The rate of rental yield growth has started to slow, but landlord gains are still higher than this time last year, a lender study found.
The Buy-to-Let Rental Barometer from Fleet Mortgages covering the Q3 period showed that rental yields had risen by 0.3% annually to 7.2%.
This was lower than the 1% annual growth recorded in the year to Q2. Additionally, average yields fell by 0.4% over the quarter.
Despite this quarterly fall, Fleet said rental yields were still “solid”, with every region in England and Wales showing an annual rise.
This was attributed to stabilising rent levels following a period of continued increases.
However, these had slowed compared to the previous report and nearly all regions recorded a quarterly decline in average rental yields.
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The East Midlands was the only region to maintain its average rental yield of 7.5% in both Q2 and Q3, and Yorkshire and the Humber saw a slight 0.1% rise to 7.7%. Otherwise, yields in all regions fell quarter-on-quarter.
Average yields in the North East were the highest at 9.7%, followed by the North West at 8%. Both held on to their positions in the last report.
Both East Anglia and Greater London had the lowest average rental yields at 5.9% each.
Meanwhile, the South West and South East both separately had average yields of 6.1%, which Fleet said showed a continuation of the North-South divide, while noting the gap was closing.
Greater London rents still highest
Average monthly rents in Greater London were still higher than other regions, rising from £2,024 to £2,134. This was followed by the South East at £1,572.
The North East had the lowest average rent, which also fell over the quarter from £768 to £702.
Fleet said strong rental yields and lower mortgage rates were having a positive impact on both existing and potential landlord borrowers, with 10% of applications sent to the lender coming from first-time landlords.
The average loan size provided by Fleet in Q3 was notably higher than the previous quarter, rising to £196,000 from £171,000 previously. The average rental cover at loan origination was 176%.
Applications for purchases rose in Q3, accounting for 43% of applicants compared to 42% previously. Meanwhile, more than three-quarters – 77% – of applications were from limited company borrowers, down from 80% in Q2. Applications from private investors rose from a fifth to 23%.
Budget determining landlord behaviour
Steve Cox (pictured), chief commercial officer at Fleet Mortgages, said: “As can be seen from this latest iteration of the Rental Barometer, yearly rental yields across every single region we lend within have all increased, albeit as expected, by smaller amounts and at slower rates, suggesting we are now past the point of the significant increases in rents we saw during the previous 12-18 months.
“It’s our belief that the demand-supply disparity is not as acute as it was previously, however many landlord borrowers are waiting to see what the Budget holds for them, and whether any further increase in taxation or costs are going to need to be faced, and paid for.”
He added: “Regionally, it is those in the North of the country that continue to top our rental yield table, but we have seen a shrinkage in the difference between North and South, and while regions such as Greater London and the South East continue to show an uplift in their average monthly rent per property, in the North East, for example, this has actually dropped from the last quarter.
“It’s still a solid and stable picture, helped no doubt by the fall in lending costs, which clearly makes affordability easier to achieve, albeit we are still a little way off the rates available in the pre-mini Budget era.”
Cox said: “In light of the speculation around potential capital gains tax (CGT) hikes for those selling additional property as individuals, it will be interesting to see if the percentage of our limited company applications continues to increase. This quarter, they have actually gone down slightly, but our belief is that more and more landlord borrowers are going to be purchasing within these corporate structures, especially if they can avoid any CGT impact when they sell.
“The next few months promises to be very interesting indeed, especially when we learn the details of the Budget and how it is going to impact landlords.”
