A study published by Property Partner has shown that high and rising house prices in the South of the country means that the North is far more profitable for landlords.
The study ranked 100 areas of the country by profitability for landlords – based on property prices, average rental income, and average salaries. The most profitable areas were those where the annual rental yield (that is, the annual rent as a percentage of the overall property price) was high compared to the area’s affordability rating (expressed as the average house price divided by the average earnings). Essentially, the best places were those where rent was high compared to property prices, but also where property prices were reasonably low compared to average income – this gives rental property investments good return with relatively low initial capital requirements.
For example: Stoke-on-Trent, which came out on top, has an average property price of £117,586 and an average annual income of £26,250 – giving it an affordability index of 4.48. With the average annual rent at £6,672, the annual rental yield is 5.67%. Annual rental yield divided by affordability of the property gives the final yield at 1.27% – the highest of any of the 100 regions scored.
The results followed a general trend whereby the higher the annual rental yield was, the better the overall investment efficiency. The five areas with the highest annual rental yield – Leeds (6.92%), Gateshead (5.78%), Stoke-on-Trent (5.67%), Rochdale (5.6%) and Newcastle (5.59%) were all in the top ten for overall efficiency/profitability. All areas in the top ten are in the North of England.
The report highlighted a strong North-South divide in terms of affordability, with much higher house prices in the South leading to less profitable overall investments.
The leat efficient areas to invest in rental properties according to the study are Poole, Central London and Sevenoaks. These were also among the worst for annual rental yield, with Poole (annual rental yield of 1.94%) at the bottom of both tables.
The problem with buy-to-let investments in the south is that while outright prices are growing fast, average rent is not going up as quickly. This means that return on investment is actually relatively low, and the large amounts of capital required to even begin investing are prohibitive to many.
So while the North-South divide tilts in the latter’s favour in terms of actual purchase prices (and therefore for those looking to sell up), the opposite is true for landlords.
Property Partner founder Dan Gandesha explained: “What our research reveals is a clear North-South divide in the investment opportunities facing buy-to-let landlords.
“We have always been at pains to point out to investors that prime locations such as Kensington and Chelsea can offer some of the lowest yields available, because prices have raced ahead while rents have failed to keep pace.
“It just goes to show, you shouldn’t always follow the crowd and the right investment could be on your doorstep where there is far less overall demand.”