In the wake of declining property prices coupled with an upward surge in interest rates, the landscape of the buy-to-let market is undergoing a significant transformation, leaving landlords seeking alternative avenues for better returns. However, amidst this volatility, an intriguing question arises: are certain areas more financially rewarding than others?
According to data from the National Residential Landlords Association, the profitability of buy-to-let investments has plunged to its lowest point in 16 years. This downturn stems from a confluence of factors, including heightened buy-to-let rates upon remortgaging, constraints on mortgage interest relief, and a deceleration in house price inflation, significantly impinging on the once-favourable capital growth enjoyed by landlords.
Gone seem the days of double-digit yields, making the hunt for optimal buy-to-let regions an arduous task. However, despite this gloomy outlook, research by digital mortgage lender Molo offers a glimmer of hope, indicating that the current average rental yield for England and Wales stands at 4.98%.
Francesca Carlesi, the CEO of Molo, advocates for targeting specific regions with promising rental yields, notably in the North, characterized by lower property prices and robust rental rates. Additionally, commuter cities exhibiting high demand for properties are deemed potential hotspots for investment.
Most Profitable Areas for Buy-to-Let
While southern regions of England might allure with higher rent prospects, the disparity in house prices prompts a closer look at other regions boasting commendable yields. Molo’s analysis reveals the Central Valleys as a standout location, showcasing a staggering gross rental yield of 7.96%, nearly doubling the national average. Despite a comparatively modest monthly rental income of £697, the area’s average property prices rank among the ten lowest nationwide, at £100,786.
Hartlepool and Stockton-on-Tees secure the second spot with an average rental yield of 7.9%, accompanied by monthly rents of £592 and an average house price of £85,774. South Teesside follows suit, offering a robust 7.66% gross rental yield, while Swansea and Coventry also present yields exceeding 7%.
Least Profitable Areas for Buy-to-Let
Contrastingly, London and southern England, despite their allure for buy-to-let endeavours due to higher rents, pose challenges due to inflated house prices. Molo’s research highlights Camden and the City of London as the least profitable, with an average yield of 3.58%, juxtaposed against high rents averaging £2,268 and an average property price of £672,104.
Similarly, West Essex features a low rental yield of 3.64% despite a relatively high monthly rental income of £1,800, attributed to steep property prices averaging £548,000. Dorset, Bromley, and North Yorkshire also exhibit gross yields hovering around 3.7%.
Strategies to Enhance Rental Yields
Property prices and rents remain pivotal in determining yield. While relocating an existing buy-to-let property may not be feasible, enhancements such as renovations to augment value are recommended by Mark Michaelides, Molo’s Vice President of Strategy. Improving energy efficiency is another avenue to amplify rental income by reducing tenants’ energy expenses.
Amidst a dearth of rental properties, landlords have the opportunity to raise rents, as evidenced by Rightmove’s data, showcasing a record-high average advertised rent of £1,278 per month (excluding London) in the third quarter of the year. However, this scarcity might soon alleviate, potentially pressuring rents downward, according to Rightmove.
Data from Hometrack forecasts a 9% increase in new let rents for 2023, tapering to 5-6% in 2024, underscoring the evolving nature of the rental market. As the sector navigates these fluctuations, the quest for optimal buy-to-let investments remains dynamic and ever-evolving.