Yield of dreams

Landlords are diversifying to boost profits, but are they looking in the right places, asks Sarah Green, Virgin Money’s Director of Intermediary Sales.

After the lending lows of 2009, the buy-to-let market has grown steadily, albeit not back to the peak of 2007.

More importantly the structure of the sector has shifted significantly. Remortgaging accounts for the bulk of business, while professional landlords, not amateurs, now play a larger role in the purchase market.

A combination of factors, including the stamp duty surcharge, the removal of tax relief on mortgage interest payments and the new PRA regulations have made it more challenging for landlords to achieve a profit on purchasing property to let, especially those without experience.

However, not only is it still possible to get the numbers to stack up, in some parts of the country, landlords are enjoying a solid return.

Chasing yields

The traditional North-South divide is flipped when it comes to rental yield, with the two best performing regions in 2018 being the North East (5%) and North West (4.8%), according to data from Your Move.

In London, yields were 3.16%, the lowest of any region in England and Wales, with the South East at 3.31%.

As a result, more landlords are looking to buy in the North.

Mojo Mortgages in Macclesfield is currently seeing a steady volume of buy-to-let business and notes that 49% of its landlord clients have purchased outside their own postcode area. Spokesperson Chris Bailey says: “People are becoming more conscious of market conditions than just practicality”.

Broker experiences

The stats are borne out by the experience of many brokers, such as Adele Forbes, Managing Director of West Yorkshire Money Ltd, in Pontefract, who says the yields that can be achieved in the North are significantly higher than the South.

She explains that the average buy-to-let loan in West Yorkshire is just £75,000 with a 25% deposit and rent of £500pcm.

“The yields in central London are becoming non-existent. With a glut of one and two-bedroom properties flooding the market and a general suppression of prices, it’s no surprise landlords are abandoning the capital in a hunt for better returns elsewhere.”

Forbes continues: “This sees them looking in and around the Midlands but also further North. It’s common to get 6-8% yield in Yorkshire, and 7-10% in Teesside. You can pick up a three-bed terraced in Teesside and South Yorkshire for £40,000 - £70,000.

"Buy-to-let still works, but you to need relocate the business model."

Ying Tan, Founder of The Buy to Let Business agrees there’s been a shift from the capital. "In areas with lower yields, such as London, landlords buy with a view to longer-term capital growth," he explains. "But that isn't guaranteed in many parts of the South at the moment, which is driving the move up North."

"What is encouraging is that we are seeing clients taking time to learn about those new areas before investing. Many are doing a considerable amount of research and then investing in university cities, such as Manchester, Liverpool and Birmingham, all of which are currently popular."

Capital return

Forbes cautions that investing in rental property in the North isn’t a golden ticket.

"Landlords have to understand this is just about rental yield not capital growth, as the increase in property value may only be slight," she admits.

Tan points out that while there is certainly a move away from London, "It’s not to say the buy-to-let market in London is barren, because it isn't. However, top slicing is more frequently required in the South and, landlords earning six figure salaries need lenders to offer the option to top up the rental income in London where it doesn’t work on its own."

"The purchase market has been very challenging over the last year. Lending volumes are pretty static in the south of England and yields are low, which is why we are seeing some clients chasing higher yields up North."

Adapt and thrive

The new normal for buy-to-let may be dominated by remortgaging and more complex purchase business but, luckily, brokers have become experts at adapting to change.

By staying up to date with the sector, both in terms of product innovation but also yield trends across the UK, you can bolster your relationships with existing landlord clients, whether they want to refinance or purchase.

As Mojo Mortgages' Bailey, says: "This has become more of a specialist area and the importance of a good broker has never been so significant."

The best way to reassure and support your landlord clients is by demonstrating your market knowledge and awareness of the funding solutions on offer to them.