Buy to let property investors advised to think beyond gross rental yields

Property investment in the wrong location can lead to low or even negative returns, according to new research which looks beyond gross rental yields.

Investing in property can appear to be a very attractive option as in the current economic climate there are few investment sectors that offer both safe haven status and inflation beating yields.

However, the research from the property website shows that the old adage  of location, location, location could not be more relevant when sinking capital into bricks and mortar.

Looking beyond gross rental yields, their analysts have calculated what they call a ‘real yield’ for the most popular rental locations across the UK that assesses the impact of changing capital values to produce what the firm believes is a more realistic view of rental yields and their investment potential.

The analysis is based on median asking prices and rents of typical two bedroom properties and combines changes in the capital values and gross rental yields. The current top 10 areas attracting the highest real yields are all in London, but the worst locations are to be found throughout the UK.

Its analysis report says that all of the worst performing areas attract negative ‘real yields’ and the information could prove very interesting reading for potential buy to let investors.

Whilst there are many reports of a North/South divide in the property market, six of the 10 worst performing areas are located in the South of England, including the relatively affluent area of Guildford.

The worst performing location with a -9.8% ‘real yield’ is named as Margate, followed by Belfast at -7.5% and East Kilbride in Scotland at -5%. Next is Ramsgate at -4.7%, Broadstairs at -4.4%, Guildford at -3.3%, Stirling at -3.2%, Slough at -2.7%, Hastings at -1.8% and Hanley at -1.7%.

‘The average gross rental yield of these areas is currently running at a very healthy 6%, but landlords must consider the rise and fall of capital values when assessing a buy to let investment. This study shows that if investors in these worst affected areas are simply taking a short sighted view, based on rental income, then they could be in for a nasty surprise,’ said Doug Shephard, director of the firm.

‘Given our new research on yields, these are areas of the UK where landlords are losing money just by owning the property and that is even before tackling the potential issue of void periods,’ he added.

He explained that some of the locations with the worst ‘real yields’ are there because although in terms of rental income, they could offer landlords gross yields of over 5%, the underlying property values are falling through lack of demand. ‘For example, in January 2007 the average two bed property spent just 56 days on the market in Ramsgate. Now in 2013, the average time on market has risen to 134 days,’ he pointed out.

‘It may be some time before property values stabilise in these locations and until they do buy to let investment could seriously damage your wealth,’ concluded Shephard.