The Telegraph recently reported (June 5, 2015): Britain’s biggest network of letting agents and property valuers, LSL Property Services has predicted that buy-to-let returns will be down by 62% in the next 12 months.
Total returns on buy-to-let property taking into account both rental income and capital growth will be down from 9% to just 3.4% by April 2016. This return, the lowest in four years does not factor in mortgages, maintenance or tax meaning many landlords could see negative returns when taking these into account.
The warning comes as enthusiasm for buy-to-let increases with relaxed pension rules and investors seeking a better return. If the figures are correct the report will also throw into question the predicted returns of property crowdfunding platforms that bring together individual investors to purchase a property for capital growth and income.
Equity returns should far outweigh debt returns, whether property related or otherwise. Investor returns should be commensurate with the risk being assumed, and equity is always a greater risk than debt. So if Buy-to-Let returns are set to fall, how does one justify the higher risk associated with the return?
The predictions are based on price and rental data of around 20,000 properties currently on LSL’s books and form part of their monthly buy-to-let house price index. LSL owns 500 estate agent outlets with brands including Your Move, Marsh and Parsons and Reeds Rains.
Rental yields have remained low in many parts of the country due to the high acquisition cost of property, with buy-to-let landlords relying on capital growth to improve their returns. However, LSL predict a slowing down and even falling of property prices within the next year dragging down the total return even if rents were to rise.
Purchasers paying with cash, rather than using a mortgage, is at an all-time high, reflecting increased buy-to-let investing. However with returns predicted to fall, it may also be the right time to look at alternative returns offered from property. Investing in a Peer to Peer loan backed by an income producing commercial property can return a fixed rate of between 5-10% pa*, the loan is secured by a 1st legal charge over the property ensuring that the investors are first in line to be paid back when the property is sold or refinanced. These investors sit lower down the capital structure than BTL investors and therefore assume lower levels of risk.
*After fees but before bad debt and taxes
Proplend does not provide financial or pensions advice. If you need to seek advice, you should consult your independent financial adviser.