How are property prices and rents influencing buy to let returns in 2016?

As we head out of the summer season into autumn, the latest market data gives us a good indication of how well property has been performing as an investment so far this year. As a landlord and investor, it’s useful for you to compare your own property’s performance with this data and the market averages.


Capital growth
Property generates capital growth in three ways. Firstly, you can build in capital growth when you buy if you purchase a property at a discount. The property might simply be poorly priced in the first place or the seller may need a quick sale and be prepared to take a low offer. Or, if the property has a serious problem like subsidence and you’re able to buy with cash, you should be able to get it for well under its ‘true’ value and fix the problem so it is worth more than you paid for it if sold onto the open market.

The second way capital growth can be generated is by adding value. Find a property that you can improve through changing the layout or adding living space, increasing its value by considerably more than the cost of the improvements.

Finally, there is ‘natural’ property price growth, which may or may not apply to your property, depending on the economic performance of the area and local supply and demand.

Historically, property prices have been known to double every 10 years, but since property price growth has slowed in many areas since 2004 and we’ve had a recession from 2007, which impacted dramatically on property prices, that calculation can’t be relied upon any more. Depending on how long you’ve had your investment and how close to the bottom of the market you may have bought during the credit crunch, you could have made some substantial gains since then, or not made much at all, but secured good income.

How well has England performed?
At the height of the market prior to the credit crunch, the average property price in England (including London) was just shy of £195,000 and is now £229,383 – an increase of just 17.8% (source: UK HPI). However, if you bought at the market low, you could have seen a staggering 44% average increase!

How well has Wales performed?
The Welsh property market was one of the last to see prices dip and therefore it’s still a few months away from seeing average prices recover to the pre-credit crunch heights of £150,310 (on average). However, year on year, prices are already up by 4.9%, just a little way off the annual long-term average growth of 6.6%, and if you managed to buy at the bottom of the market, you’ll have seen an 18% increase.

How well has Scotland performed?
This month, prices in Scotland are just a few thousand pounds below the £145,641 average achieved in 2007/8 before they fell to £121,000 in February 2009. They are already up year on year by 4.6%, so, all being well, are likely to catch up with previous heights by the end of 2016. That means buying at the market low would have given an average increase in property values similar to Wales of 18% over the last seven years.

Northern Ireland
Anyone who invested in Northern Ireland just prior to the credit crunch will know that prices still have some way to go before they recover (on average). However, if you invested at the average market low of £97,428, you should have seen good average growth of 26% since then, and in the first quarter of 2016, prices were up by 7.8% versus Q1 2015.

So, in summary, at a ‘country level’ (according to the government’s new UK HPI report), there has been some great potential natural capital growth available over the last few years – it just depends on when you bought and how much you paid!

Regional capital growth
As far as capital growth at a regional level is concerned, price performance is extremely varied. We’ve seen one London borough, Waltham Forest, increase at 28.7% in just one year (2014), while most London boroughs have seen annual growth of between 15% and 25% for the last few years. However, we are now starting to see that growth slow, with some London boroughs, including Hammersmith & Fulham and Kensington & Chelsea, even seeing some annual falls. However, it’s important to put these into context. Despite these falls, their prices are still 45% higher than at the height of the market back in 2007/8.

Outside London, the South East (+12.2%) and West (+8%) have grown well in the last year, while the East of England has outperformed every other region (+14.3%) and topped the year-on-year property price growth, thanks to increases in the two key areas of Cambridge (+12.6%) and Peterborough.

Next to start catching up with the prices rises seen in London and the South is the Midlands, with West Midlands regional prices up by 6.4% and East Midlands up 7.9%.

Meanwhile, some regions have still to benefit from the economic recovery following the recession. The North West and Yorkshire and Humber hit 5%-6.5% annual growth and the North East is trailing behind most regions, up just 1.5% year on year.

Of course, from a property investor’s perspective, large increases in capital growth are great if you already own property, but if you’re looking to make new investments, the best bargains are likely to be in those areas that have yet to see great year-on-year growth, such as the North East.

Looking at some cities, Cardiff has seen 6.54% growth since mid-2015, Belfast has experienced a 9.75% annual increase, while the City of Edinburgh is up by an impressive 11.7%. We know that what happens in the local economy impacts on property prices and the City of Aberdeen is no exception; due to the drop in oil prices, they’ve experienced the biggest falls, with prices dropping by 6.8%.

Overall though, the good news is that property prices are moving forward, albeit at different rates and with some areas doing better than others.

Rental Income
Belvoir’s Rental index is a transparent view of what’s happening to rents – right down to county level. This allows you to check out not only what’s happening right now in your area, but also to look at the long-term trend, with data going back as far as 2008. This is invaluable information and a great way to check whether your own rents are keeping up with your local market.

Rents are currently doing well by Belvoir’s calculations, rising on average by just over 5% year on year, on a like-for-like annual basis. That’s good news as it’s above the cost of living, so as a landlord you should be seeing a growth in ‘real’ income. However, this is an unusual rise, higher than the long term annual average increase. Over time, rents typically grow by just under 1.5% each year, often rising and falling in line with wages. And that’s proof that good landlords and agents aren’t charging extortionate rents, but fair, affordable rates for tenants.

Regionally, London rents are starting to slow, following some good growth over the last 12 months. It is a similar picture for the South West, while in the South East, rents have risen by just £10 a month. Bigger increases have been seen in East Anglia, the Midlands and Yorkshire, with 3%-4% rises showing in the North East and West.

So, if you haven’t reviewed your rents in the last 12 months, it’s important to chat to your local Belvoir agent to get an idea of whether to hold rents at their current levels, or see if you can increase them in line with the market, which is typically in line with local wage growth.