Prime Central London Buy-To-Let property investment currently yields an average of 2%, which is only 0.71% more than 10-year Gilts at 1.29% (9th January 2019).
Previously when house prices were rising, BTL investors felt that even low yielding properties had the potential to deliver strong returns in the long term once capital appreciation was taken into account. However, the recent fall in London property prices and questions over rental demand post-Brexit undermine this assumption.
Concerns over both a gradual increase in mortgage rates, engineered by the Bank of England, and Brexit has widely increased the threat to BTL returns.
In addition, with tax benefits on BTL investment now being reduced, investors will need to see property prices or rents rise in order to maintain current returns.
Nationwide’s House Price Index shows house prices in London have now fallen over the last five quarters. The average London house price fell 1.7% to £614,271 in November 2018, down from £625,064 the month before. In addition, the average London rent also fell, by 0.4% to £1,992 in Q3 2018, down from £2,000 in Q2 2018.
HWC says that other fixed-income asset classes, such as funds investing in long-term (5 year) UK SME loans, or commercial property, can provide investors with attractive returns without being overly exposed to the residential property sector.
The areas of London with the highest average yields were East Ham (4.81%), Plaistow (4.52%) and Thamesmead (4.48%). Meanwhile, the lowest average yields were Highgate (1.50%), East Finchley (1.54%) and South Lambeth (2.03%).
HWC says running costs for a buy-to-let investment have run at an average of between 5% and 20% of gross rental income in recent years, depending on the use of a lettings agency. HWC explains that the low raw yields reflect a combination of the number and type of investors (including international investors) and their expectations for growth in property prices.
Mike Schozer, Chief Investment Officer at Hadrian’s Wall Secured Investment Limited (HWSIL), says: “Net yields on London BTL property at present, do not look generous enough to balance out the risks.
The outlook for house prices or rental growth do not look promising. According to Bloomberg[5], there is a large overhang of unsold new homes increased 50% in 2018, not considering the large number of uncompleted new apartment buildings in several areas such as Nine Elms. The property market is particularly volatile in the lead-up to Brexit as the Government attempts to conclude a deal.
Instead of property, investors should consider other fixed income asset classes, which can offer more liquidity and better diversification, with less risk. For those with more of an appetite for risk and high potential returns there are plenty of other investment options.”
