Rental yields steady but landlords likely to ‘bide time’ on purchasing – Fleet Mortgages Q3 Rental Barometer

Fleet Mortgages, the buy-to-let specialist lender, has today released the latest iteration of its Buy-to-Let Rental Barometer covering Q3 2022 rental yields across England and Wales.

The regional snapshot covers all areas of England and Wales in which Fleet lends and highlights the rental yield changes that have occurred in each of those regions. In this iteration, the yearly comparison is between Q3 2022 and Q3 2021.

Across England & Wales the Barometer shows a further fall in annual rental yields, down from 6.2% a year ago to 5.4% however the quarter-on-quarter drop is very small  only 0.1% on the previous three-month period when the yield was 5.5%.

In quarter two earlier this year, the rental yield trend across all regions was down with every region of England & Wales seeing a drop in rental yields of between 0.1% and 0.9%. However, in this quarter we have two regions – Wales and the South West – that have both registered annual increases, up 0.2% and 0.3% respectively.

Also, looking at the quarter-on-quarter comparison, Greater London has also seen an increase in rental yields – up from 4.4% to 4.6% – while the South East stayed the same at 5%.

While the North East of England retains its top regional rental yield figure for the ninth consecutive quarter, Wales has now moved up into second place, while Yorkshire and Humberside, and the North West remaining joint third.

Fleet said those regions which had seen a quarterly increase in rental yield were doing so because of an acute shortage of rental accommodation, particularly in Greater London.

It also anticipated that the recent increase in the cost of mortgage finance might see further landlords exiting the private rental sector which was likely to exacerbate the shortage of property in those regions.

Fleet said it anticipated mortgage interest rates would remain high due to volatile two- and five-year swap rates, with lenders having no choice but to increase product rates to match the increase in funding costs.

The lender also outlined the increased cost of buy-to-let mortgages – specifically as a result of the recent market turmoil – was bound to impact on rental yields, as landlords were unlikely to be able to recoup all of these greater finance costs via an increase in rents.

It said that, as a result of increased interest rates, it anticipated demand for residential property to fall, and expected landlords to bide their time when making future investment decisions, even with tenant demand far outstripping supply and there being a real need for more private rental sector property.

Steve Cox, Chief Commercial Officer at Fleet Mortgages, commented: “These new set of rental yield figures have to be viewed in the context of the period they cover – July through September – and what has happened to the mortgage market since then.

“It is clearly positive that a number of regions have seen a quarter-on-quarter increase in yields, and that the figure for England and Wales is down only very slightly on the Q2 2022 results. Tenant demand remains very strong right across the country, and in a number of regions, the supply of property available within the private rental sector is not enough to satisfy this.

“However, we now have to take into account a very different interest rate environment, the pulling of many buy-to-let products following the Mini Budget, and lenders having to make difficult decisions around product ranges and pricing.

“To that end, it’s an obvious point to make that the cost of buy-to-let mortgages has increased, and landlords will need to factor that into their profitability and what they might charge for rent in order to cover these increased costs. This is not an easy task given the cost of living crisis and there is a need to marry up the need of the landlord to cover the mortgage, with the struggles being faced by many tenants.

“This, at least in the short-term, is likely to have something of a dampening effect in terms of purchase activity. Even though many portfolio and professional landlords do want to add to portfolios, and add to the supply available to tenants, the cost of funding those purchases has increased significantly, as it has done for those existing borrowers who are now coming off special rates and require a remortgage or product transfer.

“Our outlook is that rates will remain high for the short-term although it is our hope that recent attempts to calm the markets will provide greater certainty to lenders who will be able to return products to market, particularly in areas such as two-year fixed-rates which have, by necessity, seen a considerable fall in number.

“Overall, the buy-to-let market does remain an attractive, long-term investment opportunity with rental yields across all regions of England and Wales currently being above 4.5%, often by some margin.

“Tenant demand is not going to drop and supply is needed in considerable numbers – if landlord borrowers and their advisers can square the finance circle, and we can see a greater degree of competition coming back to the buy-to-let mortgage market and more competitive rates, then it is likely that activity will improve and landlords will continue to secure strong yields.”