Rental yields highest since 2018

Category: prs

Specialist buy to let mortgage lender, Paragon Bank, has conducted a survey of just shy of 800 landlords, the results of which show rental yields are at a six-year high.

This is good news for landlords, who have faced mortgage rate increases, and represents the third quarter in a row with increases in rental yields.

Paragon’s data shows that the UK average for gross rental yields hit a peak of 6.1 per cent in quarter one of 2024. The last time yields exceeded 6 per cent was at the end of 2021. Not only that, but this figure is the highest the lender has seen yields reach since quarter two of 2018.

How can landlords achieve higher yields?

Within the data, undertaken by Pegasus Insight on behalf of Paragon Bank, the high yields of houses of multiple occupancy (HMOs) really stood-out.

The gross rental yield average for single tenant homes was 5.8 per cent, whereas the average gross rental yield for HMOs was 7 per cent.

HMOs typically require more work and can involve more regulation – including the possible need for a licence – but multiple rents and the lower impact of voids can make the effort worthwhile and be highly profitable.

Regional variation in rental yields

Wales and London are at the lower end of the scale for average yields, for different reasons. In Wales, property prices are lower, but rents are also lower compared to the rest of the country which brings the average down.

Whereas in London, property prices are very high, and whilst rents are high too, they are not yet at a point where this brings the yield up to other parts of the country.

The highest average rental yields were found in the North East (7 per cent), Yorkshire and The Humber (6.6 per cent) and the East Midlands (6.5 per cent):

Speaking on the findings, Paragon Bank managing director of mortgages, Richard Rowntree, said:

Against what has been a challenging economic backdrop, landlords are naturally looking for ways to maximise returns but they are also attempting to mitigate the impact of a tax burden that has increased in recent times. Alongside their yield generation potential, HMOs appeal to investors because of strong demand for affordable homes, particularly in areas where tenants would perhaps not be able to afford to buy or rent a whole property.

This is particularly evident at the moment, with high levels of rental inflation. Alongside a stabilisation of house prices, it is likely that this has contributed to improving yields.”

He went on to acknowledge that strong rents have a detriment to tenants, underlining that if there were more rental properties available, rents would come down:

While strong yields are good news for landlords, we recognise that this rental inflation poses a very real challenge for tenants so are buoyed by reports of improving levels of housing stock in the sector. This is because addressing the imbalance between supply and demand is central to keeping rents at an affordable level and also means that tenants have more choice when choosing a home. A thriving market, where landlords can operate profitable lettings businesses, is crucial in encouraging investment in this stock and making more homes available for renters.

Landlords of course want encouragement to invest to balance this see-saw, or ways to maintain profitable yields, so HMO investing alongside investing in buy to let via a limited company and holiday lets are areas that are drawing focus.