Overall in 2009 landlords were £12,700 in the black, almost reversing £15,000 losses in 2008 and 2010 is set to see higher returns that 2009, according to the latest Buy to Let Index from LSL Property Services, the UK’s largest residential letting agents.
It also shows that although increases in property values and a recent slight drop in rents caused dip in yields, tenant arrears performed strongly in 2009, contrary to expectations, and landlords enjoyed a 7.6% annual return on their investments by the end of December 2009.
The value of their properties rose 3% in the year while rental income after void periods added a further 4.6%. This means that in 2009 a typical landlord made a return of £12,740. This was a combination of modest capital gains of £4,831 on each property and £7,909 in rental income.
By contrast, in 2008, a typical landlord would have lost 8.8% even after allowing for rental income. They lost £23,000 in capital as the property fell in value, and earned £7,900 in rent for the full year, leading to a total loss of £15,100.
‘Despite the worst recession in living memory, and despite house prices continuing to fall for the first few months of 2009, investment returns in buy-to-let were very respectable. The £12,700 the average landlord made on a rented property during the year recouped most of the losses in the housing crash of 2008. Brave landlords who added to their portfolios will be celebrating an excellent year,’ said David Brown, commercial director of LSL Property Services.
The trend in prices continues to be favourable. Landlords’ properties rose in value by 0.4% in December. By contrast, the average UK rent fell slightly in December, down 0.4% to £661 per month. Rents have corrected slightly since September giving up a third of the sharp rent rises in the summer.
Rents ended 2009 0.2% higher than the previous year. Yields ended the year at 4.8%. They fell from a peak of 5.1% in March as the recovery in property prices outstripped growth in rents. But they remain well above the 4.2% trough at the peak of the housing market at the end of 2007, when interest rates were far higher than today.
‘Landlords must not lose sight of rental income when house prices move up, however. Rents should form the foundation of buy-to-let investment and are key to financing mortgage borrowings. Allowing yields to drop too low is inadvisable,’ added Brown.
Arrears performed very well in 2009, despite the recession. On average 11.7% of rent was unpaid by the date it was due, down from 14.5% in 2008. By the end of December 2009, 12.5% of rent was unpaid, far less than last year’s Christmas peak when 15.9% of rent was late. Serious arrears held steady, with 1.1% of rent still unpaid three months after it was due. At the end of 2009, £282 million of rent was unpaid by the date it was due, down from £346 million at the end of 2008.
The report concludes that if property prices continue to rise at the current modest rate of 0.4% per month, equivalent to 4.9% for the full year, a typical landlord will make a total return of £16,000 in 2010, equivalent to 9.8%.
‘2010 is likely to be an interesting year for the buy-to-let market. The proposed introduction of regulation should help filter out unscrupulous mortgage advisers which will be positive for the sector, particularly for inexperienced landlords. The downturn has already pushed many of the short-term speculators out of the market too,’ said Brown.
