jobs, transportation, shopping and leisure facilities, as well as good schools, colleges and universities.
While each location may look equally attractive, in fact prospective landlords should be careful when making assumptions about the future profitability of their investments.
Coventry, Liverpool and Cardiff are all areas where house prices have been well below the national average for several years, and where house price growth remains modest. This would suggest that rental yields are likely to continue to be good in coming years.
Avoid the fastest growing markets
Just like other popular rental markets such as Oxford (-11.7%), Brighton and Hove (-8.8%) and Newham (-18.3%), some regional cities have seen rapidly increasing prices as house price rises outpace rent for the first time. This makes them poor Buy to Let locations in terms of their rental yield (although not necessarily in terms of their capital gain).
Make sure you understand your location
The HSBC report suggests that good rental yields are still available across the UK. However, it also shows that landlords will really need to know and understand the local market to make the best of renting.
This means buying in the right area and understanding the likely demand, as well as knowing what type of property is most desirable for the tenant you hope to attract.
Try to keep a clear head when buying for investment purposes – considering where your tenants want to live, what kinds of local amenities can secure a higher rent, as well as the specifications of the rental property itself.
With the right research you should enjoy a good return on your investment.